What looks to be the worst US drought in a quarter of a century has given rise to an old-fashioned commodity rally on world markets, with key grain prices hitting highs which caused food crises in vulnerable parts of the globe last time around.
Seeking to protect their populations from hunger this time, many countries relying heavily on imports have held off for now, touting healthy stock levels and hoping other sources will come through and bring prices down.
However, their hopes may be dashed if they all return to market at once.
With so much of the world putting faith in a record US corn crop, it is little wonder that prices have surged around 40 percent in the past three weeks as relentless dry weather melted yield expectations for cereals. Soybeans are at record highs, while wheat is not far behind.
“Production potential looked great and it kind of lulled these end-users into a false sense of security. At that point we were seriously looking at [corn] prices under US$5 [per bushel] if weather conditions remained ideal, but now we’ve rallied sharply higher and never looked back,” Jefferies Bache analyst Shawn McCambridge said.
Now, corn futures contracts backed by this year’s harvest are above US$7 a bushel and climbing fast.
Traders said consumers in Europe, North Africa and the Middle East had pulled back on regular purchases, expecting prices to cool off.
“This to me is a time bomb. I am routinely one of the more bearish people, but it wouldn’t surprise me if corn traded at US$10,” the trader added.
There are several parallels between the current state of play and food crises of the past few years, including scorching weather, wilting crops and sky-rocketing prices. Just substitute this year’s US drought and corn for 2010’s Russian crop failure.
Similarities can also be found on the macro front — 2008, when prices were last at these levels, saw a mushrooming financial crisis culminate in the failure of Lehman Brothers, and now Europe’s debt crisis has left the eurozone precariously balanced, with other regions also on edge.
The uncertainty has led to swings in all the markets this time as then, but the simple common denominator of supply and demand has been the driving force of the latest grain price spike, with weather the only fundamental that matters.
Such frenzied buying leads ultimately to additional food inflation and domestic price rises can be a tipping point in countries with already struggling populations.
State buyers from the top importing countries, including Egypt and Iran, China and India are sanguine so far, united in delivering a message of comfort in domestic stock levels and ability to sit out the current price surge.
Leading wheat buyer Egypt, importing more than 10 million tonnes per year, has said it has a strategic stock of about six months plus to last until January.
“Of course entering the markets for August shipment isn’t likely now and that’s because our local purchases leave us in a very comfortable position,” Nomani Nomani, vice chairman of the General Authority for Supply Commodities said last week.
In Asia, top grain consumers China and India have ample stocks of wheat and rice, thanks to near-record harvests in the last few years. US corn export sources also noted that China and South Korea were ahead of the curve, booking larger shipments in anticipation of supply problems and high prices.