Global Commodity Markets Look to Recover from Drought, Adverse Weather

Wheat, corn, soybeans and cotton are experiencing particularly crucial harvests this year as China, India and other countries look to bulk up their reserves.

“Prices of commodities are high by historical standards,” says Dr. William G. Tomek, Professor Emeritus at Cornell University. This has, in turn, caused a steep increase in farm incomes.

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The growing populations and incomes of China and India continue to be important drivers of demand for commodities, as better diets have increased the need for livestock and feedstock.

Wheat

Wheat export demand remains strong in the US, Tomek says. Prices are more than a dollar a bushel over last year’s price, and the crop is not in short supply.

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“In the US, the increase in grain production is also related to the increase in productivity: a 0.5-bushel-per-acre increase in yield in addition to a 45,000- acre increase in harvested area,” says Bill Coe, partner and US agribusiness leader, Pricewaterhouse Coopers.
USDA raised its US wheat export forecast 1 million tons to 26.5 million as sales of wheat for feedstock to South Korea and Mexico continue to rise.

In South America, Brazil’s 2011/12 wheat imports are estimated 7.1 million metric tons (mmt), a 6% increase from 2010/11 due to higher domestic consumption. Brazil historically has produced enough wheat to meet only half of its consumption needs, USDA said in a recent production report.

Climate conditions in Argentina caused other countries such as the US, Ukraine, EU-27, Russia and Brazil, to assume greater positions in exports, Coe says.

Corn

The US, the largest producer and exporter of corn, is struggling to keep pace with demand.

“The corn market is now highly dependent on the next US crop and hence farmers’ intentions to plant (expected acreage) will influence prices,” Tomek says. “The new crop, about to be planted in North America, will be critical to future supplies.”

The corn market has been heated since 2009, mainly due to higher demand for its use in biofuels and the increase in meat consumption worldwide, whereby corn has a singular importance as raw material for animal feed, Coe says.

However, with record US and Ukrainian crops depressing global prices in 2012/13, Ukraine is emerging as a competing market after the past couple years saw large losses caused by drought, according to USDA. In the EU, corn feeding estimates are rising as the grain is expected to replace higher-priced wheat for feedstock.

Soybeans

A 12-million-ton drop in South American production in early 2012 has caused US soybean prices to increase rapidly.

““The price of soybean, similar to corn, will be to rise due to the decrease in Argentina’s and Brazil’s production caused by the huge drought in the main agricultural regions,” Coe says.

In the 2011/12 harvest, La Niña caused a huge drought that drastically impacted the production of soybean and corn in both Brazil and Argentina, which directly contributed to the trends of high in commodity prices, he says.

The USDA recently cut Brazil’s soybean exports for 2012 to 36.9 million tons, or by 900,000 tons because of reduced production and strong demand by domestic processors. However, global soybean demand has as major buying countries have decreased their imports.

Cotton

Global cotton production in 2012 is expected to fall and consumption is forecast to increase this year, according to USDA.

Cotton Australia reported that the country’s cotton crop is forecast to reach 4.4 million bales this season. In contrast, US cotton growers are hoping to recover from severe drought during the 2011 production season.

“US production is highly dependent on whether the huge West Texas growing area comes out of the drought this year or not,” said Andy Ryan, Senior Risk Management Consultant for INTL FCStone LLC . “Production there was dramatically lower last season and prospects for this year are highly weather dependent.”

 

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