Reduced plantings of cereals, tighter world stocks and continued growth in demand should signal a return to the “bull market” for grains early next year.
Chicago analyst Dan Basse, of AgResource, told the Global Grain 2008 conference in Geneva in mid-November that commodity prices would bottom out in the first quarter of 2009, and then start to improve as traders switched their focus from this year’s bumper crop to next year’s tighter market.
Mr Basse admitted to being surprised by the extent to which the trade had collapsed in 2008, though this was as much to do with speculators as the bumper global harvest.
For example, fund managers had held some 820,000 futures contracts on the Chicago Board of Trade last May, but by November this had dropped to 500,000 as they closed out their positions in search of cash. “Market volatility in 2008 was something to behold,” he said.
But the “get me out” (GMO) approach was ending and market fundamentals returning.
Soaring fertiliser prices and recent depressed prices meant farmers the world over were planting less grain this season as they had seen their margins squeezed.
Mr Basse reckoned world wheat production would decline by 31m tonnes to 647m tonnes in 2009, with lower output in the EU, the USA, Canada, China, Russia and Ukraine. Overall, world grain production was predicted 3-5% down, especially if there was a weather problem along the way. “And the odds of back-to-back favourable weather are historically low.”
This downturn in world output would be exacerbated by the very tight stock situation, said Mr Basse.
“I have been very disappointed by the extent to which world grain stocks have increased, given the high prices of 2007 and record crops of 2008. For all the work of the market, we have only seen an 11m tonne increase, whereas I would have expected a 60m-70m tonne increase.”
This was only the second time since 2000 that grain stocks had increased at all and Mr Basse forecast a 20m-30m tonne decrease in 2009.
The poor recovery in the stock position reflected the fact that global demand for grains was still at record levels and, despite the recession, would continue to grow in the years ahead.
Mr Basse reckoned that, by mid-2009, globalisation would quicken, with China, India, Russia and Brazil all increasing their economic strength. “The USA is losing its role as the big global leader – both politically and economically,” he added. It was running up huge debts and would soon be running into problems of inflation too.
The emerging economies, while they might see economic growth drop from 8% to 6% in 2009, were still growing. And, as per capita income increased, so did demand for a western-style diet.
This had led to a steady and continuing expansion of the Chinese pig herd and poultry flock, for example, which required extra quantities of feed grain. Global demand for feed wheat had almost doubled in 2008 to over 120m tonnes.
Biofuel production would also continue to expand, especially given US president-elect Barack Obama’s enthusiasm for alternative fuels, and this was another reason to expect firmer prices. “I believe agriculture is still in a bull market that will last another five to ten years,” said Mr Basse.