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Two reasons why crop price falls will be restrained

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The supercycle in agricultural commodities is looking past its best, but that does not mean prices will fall all the way back to earth.

The US Department of Agriculture on Thursday unveiled a picture of world cotton and grain supplies which displayed anything but the bullish dynamics which have kept values of many grains on the boil at levels well above historic averages.

And this at a time when values of the likes of cocoa, coffee and sugar are already around multi-month lows.

Substantial power looks like returning to buyers from the producers who, with stocks thin, have been able to make price rises stick.

But there are two reasons why prices will not retreat to pre-2007 levels.

Long way to go

The first is that buyers do not yet hold all the cards. Big corn and cotton crops are not in the bag, or bale, yet.

Corn, especially, is vulnerable to any weather setbacks, as brokers have pointed out, questioning the USDA's estimate of a record yield this year.

And, given the world's reliance on the US for exports – with a market share estimated at nearly one-half in 2012-13 – any setback to the American crop would have a mammoth impact on prices worldwide.

Furthermore, oilseeds represent a major blot on the outlook for otherwise-ample supplies.

The extent of the decline in soybean stocks in the US, the top exporter, will take more than one harvest to fix. That means prices staying elevated to incentivise sowings next year too.

Breakeven factor

The second reason is that, even if worries over world crop supplies do return to historic low levels, farm costs will not.

Agricultural suppliers have used the rally in crop values, and farm profits, as an opportunity to lift the prices they charge to growers - a factor for producers of the likes of cocoa, coffee and rubber besides the main grains and oilseeds encompassed by the USDA's estimates Thursday.

Potash prices, for instance, have stabilised at some three times the level they were before crop markets began to take off in 2007.

Higher farm bill will lift the floor to crop values - as many feel they have already done in sugar, whose fall to values near 20 cents a pound is seen threatening profits at marginal cost producers.

Key incentive

What the USDA data highlight is growers' potential, given the right weather and price incentive, to lift crop production enough to meet demand fuelled by emerging markets.

But the weather outlook is still uncertain – and made even more so by forecasts of a switch to an El Nino pattern this year, as often occurs after two successive La Nina seasons.

And it would not take a retreat in prices back to levels buyers were used to persuade farmers to leave land fallow and scrimp on fertilizer and agrichemical applications.


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