If so, we need to pay attention to the lessons this will have for us in a number of linked industries. The key takeaway: commodities are not stand-alone markets. What happens in corn in the USA also affects the ability of Chinese middle class consumers to buy pork at reasonable prices.
Global production will rise 5.6 percent to 866.2 million metric tons in 2011-2012, still too little to meet demand of 871.7 million tons. Demand is being driven by China where both drought and floods have seriously damaged production. As it economic growth has spiralled China has also massively increase its consumption of meat products and corn provides a staple feed for pigs and poultry.
We might also see wheat being substituted for corn in animal feed. Wheat is at its cheapest relative to corn in 15 years. US futures have hit a 6 month low on news that the harvest is reasonably good. But that doesn't mean its cheap - in fact in real terms (i.e., take out inflation) its at its highest real value since its peak in 2007-08. The markets are looking at what they say is "way too much grain" but we think that situation can change. A great deal depends on the EU harvest (and rain suggests that might be good) and the position of Russia which may re-start wheat exports that were suspended following the fires of last year.
If cheaper wheat can't absorb some of the extra cost of feeding animals (corn can account for as much as 40% of the cost of poultry feed), livestock owners could react by increasing the rate at which they slaughter. This has yet to occur and the situation is a little more complicated than one might expect: cattle slaughters in the Mid-West of the USA are lower than for this time last year. Fewer cattle moved from grazing into feedlots during May from the same period last year. The smaller number of "feeders" reflects fewer calves being born during the last year as cattle producers tighten their herds before the fattening phase in the face of the doubling of corn prices. China is in a different situation having already reduced its pig herd. Huge middle class demand and rapidly rising pork prices will drive an expansion of production and so hit feed prices. Chicken production is also booming despite outbreaks of disease.
While there appears not to be a world market for alternative fuels, high renewable prices overall suggest continued bullishness in other oilseeds that can be turned into fuel. That doesn't include soyabeans (which have a relatively low oil content) and which gets driven by the animal feed market for meal - overall soyabeans look a little weak, plantings are lagging as farmers focus on getting the new corn crop planted. But higher oil bearing crops, rapeseed/ canola and of course in the tropics palm oil will see benefits in the bio-fuel complex.
What lessons are to be learned? Our perspective is to look at the longer term and disregard short-term ups and downs. The key lesson is that as never before this is a highly connected world where floods in the Yangtze River Basin can drive crop plantings in the Mid-West.
Asia, and China in particular will play a more important role in all our markets; when China sneezes, we all catch cold, or in this case food prices everywhere will jump. This helps make sense of food security strategies being employed elsewhere e.g., as Gulf Arab states secure their own physical supplies and as China looks to invest in Africa. We remain convinced that the food commodity markets will become more finely balanced and more subject to sudden reversal.
For more information or to ask questions, please write to foodworks@quartermainesworld.com. We enjoy your comments and will respond to every question.
