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It appears the rains in Spain, Portugal, and France have not fallen on the grains as predictions of summer droughts across Western Europe have pushed soft commodities prices higher in recent weeks.
By James Wellstead – Exclusive to Resource Investing News
However, weather has been the most recent news item shaping investors’ expectations of grain and food commodity prices in 2012.
Dry weather, crop concerns
Unseasonably dry and severe winter weather across much of Western Europe and projections of dry La Nina weather in South America have been responsible for pushing a number of soft commodities higher in recent weeks.
US Department of Agriculture representatives recently suggested that Spanish winter grains have reached “a very critical situation” with “the driest winter ever recorded” in Andalucia, Castile-La Manca, and Aragon. Portugal and France have also suffered abnormal winter weather, and Morocco, a market already reliant upon wheat imports, could see a 50 percent reduction in wheat yields if precipitation levels stay low, said Australia and New Zealand Banking analyst Paul Deane recently.
2012 has seen European wheat, rapeseed, and maize prices trading higher, with five to ten percent gains made in Paris- and London-based trading.
South America food crops have also been driven by drought forecasts, with the most pressure on sugar and soybeans coming out of Brazil. Sugar output from Brazil has fallen by more than six percent since mid-February, when growers harvested the smallest cane crop in four years.
In the last three months alone, soybean production has fallen by nine percent in Brazil and eleven percent in Argentina on the back of the same dry weather. The result has been soybean prices hitting five and a half month highs on concerns that Brazilian port capacity will repeat congestion slowdown seen in 2010.
“The ports in South America look like they’re going to be full right through next month so we might continue to see business come here (to the United States) and see this price support,” said Jack Scoville of The Price Group to Reuters this week.
Weather conditions boosting US market
Outside of driving soybean production outlook and prices in recent weeks, global weather conditions have also pushed corn prices higher in a year in which corn planting is expected to be at its highest level since World War II.
The USDA recently announced that the Ukraine is playing an increasingly large role in this booming market. This year, production is expected to double in the Eastern European country, with a near tripling in exports from five to 14 million tons in 2011/2012 expected. Crop shortages expected in Argentina, the world’s second largest exporter of corn, and a tight corn supply in the US will allow the Ukraine to displace about four million tons of US exports in the Middle East and North Africa, the monthly government report stated.
US corn trade has fallen from around 68 million tons in 2007/08 to 45 million tons expected in March of 2012, despite global increases in trade since the 2007/08 time period.
Growing demand from ethanol-exporting refineries, which buy some 40 percent of US domestically-produced corn, has been contributing to rising prices too. Last November, when ethanol exports hit record levels, with 121,000 barrels a day being exported, corn prices were pushed higher as well.
“As we look at the 2011 corn and soybean crops in this country, they’re probably the most valuable crops we’ve ever produced,” Chad Hart, an economics professor at the University of Iowa, said in a recent interview.
Last year, US farmers earned a net income of nearly $98 billion, the highest ever according to the Food and Agricultural Policy Research Institute. These figures are likely to be repeated this year, bringing input prices like fertilizer along for the ride.
Fertilizer prices rising
“Soybean prices are now at five-month highs. This high level of price will ensure farmers use every advantage they can to produce the highest amount of agricultural commodities per acre of land and look for increased use of advanced seeds and fertilizer products,” said Sasha Cekerevac, co-editor of Penny Stock Detectives, in a recent interview.
But despite expected price increases in 2012, the price boost should remain lower than last year’s. Agriculture and Agri-Food Canada recently reported that it expects fertilizer prices to gain only five percent in 2012, compared to the 29 percent rise seen in 2011.
Canada’s grain markets have been affected by other factors this year, including the planned dissolution of the country’s single desk-marketer, the Canada Wheat Board, in August, and the announcement that Viterra (TSX:VT), the country’s largest grain handler, received expressions of interest from third parties.
