World crops shock looms

AUSTRALIAN farmers are about to benefit from a surge in the global price of corn, wheat, soybean and sugar, as extreme weather knocks out key food producers around the world.

By InvestSMART · 21 Jul 2012

By InvestSMART ·
21 Jul 2012

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AUSTRALIAN farmers are about to benefit from a surge in the global price of corn, wheat, soybean and sugar, as extreme weather knocks out key food producers around the world.

But economists warn that Australian consumers are at risk of an uptick in food prices as suppliers pass on higher costs of production amid competition from overseas for quality produce.

In the past six weeks, world corn and soybean prices have surged more than 50 per cent as the worst US drought in 56 years cripples production.

Extremely hot weather in the US farmbelt a region that accounts for a third of global corn production has become so bad that analysts expect the price of corn on world markets to stay near record levels for the next year.

Australian producers exporting their goods will be able to charge overseas customers more, putting pressure on the volume and prices of goods sold into the local supply chain.

Early wheat harvests in southern Russia and Ukraine report declines of up to 40 per cent from last year, following damaging winter weather in the Black Sea region.

The supply shocks to the US and Black Sea regions alone mean global corn and wheat stocks are expected to fall by at least 15 per cent this year.

This week, the Chicago Board of Trade said corn prices were up 53 per cent since June, wheat prices climbed 41 per cent, while soybeans were 27 per cent higher.

"The US corn crop is a category killer," said senior ANZ agricultural economist Paul Deane. "It is such a massive crop that, depending on what yields do, it can set the tone for the grain market for the next 12 months.

"We've pretty much got an assured bull market in grains again for another 12 months. These prices are certainly here to stay. They're not going to disappear very quickly."

Sugar prices also soared in recent weeks after continual wet weather in Brazil, which supplies more than 50 per cent of world sugar exports.

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Frequently Asked Questions about this Article…

Why are corn, wheat, soybean and sugar prices surging on world markets?

Extreme weather is knocking out key producers around the world. A severe US drought has crippled corn and soybean production, damaging the US farmbelt that supplies about a third of global corn. Damaging winter weather has cut early wheat harvests in southern Russia and Ukraine, and continual wet weather in Brazil has hit sugar output. Those supply shocks are pushing global crop prices higher.

How much have corn, wheat and soybean prices risen recently?

Price moves have been sharp: the Chicago Board of Trade reported corn up about 53% since June, wheat about 41% higher, and soybeans roughly 27% higher over the same period. Sugar has also surged following wet weather in Brazil, the world’s biggest sugar exporter.

What does the crop price surge mean for Australian farmers and exporters?

Australian producers exporting crops can benefit by charging overseas customers more as global prices rise. Higher world prices present a chance for improved returns for farmers who sell into export markets.

Could higher global grain and sugar prices lead to rising food prices for Australian consumers?

Yes. Economists warn Australian consumers are at risk of an uptick in food prices as suppliers may pass on higher production costs and exporters compete overseas for the best quality produce, putting pressure on local supply volumes and prices.

How are US and Black Sea supply shocks affecting global grain stocks?

The combined supply shocks from the US drought and declines in the Black Sea region mean global corn and wheat stocks are expected to fall by at least 15% this year, tightening supply and supporting higher prices.

Are grain prices expected to stay high or fall quickly?

Analysts quoted in the article expect a sustained period of higher prices. With the US corn crop so influential, experts say corn prices are likely to remain near record levels for the next year and describe an ‘assured bull market in grains’ for roughly 12 months.

What role does Brazil’s weather play in global sugar prices?

Brazil supplies more than half of world sugar exports, so continual wet weather there has reduced supply and caused sugar prices to soar in recent weeks, contributing to the global price spike.

What should everyday investors watch in the coming months related to the crop shock?

Investors should monitor weather in key growing regions (the US farmbelt, the Black Sea and Brazil), seasonal harvest reports, and global stock estimates—these drive corn, wheat, soybean and sugar prices. The article highlights that yields and harvest outcomes over the next 12 months will set the tone for the grain market.