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Why didn't cop prices go even higher in 2012?

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One of the surprises of 2012 is that grain and oilseed prices did not go higher still.

Sure, Chicago corn futures hit a record $8.43 ¾ a bushel, and soybeans an all-time high of $17.94 ¾ a bushel.

But they appear worth every cent of those gains, and by historical standards more, after a year which brought the US its most widespread drought since the 1950s, following on from a poor South American soybean crop, especially, too.

The setback to crop supplies this year has been on a different scale to that of last year, which drove Chicago corn to its previous record of $7.99 ¾ a bushel.

Tighter squeeze

For corn, the extent of the squeeze is driving the first decline in world use of the grain in 17 years, and the biggest drop in consumption in nearly 30 years, on US Department of Agriculture data.

Even so, the US is expected to end 2012-13 with less than 24 days' supplies of the grain, down from 33 days a year before.

Morgan Stanley hardly looked sensationalist in July forecasting that corn futures would hit $10 a bushel, nor Goldman Sachs in foreseeing soybean futures reaching $20 a bushel.

As for Chicago wheat futures, they never got above $9.47 ¼ a bushel. OK, wheat supplies have been relatively abundant, supported by a strong US crop.

But when supplies of total grains are not far above those of five seasons ago, when prices soared, many investors expected the rally in wheat futures to do better than stalling some 30% below 2008's record high.

Two downers

That prices did not rise further can be attributed largely to two factors – one a disappointment, the other a source of promise for efforts to keep the world fed.

The disappointment is the poor state of the world economy. While this year was hardly expected to prove a banner year for economic expansion, growth has fallen short of modest initial forecasts, including in China, a huge consumer of agricultural commodities.

The reason for cheer is that while many governments have struggled to support economic growth, they have taken a huge leap forward in promoting world food security.

By ignoring the siren calls to answer tight crop supplies by stockpiling, through curbing exports and panic buying, they have steered clear of the tinderbox which has blasted off many previous crop price spikes.

Government trade curbs have proved highly effective at sending agricultural commodity prices soaring, even in crops for which there is no actual shortage.

One of the best examples was in rice, of which trading prices tripled between November 2007 and April 2008 despite ample supplies, after countries such as India and Vietnam responded to tight supplies of other grains by imposing trade curbs.

Winners and losers

Governments deserve applause for, by and large, keeping their heads this time.

Sure, it is a little grating to hand out plaudits to authorities for acting as decency dictates, in avoiding the knee-jerk reaction to meet crop squeeze with stockpiling.

But it would also be churlish not to praise, say, Russian officials for keeping their exports open, despite a wheat crop even worse than in 2010, when a poor harvest sparked an 11-month ban on shipments.

The decision has brought benefits to consumers worldwide, through avoiding an upward price spiral, besides ultimately in Russian agriculture itself, through improving its appeal to agriculture.

The losers are crop bulls who lost out on that extra crop price premium, which may continue to elude them if authorities keep putting the broader good before short-term selfish impulses.

Ironically, a year marked by crop disasters has given huge hope to the cause of feeding the world, affordably.

By Mike Verdin

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