The evidence of a slowing world economy is building, making it difficult to expect a winter grain price rally like we had last season.
While there is hope that grain prices could rise some from today’s level, the fundamentals, and particularly the market psychology, are not in place to test the price highs seen earlier this year.
The United States, clearly, is in recession. The domestic auto industry is on the brink of bankruptcy and the jobless rate is at a 14 year high and climbing. Most European Union countries and Japan are also in recession.
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China’s economy grew at its slowest pace in five years in the third quarter, and its October industrial production and trade figures suggested the slowdown is deepening.
India’s growth is also slowing.
The slowing world economy has caused the Organization of Petroleum Exporting Countries and other forecasters to reduce their expectations of oil demand for 2009, further weakening the price of a barrel of crude.
In the U.S. alone, oil use has dropped 5.4 percent this year and it is expected to drop a further 1.3 percent next year.
The weak economy has forced ocean freight to a fraction of what it was six months ago, and credit tightness is impeding what trade there might be.
The situation was summed up in the following quote found in a Bloomberg news service story Nov. 17.
“We’re not trading grain fundamentals here. We’re trading gloom and doom,” said Sid Love, analyst for Kropf & Love.
The various stimulus packages governments are implementing will not bear fruit until next year.
The main hope for higher grain prices in the second half of 2008-09 is the possibility of a major weather problem in South America hurting the soybean crop there.
It has been dry in Argentina for months. The Buenos Aires grain exchange this week shaved its wheat crop forecast to 10.5 million tonnes from 11 million last month and 12 million forecast in September. Because of an otherwise big world wheat crop, this modest reduction in Argentina’s wheat outlook is doing little to support prices.
However, the world oilseed supply balance is tighter and if problems develop this winter in Argentina’s soybean crop, the third largest in the world, it could cause traders to worry.
A limiting factor to rallies during the winter is that many farmers in Canada, the United States and elsewhere have been reluctant to open their bins and sell at current low prices. If prices rally, it could attract strong deliveries that would cut the rally short.
Another limiting factor is that oil prices are unlikely to rally significantly in 2009. Oil’s rally last year was like a booster engine, providing much momentum to all commodities including grain. If oil remains stagnant, it will act more like an anchor this coming year.
The only good thing about a dimming outlook for 2009 markets is that it could be setting up a strong 2010.
If weak prices today cause farmers and oil producers to reduce investment in production, the world might again find itself short of grain and oil when economic activity rebounds.
