Technical verdict on recovery
Sharp fall in prices of agricultural crops
THE PRICES OF farmed produce – as well as some agricultural “softs” – have fallen fairly sharply on the Chicago futures market over the past few weeks. The falls – especially in the prices of maize and wheat – are also already clearly apparent on South Africa’s Safex agricultural market and will also pull down the price of other foods, such as meat and vegetables.
The drop in the prices of main agricultural products is good news on the one hand. As recently as six months ago influential institutions such as the International Monetary Fund and the World Bank were forecasting that rising food prices were posing a real danger, leading to increased inflation and hurting economic growth. That danger is certainly receding.
The fall in the price of grain, especially, is of course bad news for producers. But before they start complaining they should remember prices are still considerably higher than they were a year ago.
The unexpected turnaround in prices from sharp increases to falls naturally also creates opportunities for speculators. In fact, at the moment there are a few opportunities on Safex crying out to be utilised by speculators with a fairly high risk profile.
The price drop of wheat in Chicago over the past two months is actually quite an interesting story in itself. In March/ April it rained very heavily in the United States. The Mississippi broke its banks for many kilometres. Speculators were quick to deduce large areas of the US’s best agricultural land would be too wet to plant wheat so there would be an even greater shortage. The price rose to around US833c/bushel.
But just when it looked as if there would be no end to the price increase, the Russians announced they were lifting their 2008 ban on exporting grain. Readers will remember there were impending food shortages and sharp price rises in 2008. India banned the export of rice and the Mexicans had to subsidise the price of maize, the national food for its masses.
Shortly after the Russian announcement caused a sharp fall in the wheat price, the US Department of Agriculture made the shocking estimate that, despite the flooded Mississippi, the country’s producers had planted the most hectares of grain since 1944. That caused chaos and the price of once scarce wheat fell to the current 640c/bushel – less than the price of maize. Now wheat is even being used in the US to produce the almost worthless ethanol. This kind of price anomaly – wheat is traditionally 30% to 50% more expensive than maize worldwide – naturally produced wonderful opportunities for speculators.
The short table with a few agricultural prices in Chicago illustrates clearly how the market always corrects ridiculous situations. The price of cotton (see graph), an annual plant, dropped 43% over the past quarter. Recently we heard T-shirts, even those we wear to play golf, are becoming thinner in order to save expensive cotton.
The sharp fall in the global price of wheat has also spilled over to SA. We don’t produce enough wheat for our domestic needs and so have to import quite a few hundred thousand tons every year. Lower import prices also affect domestic prices – and that’s why the price of wheat on Safex has already dropped from May’s R3 400/t to the current R2 930/t. But that’s not the end of it. The price of recently planted wheat – which will only be harvested in December – is already down to R2 770/t and seems set to fall even further.
From May’s R3 400/t to December’s R2 770/t is already a fall of just under 20%. We’re waiting to see if local millers and particularly bakers will have the cheek to increase the price of bread later this year. The price of wheat is 20% lower, so please don’t try to use – as in the past – the excuse of increased postage to justify a planned bread price increase. Don’t forget: SA’s competition authorities have some very sharp teeth.
The same price anomaly that wheat is experiencing – where the price of the