ANALYSIS BY SAM NELSON
A resurgent U. S. grain market, stoked by drought in South America, spells more financial troubles for struggling meat producers and higher food prices for consumers already pinched by the recession.
The worst drought in decades in Argentina, and in neighbouring Brazil, is helping to rally prices of corn and soybeans at the Chicago Board of Trade (CBOT) at a time when prices have slumped from record highs last summer.
Argentina is the world’s second-largest corn exporter and the third-biggest shipper of soybeans. Brazil is the No. 2 soy exporter, behind the U. S.
“People can lose their jobs and grumble a little but if they lose their opportunity to eat, then there is a very serious problem,” said Gavin Maguire, analyst for brokerage house Ehedger.
Corn and soybean prices have risen more than 25 per cent since early December, adding financial pressure on meat producers, who already were trimming animal and chicken numbers because of shrinking credit and the inability to pass on the increased expenses to retail shoppers.
“If Economics 101 gets applied to the supermarket, then we’re going to see a pretty standard procedure, which is: Fewer supplies of chicken breasts, shall we say, should lead to higher prices down the road,” Maguire said.
The U. S. Department of Agriculture on Feb. 10 released a report confirming that the supply of soybeans and corn in South America had been slashed by drought.
But corn and soybean futures traded on CBOT declined a bit early Feb. 10, rather than rising, because investors had already been buying futures and driving prices higher in anticipation of the cuts in South American output.
“I thought they (U. S. data) were fundamentally constructive, but not a surprise,” said Anne Frick, oilseeds analyst for Prudential Bache Commodities.
The U. S. remains the largest exporter of soybeans, wheat and corn, the main feed grain in the United States. U. S. corn supplies remain abundant, while soy supplies are dwindling.
“It’s a difficult environment, because livestock and poultry producers have had a difficult time passing off their increase in production costs at the grocery store, and that’s why they have reduced herd sizes,” Maguire said.
“Now they’ve cut back the herd size to the point the supply is genuinely limited, and we certainly cannot expect lower food prices in this environment,” he added.
The U. S. Department of Agriculture cut world soybean production estimates nearly four per cent this month because of the South American drought, slashing Argentina’s crop by 5.7 million tonnes, and cutting Brazil’s output by two million and Paraguay’s by 1.6 million tonnes, USDA said.
“The main change to the report is the decline in Argentina and Brazil. That was expected, but maybe it is a little bit more (than estimated),” said Rich Nelson, economist for commodity research firm Allendale Inc.
Meanwhile, the firm floor under grain and soybean prices is giving no relief to cattle, hog and chicken producers, leading to worries about more cutbacks in meat output, which would add to price increases at the supermarket, and not only in the U. S.
China has been aggressively buying soybeans from the U. S. as a precaution against rising food prices and potential food shortages.
“Obviously, there is a lot of resistance to food price increases, and that’s what the Chinese are trying to do with their bean consumption is try to keep their people fed,” Maguire said.