Tech­ni­cal ver­dict on re­cov­ery

Sharp fall in prices of agri­cul­tural crops

Finweek English Edition - - FRONT PAGE -

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

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