Friday, October 12, 2012

Agricultural Commodity Prices Set to Increase Before the South American Harvest Next Spring

by Sober Look
The drought of 2012 has pushed agricultural commodity prices to new highs. In spite if these price increases, demand has remained strong, putting pressure on inventories. Now the focus will be on the harvest progress in South America, as the planting season approaches. With prices remaining at lofty levels, Brazil, Argentina, and others are preparing to plant record harvests, which should ease the supply disruption in late spring of next year. Until then prices will stay elevated and could spike further, particularly if the weather does not cooperate. In fact according to Goldman, prices are going to rise on tight supplies alone, but the path will clearly depend on the weather.
GS: – The current spike has come in response to the summer drought in the US Midwest, which was one of the worst in the past century. In addition, a wide set of agricultural commodity producing countries have experienced adverse weather conditions (such as Brazil and Argentina in the past winter, and Russia, Ukraine, Kazakhstan and India). Damien Courvalin from our Commodities Strategy Team points out that these disruptions have caused substantial losses in global food supply.

Despite the resulting 40% spike in the S&P GSCI® Agricultural Index between mid-June and mid-July, demand for agricultural commodities has remained robust. The net result has been a decline in inventories, with the USDA’s September 1 stocks of corn and wheat well below expectations…
Our Commodities Strategy team expect demand to remain resilient and supply to remain binding, leading soybean and corn prices to new highs in the coming months. Higher prices will eventually be followed by a supply response, and if weather returns to normal, we should expect a large crop in South America (harvested next spring) and in the US (harvested next autumn). In the interim, prices are likely to remain high.
However, there is a clear weather dependency to this assessment; further weather adversity is likely to pose further upside risks to food prices.

Source: GS
This projection suggests that we may not have seen the highs for the year in agricultural commodities. Prices could rise further before the South American crops bring much needed relief.

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