Sunday, October 21, 2012

Uncertainties about South American harvests are keeping global grain prices elevated

In spite of promises of record wheat and corn harvests in South America (discussed here), grain prices continue to stay elevated.

May 2013 wheat futures (Source: Barchart)

All eyes are on the soy, corn, and wheat sowing in the Southern Hemisphere, as buyers of agricultural commodities expect these spring crops to replenish the supplies lost to the summer's drought. But is it possible that the South American harvests will be worse than expected? That certainly seems to be the case with respect to Argentina.
Reuters: - Argentina's upcoming wheat harvest is expected to shrink 17 percent from last season, the Agriculture Ministry said on Thursday, as farmers skirt government export curbs by shifting to other crops.

The forecast drop to 11.5 million tonnes is bad news for consumer nations looking to Argentina to help make up for thin supplies caused by droughts in bread basket producers such as the United States, Russia and Australia.

In its monthly crop report, the Argentine ministry stuck by its view that 3.7 million hectares were sown with wheat in the current crop year, down 20 percent from the 2011/12 season.

Farmers have shied away from wheat to avoid export limits that do not apply to Argentina's main agricultural export, soy, which will start being planted this month and could be headed for a record year.
Furthermore, at least so far, the weather in many parts of South America has not cooperated - one uncertainty that all harvest forecasts can not fully incorporate.
Agrimoney: - Prospects of South America replenishing world corn supplies are taking a dent from excessive rains which are delaying plantings, and mean that the crop has got off to a "below average start".

The Buenos Aires grains exchange on Thursday said that the pace of corn sowings in Argentina, the second-ranked exporter, had slowed to 6.9% of area in the last week, leaving 32% of corn planted.

That is 11 points, equivalent to some 370,000 hectares, behind the average pace.

"Planting of commercial corn has slowed due to continuous rainfall that has been recorded over much of the agricultural area," the exchange said, flagging amounts of up to 300mm (12 inches) in some areas.
As discussed before (see post), elevated food prices over a prolonged period of time will generate more uncertainty and even civil unrest in emerging markets nations. The risks of food inflation (which can have a strong impact on inflation expectations) in some countries will also prevent central banks from shifting to a more accommodative policy during periods of slow growth (see post).
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