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GrainWorld: Expect more instability, price swings

Winnipeg (Resource News International) — The Canadian agriculture industry can expect to see more instability and price spikes in grain and oilseed futures markets going forward, Prof. Alex McCalla told participants at the Canadian Wheat Board’s annual GrainWorld conference here Monday.

Many analysts believe that structural changes combined with a series of market “shocks,” or sudden shifts in supply and demand, were key factors in driving agriculture prices to the historic levels seen during the 2007-08 and early 2008-09 crop years, said McCalla, professor emeritus of agricultural economics at the University of California.

The basic structural parameters that helped to take the market higher remain in place, he noted. Those factors include greater demand from growing middle class sectors in countries such as China and India, increased competition for water and land due to greater urbanization, and an expanding world population that is forecast to rise to nine billion by 2050.

As a result, a repeat of the recent price spike scenario can be expected, although the timing is unknown. “World markets will continue to be price sensitive to cumulative shocks which will occur randomly,” McCalla said.

In the coming crop years, global agriculture stocks will be rebuilt, albeit at a slow pace, McCalla said. On the other hand, he warned that larger and more frequent production dips are a possibility if global warming results in negative weather events more often and in greater magnitudes.

Another unknown factor, looking forward to the next crop year, will be the supply response now that agriculture prices have collapsed, McCalla said.

“The best we can say about futures markets is that there is likely to be greater annual instability and a possibility of increased frequencies in price spikes,” McCalla concluded.

Macroeconomics

Three alternative explanations for the price spike were also outlined in McCalla’s presentation.

The first focused on the influence of macroeconomic factors, such as crude oil prices and the value of the U.S. dollar. The second explanation tied the price spike to the long market positions taken by hedge and index funds. A third explanation argued that the market was “shocked” higher by greater demand and short supplies.

McCalla was joined on the “Agriculture, Economics and Financial Crisis” panel at GrainWorld by Brian Oleson of the University of Manitoba’s department of agribusiness and agriculture economics.

The “explosion” in crop prices during the calendar years 2006 to 2008 was fuelled by improvements in supply and demand factors, peak crude oil prices, ethanol-related demand, the weak U.S. dollar, improvements in supply and demand fundamentals and a sudden awareness of the growing demand from middle income families in China and India, Oleson said.

Looking forward, Oleson predicts US$3.50 per bushel will be the new price floor for corn, US$8 a bushel will become the new price floor for soybeans and C$425 per tonne (where C$1.00 = US80 cents) will be the new price floor for canola.

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