Commodities: What To Watch
7 July 2010 Agriculture is connected with many commodities, from oil to fertilizer to chemical inputs. And just as supplies and prices of inputs affect agrochemicals, so do the prices farmers get for their crops — which affect usage rates of agrochemicals, fertilizers and other crop inputs.
The Way Of The World
“Everything is related,” says Mel Brees, agricultural economist at University of Missouri Food and Agriculture Policy Research Institute (FIPRA). Commodity futures rise and fall weekly, depending on weather, politics and even the futures market itself.
Contributing factors can be as specific as the price of oil, or as far-reaching as world economies. “Economic concerns have been impacting the market in various ways for quite some time,” Brees says. “The recent concerns in Europe turn attention to currency values and the impact on the US dollar.” When economic problems in the EU or elsewhere in the world add strength to the dollar, US goods become more expensive — generally a negative development for US growers. “The impact on the commodity markets and stock markets as well seems in recent months to have an impact on grains,” Brees explains. “You see not only currency prices and oil prices, but see what happened to the Dow [when it dropped almost 1,000 points on May 7]. That’s creating a lot of uncertainty as we look ahead in the markets.”
At the close of trading each day, Brees says, market reports will mention the dollar value and energy prices, as they both have major impacts on the market. “Recently, we’ve seen weaker oil prices and a stronger dollar,” he says.
“The crude oil market over the past 15 years has gone from investment trade being two times the physical trade volume, to closer to 12 times the physical market trade currently, which is exactly why the current administration in Washington was investigating crude oil trading in 2008,” says Troy Lust, senior risk management consultant, FC Stone. “The daily volume is now dominated by fund activity, right or wrong.”
An additional factor will be the 2012 US Farm Bill. While details are not yet worked out, it is likely that some current policies will change, such as the ongoing dispute between Brazil and the US over cotton subsidies. A memorandum signed in April allowed for a US-financed fund that could be allocated to cotton producers in Brazil; however, the details are yet to be agreed upon.
| World Ag Commodities | ||||||
| Area (Million hectares) |
Yield (Metric tons per hectare) |
Production (Million metric tons) |
||||
| 2009/10* | 2010/11** | 2009/10* | 2010/11** | 2009/10* | 2010/11** | |
| Corn | 156.31 | 159.32 | 5.17 | 5.24 | 808.57 |
835.03 |
| Cotton | 30.32 | 32.29 | 0.74 | 0.77 | 102.91 | 113.88 |
| Rice | 155.17 | 160.06 | 4.26 | 4.30 | 442.18 | 459.74 |
| Soybeans | 101.92 | 101.52 | 2.53 | 2.46 | 258.00 | 250.13 |
| Wheat | 225.62 | 224.53 | 3.01 | 2.99 | 679.98 | 672.18 |
| *Preliminary figures as of May 11, 2010 **Projected, as of May 11, 2010 | ||||||
The Ethanol Effect
While all eyes are on the oil spill in the Gulf of Mexico, analysts downplay the long-term effect on oil prices. Lust says: “We’ve watched crude go from $86 per barrel to $65 while this has been going on.” He puts more stress on world economies, such as Greece, Europe and the US, as well as growth in Asia. “And remember,” Lust says, “crude oil is basically a ‘controlled substance’ in that OPEC has the ability to turn the spigot on and off.”
“The real impact on the supply of oil is pretty minimal,” Brees agrees. “The economic situation worldwide and that impact on demand has had a lot more to do with oil prices than the spill in the Gulf.” If high oil prices come back, then corn, soybeans, barley, sorghum and other ethanol inputs could see greater demand as oil substitutes. Brazil continues to make enough sugarcane ethanol to export, and the US is looking at other sources as well.
Matt Hartwig, director of communications, Renewable Fuels Association, says the federal government can help increase biofuel production. “In particular, loan guarantees and other programs that will help next generation biofuel technologies make it to the commercial market are essential,” says Hartwig. “We are urging the US EPA to approve the use of E15 (15% ethanol/85% gasoline) for all vehicles.” Recent comments by US Agriculture Secretary Tom Vilsack have bolstered the idea that EPA will comply. At 10%, the US produces 13 billion gallons of ethanol. “Ethanol is one-third of our demand base in the US corn balance sheet,” says Lust. “The crude oil market is important, but producing an adequate corn supply and having good ethanol margins are more important.”
Inputs
Just as the price of crop inputs can help or hurt growers, so can input prices hurt crop protection chemical manufacturers. Key components of glyphosate, like IPA salt, have steady demand. For other inputs, such as phosphorus, demand is only increasing. Global demand has grown 3% each year, with 17 million metric tons of mined phosphorus used worldwide for agriculture production in 2008.
However, supplies are dwindling, and just five countries — Morocco, China, South Africa, Jordan and the US — hold 90% of global phosphorus reserves. The US is now importing 10% of its phosphorus needs. Increasing fertilizer demands and decreasing supplies of phosphorus will result in ever-rising prices, possibly overshadowing even the 350% increase in phosphorus prices from 2003 to 2008.
Sulphur prices also surged in early 2010 as producers in the Middle East sought pricing of $30/tonne higher than late 2009 prices; however, they have remained fairly steady since then.
China And World Commodities
With its population of more than 1.3 billion people, China is the largest consumer of agricultural products in the world. The economic growth of the country has greatly impacted world markets; its agricultural imports more than doubled between 2002 and 2004, and it’s giving US corn a boost this year with bookings for 9.8 to 11.8 million bushels. China is also producing more this year; following an extended drought, it expects to produce 166 million tons of corn in the 2010/11 year, according to the USDA — a more than 7% increase over last year. Chinese demand for soybeans this year has also been high, even as the country expects a 4.83% increase in production.
Such a large market will effect commodity prices, Lust says, and bear keeping an eye on. “Watch the internal grain prices and the growing season weather in China closely this year.”
Market Trends
In general, ag commodities are looking up. “There has been a rapidly rising demand for commodities from financial investors,” says Lust. “Their allocation to commodities have risen dramatically the last few years — to the point where commodities have become a major asset class.” Investors are looking to benefit from the growth of emerging economies, which mostly means Asia, with China leading.
What effect do investments have on growers? “Farmers are doing well and their debt load is low,” Lust says. “And the markets have given them plenty of chances to sell at profitable levels.”
As for individual commodity outlooks, corn is in the lead, as usual. Brees says: “We tend to see some support in the corn and soybean markets due to strength of demand.” This keeps growers positive; USDA’s most recent projections for 2010 crop prices have corn positioned at a level where it’s profitable for most producers to grow corn. “That’s the same thing for soybeans — $8 to $9.50 or about $8.75 midpoint; again, that’s a profitable price level,” says Brees. “With that kind of an outlook, producers will be optimistic. Of course, everybody understands that if prices go to that low end of the range and cash prices dip lower, we could some red ink, but prices at the upper end of those ranges offer very good returns. Until we either get a more pessimistic outlook or something changes, I’d say that generally producers would be encouraged.”
Global oilseed stocks are rebuilding, with soybeans making up the bulk of acreage. Soybean imports to China may reach 46 million metric tons this year, mostly from the US and Brazil, following a Chinese ban on soy from Argentina.
FAPRI long-term projections position US production as relatively stable, Brees says. “We do see corn acreage growing a little bit over the next few years, and biofuels are certainly one of the reasons we’d expect that to occur. Worldwide in recent months, our corn ethanol has been very competitive with Brazilian sugar ethanol. That even opens up the possibility of ethanol exports. With those limits, I think you would say it’s still a fairly optimistic outlook for the corn side and would support some increase in corn production.”
Most of that increase in acreage has been acreage switched out of wheat. Over the last several years, a significant amount of wheat acreage has shifted to corn and soybean production. However, wheat is having a good year in 2010, with global production responding to high prices.
Wheat, along with corn, soybeans and grains have seen increased demand as feedstocks for the world’s growing middle-class. “In India, China, and other countries, as incomes increase, they want to add more meat to their diets, which increases the demand for feedgrains,” says Brees. “China has been increasing demand for soybean meal for livestock production, and now we’re seeing increase on the corn side from the feedgrain standpoint.”
And so, the major concern comes back to world economic conditions. “If Europe can solve some of its problems and we’re able to continue the economic recovery in the US, it would point towards a more positive outlook,” Brees says. “If we stumble domestically, or Europe continues to have problems, or some of those problems spread to other countries, economic problems in China would be very negative to demand as well. It’s not just that we look at how much corn and soybeans we can produce or how much they produce in South America; it’s demand side, as well.”
Lust is also cautiously optimistic. “Expect volatile trading ranges to continue, especially during the critical times of the growing season,” he says. “It’s very important to know your cost of production and what price levels are profitable to your operation. When we have oversupply situations and larger carryouts on any commodity, the market will have a tendency to spend time at or below cost of production to stimulate demand. When carryouts are tighter, with the strong demand bases we’ve created, the market runs to rationing levels. That’s time to sell.”
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