Producers who think grain prices have forever shifted to a higher plateau may be in for a surprise, says a senior executive at a Canadian agricultural think-tank.
Larry Martin, chief executive officer of the George Morris Centre, disagrees with analysts who say biofuel demand has permanently revitalized grain markets.
“I do not believe that this is long term. I think it’s a blip,” he said.
There has already been a backlash to rising food costs. Markets around the world are reacting in ways that will eventually keep commodity prices in check.
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Food issues
In India, policy measures have been adopted to bolster food supplies to get a handle on rampant inflation that has become a political hot potato for the government.
Martin said developing countries are the first to feel the pinch of what some analysts have dubbed agflation. Consumers in those countries are more price sensitive and tend to eat raw grains, oilseeds and pulses.
North Americans are less sensitive to price increases because food is a smaller percentage of their living costs and their diet includes more processed foods that contain many other costs such as packaging and labelling.
But last week there were reports from Europe where the shift out of barley production into rapeseed to supply biodiesel refineries has helped cause malting barley prices to rise 40 percent in two years.
“It’s now becoming a political issue in Germany because it’s affecting the price of beer. Beer is a big deal in Germany,” said Martin.
As more of that consumer angst takes hold in biofuel-producing nations, there will be pressure on governments to reduce their subsidies to the industry.
And there will be greater incentives for developers of cellulose based fuels to redouble their efforts.
Prices will fall when that policy-changing momentum is coupled with the natural tendency for farmers to grow more of the crops in demand.
“I think (the biofuel rally) could be fairly short-lived,” said Martin, noting that in his 35 plus years as a grain industry observer, markets have always corrected themselves.
Analysts say another market myth that needs to be put to rest is the assertion that grain prices are at 10 year highs. While that may be true in the United States, it isn’t the case north of the border because of the ever strengthening Canadian dollar.
“That has done a lot to moderate the rise in commodity prices,” said Chris Beckman, oilseed analyst with Agriculture Canada.
“The prices this year are nice but they’re not as high as they were two or three years ago.”
His agency is forecasting a 2007-08 canola price of $380 per tonne, down from $415 in 2002-03 and $440 in 1996-97.
The price of No. 1 CW red spring wheat is forecast at $212 per tonne, down from $241 in 2002-03 and $254 in 1996-97.
“We’re well off the highs in terms of wheat,” he said.
However, this rally is based on a new source of demand rather than production problems in major grain regions.
“I think this is probably the biggest shock to the system we’ve seen since 1972,” said Beckman, referring to an event known as the Great Grain Robbery, when Russia came into the market unexpectedly, buying up significant volumes of grain.
But he agreed with Martin that world production is rapidly reacting to the price signals, offsetting the effects of the new source of demand.
He said the length of the rally depends to a great extent on government policy.
