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News and analysis on the global poultry
and animal feed industries.
Livestock Feed Manufacturing
on May 1, 2009

Coping with crop price volatility

Wide crop price spread possible in 2009-10

Crop prices may not be quite as volatile as they were last year, but that doesn't mean feed companies can escape dramatic upturns and downturns. Far from it. "There is potentially a very wide, $2/bu. range for corn (maize) prices for December Chicago Board of Trade futures, anywhere between US$3.50 and $5.50/bu.," says University of Illinois economist Darrel Good.

If energy prices remain low, the global economy remains weak, and there are no crop fears, prices are likely to remain on the low end. But higher energy prices, a stronger economy, and fears of lower crop yields materialize, prices could be on the upper side, Good says. "One, even both of these scenarios could play out this year," he says.

"Although a great deal of further empirical investigation is needed, there are strong reasons to think that increased volatility of global grain prices is here to stay, and may grow further," says Christopher Delgado, Strategy and Policy Advisor for the World Bank.

More turn to spot market

After getting burned with hedging programs last year, a number of feed companies interviewed by Feed International in recent weeks say they are changing how they purchase grain. Now, these companies say, they are buying grain inputs in the spot market rather than extensive hedging.

While such a view is understandable after last year's price surge of maize and other grain and oilseeds and then crash, the abandonment of using futures contacts concerns Richard Brock, president of Brock Associates. One important question, he says, "is will futures contracts exists three years from now?" Without futures contracts that allow both feed companies as well as farmers to offset their commodity price risk, Brock believes there would be more price volatility, not less. The result, he says, could be more feed company consolidation.

Brock places much of the blame for last year's grain price volatility in futures contracts at the door of lax regulation commodity index funds by the Commodity Futures Trading Commission (CFTC). Last June, he says, one commodity index fund totalled $142 billion66.9% in energy, 13.8% in grain, and 5.6% in livestock. Such a huge investment in grains was largely responsible for the last run up in grain prices, he says. A a result, prices took a harder crash when funds liquidated much of their positions . It wasn't just that commodity index funds were heavily invested in grain futures, Brock says, but that they were heavily weighted in net long positions. The lion's share of the problem was created, he says, by the CFTC not enforcing position limits. As a result, now, he says, "cash is not trading its own fundamentals."

Looking at this year, Brock's bearish scenario on maize is for prices to be $2.75 to $3.50/bu., his bullish scenario $4.50 to $5.25, while his average scenario calls for maize prices to be $3.70 to $4.30. With lower acreage and low production, "prices could be $6/bu., but a lot of bad things would have to happen."

$2.50/bu. maize?

Some are far more pessimistic on corn prices. Bill Gary, who has been trading grain since 1961 says in a Bloomberg article that maize will probably tumble 31% to $2.50/bu.

"Volatility is the word that best describes agricultural markets," says Pat Westhoff, co-director and crops economist of the Food and Agricultural Policy Research Institute (FAPRI). While corn futures prices topped near $8/bu. last summer, they fell below $4 by November. FAPRI projects the average farm corn price for the crop to be harvested this fall to be $3.74, and its models call for corn to average about $4/bu. over the next decade. By 2017, FAPRI projects that more U.S. corn will go to fuel than will be fed directly to lievstock.

On the oilseed side, Brock says that "protein demand is still going to be good." His bearish scenario is for soybeans this year to be $6 to $7/bu., his bullish scenario calls for $8.50 to $10.50 beans, while his average scenario points to $6.75 to $8/bu. beans.

FAPRI, meanwhile, projects soybean prices to drop from $9.37 to $8.76 for the crop to be harvested in 2009. Soybeans face lower demand from poultry and livestock feeders. Also, with lower global demand, soy oil prices have declined sharly this year. More soy oil will be diverted into biodiesel, FAPRI says.

Gary believes, however, that soybeans will likely drop 28% this year to $6.50, which would be the lowest level since April 2007.

Possible $100/ton trading range for soybean meal

Looking at October soybean meal futures, Good says a $100/ton trading range--$230 to $330/ton--is possible, and notes that "we've seen $75 already." Good thinks it likely that volatility on soybean meal, like corn, is likely to continue. "There's so much uncertainty that prices could move strongly in either direction."

In Gary's view, "this recession is going to last a lot longer than the one in the 1970s, I don't see any major bull move in commodities in the next several years." Gary accurately predicted in July that prices would plummet as credit tightened, Bloomberg says.

Also agreeing that soybean complex prices will remain under pressure is University of Tennessee economist Daryl Ray. Soybean meal prices are coming down and are likely to go lower in the months ahead, he says. And next year, "a large global soybean crop is probable. Protein prices could be considerably lower." He says that oilseed acreage is increasing substantially in developing nations and that's likely to continue. "The United States is flat, but competition from developing nations is increasing."

Ray says that food is a national security issue for many nations and that's likely to continue, thus propping up his view that soybean production is likely to grow more rapidly than demand. "Nations want to feed their population." For example, he notes that former Soviet bloc countries such as Ukraine are ramping up their grain and oilseed production.

Production rising faster than demand

What's not considered, Ray says, is that "except for short periods, (global) production is rising faster than demand." He adds that "excess capacity in the future will be a worldwide problem." As a result, Ray says, "we should expect continuing periods when agriculture cannot self-correct. We don't see the self correction that we see in other (industrial) sectors." Ray continues that the "bump in ethanol is a temporary thing. It can't continue to go up forever."

Brock says in his newsletter that "it's ironic that many people now view $8.50 soybeans and new-crop corn near $4 as low prices. Those prices are low only when compared to last year's highs. Look at long-term corn and soybean charts and you will discover that $8.50 beans and $4 corn are toward the top of their historical prices ranges. Out of the 290 months since 1985, there have been only 14 monthly closes above current prices in corn futures and 25 in soybeans."

Corn prices are likely to remain near current levels, in the $4/bu range between now and 2010, with soybean meal $250/ton, says economist Paul Aho.

The reason for the crash in grain prices late last year, Aho says, was largely the dramatic decline in oil prices that nobody saw coming. This was mainly due to the downturn in demand caused by the world economic recession. Another reason for the decline in grain prices was the increase in global supplies, particularly higher wheat supplies in Australia. Yet another factor for the decline in grain prices was "the flight of speculators from the market," he says.

Prices linked with oil

In Aho's view, grain prices have become linked to oil prices now that 30% of the U.S. corn crop is used for ethanol, and the corn-energy link is likely to continue.

After a two-year lull, he sees both oil prices and grain prices rising once again by 2011, in part because he believes the world economy will grow once again beginning that year. "We'll likely see $5/bu. corn, even $6/bu.," he says. One additional factor ethanol has created for livestock producers, he says, is that it has made energy feeds more expensive and protein relatively less expensive, and that is likely to continue.

Brock and others agree that corn and energy have become linked and oil prices are a driving force behind the price direction of corn. The World Bank's Delgado says, however, that "the correlation of corn prices with oil prices is much higher when the oil price is high, especially when high relative to corn." Furthermore, he says, metal and oil prices have been more than twice as volatile as corn prices since 2000.

Globally, Aho says, human consumption of all animal protein is taking a hit during the current recession, but he sees poultry coming back once the global economy recovers two years from now, although "beef may stagnate." He adds that the world economy is likely "to come out of it" (the recession) in 2011. He notes that the world economy has gone from a 5% growth in 2004-05 to actually a contraction of 1%, according to a prediction this week by the World Bank.

One reason why Aho believes oil prices are headed back up is what he calls a geopolitical peak: many oil producing nations are unstable politically or have political problems, such as Nigeria, Indonesia, Iran, Iraq, Venezuela, with the exception being Canada. He adds that "oil prices reached $147/barrel last year for an $84/barrel average before the huge drop." But a key point, Aho says, is that "we'll be climbing back up," and again, as energy goes, so goes corn.

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