Iffy Chinese demand makes it hard to gauge the outlook for bulk metals such as copper and iron ore. But grains look different. Global stocks of agricultural commodities are low and the drought that hit harvests in the fall of 2012 has continued, jeopardizing the new wheat crop. With low rainfall also hitting river-borne U.S. trade routes, grain prices may well stay elevated.
Prices of corn and soybeans have retreated somewhat from the record highs they reached when the severity of last summer's dry spell became clear. But the lull may be deceptive. Several factors point to high prices next year.
Dry weather has persisted, with some 63 per cent of the continental United States facing at least "moderate drought conditions" in early December, according to the U.S. Drought Monitor.
Snarled logistics could exacerbate cost pressures. Water levels on the Mississippi River, a critical grain transit corridor, are near record lows, causing headaches for barge operators. Supply risks also extend beyond the United States. Unsettled weather has delayed recent plantings in Argentina, another big grain exporter.
Stockpiles offer scant comfort. The U.S. Department of Agriculture recently estimated U.S. corn reserves at 647 million bushels for 2012-13, the lowest level in 17 years and a thin-looking 5.8 per cent of total demand. Soybean inventories are headed for a nine-year low. One exception is wheat, where the USDA recently bumped up its stockpile forecast. But the UN Food and Agriculture Organization expects tighter stocks for a variety of important foodstuffs next year.
That should support prices even before taking ultra-low interest rates and central bank money printing – which can boost demand for inflation hedges like agricultural commodities – into account. Demand for corn in U.S. ethanol production is another potent factor.
It all fits a broader theme: Since the financial crisis, unusually low stockpiles have left agricultural markets on a razor's edge. Prices may only fall significantly in 2013 if near-ideal weather delivers the bumper harvests needed to supply the world's growing hunger for grains.