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Agricultural Markets: Finely Balanced

April 4, 2014
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Agricultural commodities have risen sharply this year. 

During the first quarter of 2014, the International Gains and Oilseeds Index (“GOI”) rose from 250 to 267 or 6.8%. The GOI was positively affected by increases in the price of wheat, maize and barley, which was partly offset by declines in soybeans and rice. The increase in agricultural prices is mainly due to unfavorable U.S. weather conditions and concerns over Ukraine, a major grain exporter. The potential impact of continued political tensions in the Ukraine and the Black Sea region remains uncertain. The political and economic/financial uncertainty caused by the tensions in the region has increased prices and volatility. Russia and Ukraine are both significant exporters of wheat, with the Ukraine the third leading global exporter of maize.

The preliminary projection for the 2014/2015 total grains balance estimates output at 1,949 million tons (“mt”), down 1% year-over-year, while consumption is expected to rise 1.1%. Global markets would be exceedingly tight if production of total grains had not risen strongly in 2013/2014. In 2013/2014 total grains production rose 9.9%. In 2013/2014, carryover stocks of total grains rose 15.8%. It is expected that in 2014/2015 total grain carryover stocks may again rise another 3.6%. The rise is carryover stocks to a large extent has moderated the impact weak production of total grains.

Paul Conway, Vice Chairman of Cargill, the U.S. agricultural trading house, said extreme weather events were becoming more common, raising price volatility and leaving “very little room for error” in the supply chain. Mr. Conway stated, “We are still living on a knife edge. With the increase in GDP, increase in consumption, also driven by meat, we need a good planting season, a good growing season and a good harvest season in the northern hemisphere and then a repeat in the southern hemisphere”.

A number of meteorological forecasters have indicated there is possibility of an El Niño weather event developing later this year. While the implications for the agricultural markets and crop production are not clear, an El Niño is normally associated with  extreme climate change as pattern oscillations fluctuate weather across the Pacific Ocean resulting in droughts, floods, and lower crop yields in varying regions of the world. It was reported in the Wall Street Journal towards the end of the first quarter 2014 that the Australia’s Bureau of Meteorology expects a volatile El Niño weather pattern will return this year and forecasts a drier-than-normal weather for parts of the north and east of the country, and wetter-than-normal weather for the southwest, potentially causing problems for the production of crops.

The return of El Niño this year could add to a strong rally in agricultural commodities prices.

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