Second-guessing the big dipper

I listened to one of the top people in UK grain trading the other day. He reviewed the past 12 months during which the graph tracking prices has taken on the look of the big dipper at Great Yarmouth. There was no way a year ago that we could have foreseen how values would rise, he said. There were adequate stocks carried over from the previous year. We seemed set for a quiet time on the markets.

Then suddenly, last July, there were stories of severe drought in Russia and neighbouring countries. It soon became clear the situation was serious and that countries expected to be significant exporters would become importers. Not only that, but they banned exports to protect domestic food supplies. Markets took off, speculators joined in, and we now find grain and other combinable crop prices virtually twice what they were less than a year ago.

Over the next half-hour the speaker went on to describe current confusing market signals. He spoke of how UK traders had over-exported home-grown grain because the demand for it had been there through the autumn and our prices were competitive. He judged that the UK and possibly the whole EU might run out of exportable supplies by March and said potential buyers would be forced to look to the USA and pay whatever extra it cost to ship across the Atlantic.

Against that, he said that consumption at the Ensus ethanol plant, which had been expected to use half a million tonnes of wheat this year, would be well down. But the 2010 harvest here in the UK produced only 15m t against an expectation of 16m t, so those two discrepancies would, to some extent, help balance one another out. Even so, our carry-over stock come next harvest would be lower than was normal or advisable so “prices will continue to be well supported”.

Further afield, the USA had recently given its assessment of grain supply and demand. Production was down and consumption up, so that year-end stocks would be 20m t down on the previous year.

It was a similar story for maize, and the fact that some 40% of American production went for ethanol use must affect the supply/demand balance. Argentina and Brazil had both experienced adverse weather so the world should not expect normal availability from those sources. China was beginning to show signs of a potentially “insatiable” demand.

There was, at present, just enough grain to satisfy all these needs, he said. But the world cannot afford any poor crops in future because every grain will be needed. The alternative would be food rationing.

As he spoke, hungry people in Tunisia were rioting in the streets. Part of the reason was anger at that country’s corrupt and inefficient government. But the trigger that started the unrest was shortage of food and high prices.

I have always clung to the belief that high prices beget low prices. In other words, high prices encourage greater production and lower consumption, which together lead to less demand and lower values.

I still believe it to be a sound system by which to plan a farming strategy. But could it be that we are starting to see the fundamental change that some have been predicting, to a system where supplies of food will be permanently short as demand inexorably rises? The grain trader hinted he thought we might. I am not so sure.