The worst US drought in
50 years has sent commodity prices in grain and livestock to
record highs, and in spite of a drop-back in prices,
traders say volatility is to be expected for as much as another
year. As of September 4, the soya bean price was up 32% and
that for corn up 45% since the end of May.
The effects are not only
being felt in ethanol production and livestock feed.
farmers in the western states, large numbers of horses are
dying as pastures are completely dry and ranchers cannot afford
to buy hay at present prices. "People dont realize how
bad it is because horses are not part of the food chain, but
the drought has resulted in a lot of animals just starving to
death," says one farmer. "We will end this year in the lowest
stocks-to-use ratio in grain for many years."
Blu Putnam, chief
economist at CME Group, says: "In the US, food and energy
prices are likely to tick up, although the interconnectedness
of the world now means that the impact will be felt globally.
In China, for example, feed-price increases will be felt in a
shortage of pork."
Scott Shellady, a trader
on CME, says he thinks that corn prices are still at risk of
moving higher. "Its been a lackadaisical few weeks, the
August report was fairly unsurprising and traders have been on
holiday. Its a contrarian opinion but I think we could be
setting up for a move higher. And if we go over the all-time
high of $8.40 [per bushel] then it could take off."
a commodities analyst at Barclays, says this drought differs
from that of 2007 in that it is more focused around the US. Oil
prices are also lower now than during the last drought and
inventory levels in China are higher.
Unnikrishnan says the
market has priced in the big drop in
global supply, but the question is how demand will respond
to the price increases. She expects an elevated degree of
prices continuing into early 2013 because of
tightened supply, but that the focus will be on south
Americas harvest in April.
One trader says the south America harvest needs to be a
bumper one. "There is no wiggle room on crops now. South
America has to be a bumper crop as does the crop in the
northern hemisphere next year." He says the lack of leeway
makes for extremely volatile markets. "The first weather
forecast that seems slightly negative will cause explosive
moves in prices. It might therefore be good value to buy
options in the 2013 crop and sit on them for six months."