Futurescape 2009 – Rising Prices and Fewer Products

Since the June 2007 highs, commodities have plunged to lows, with corn down 50%, soy 40% and wheat 60%. Yesterday, the USDA reduced its projected corn harvest to12.02 billion bushels, down from last month’s revised estimate of 12.03 billion and below analysts’ estimates of 12.08 billion, and the USDA also went on further to state that corn yield per acre is expected to be 153.8 bushels. Analysts expected the yield to be 154.4 bushels.

In addition to this, farmers are also getting a hit from the current global crisis, due to the fact that banks are tightening credit, many farmers worldwide are having a tough time obtaining credit, which would help in the purchase of the increasingly scarce potash fertilizer as well as farming equipment.

Fundamentally the ag story worldwide is this, the world is at 40 year agricultural stock lows, the consumption growth rate is put at about 3%, which is surely no where near the current production rate, and the world’s population growth rate (a strong fundamental factor for agriculture) is steadily growing. It is more likely that people would cut down on the purchase of luxury items, but people always have to eat, even if they have to reduce their consumption due to financial tightness, the demand for food will remain.

Middle Eastern Food Shortages (above)

It is important to note that without farmers not being able to obtain bank credit, the likely reaction is that they would delay plantings, or have inefficient production rates. Some may argue that in 2007 farmers saw record gains in the agricultural complexes making very high margins on their sales, also in the same light, 2007 also saw record increase in the price of potash which is most commonly used to make fertilizers, therefore translating to higher prices for fertilizer. The price of fertilizer is said to have jumped some 70% in 2007. While this may make up just a small percentage of the cost of farming, they would have to bear these costs again this year in the purchase of fertilizer, and with little financing available the picture doesn’t look good.

Shipping docks are piling up with goods that are not being sold due to frozen Letter of Credit, harvest reports are pointing to harvests that are much lower than what was seen last year. Consumption may currently be slow, but the demand for food commodities still remains, but a bigger problem is the issue of farmers not being able to farm 2009’s harvest due to tightening credit.

When the economy begins to rebound next year, there is a very strong possibility of a food shortage crisis arising. The current world economic crisis may affect the fundamentals in the short term, but there’s a greater adverse effect to be expected in 2009 when the world begins to recover from this period of economic fall, and there still remains the story of inflation, which usually provide itself as a lunch pad for commodities.