Grain Prices Continue To Ease

MATTHEW ENIS

CHICAGO — Wheat, corn and soybean futures all fell to multiweek lows last week due to a confluence of factors, including expectations that, due to higher-than-anticipated yields, global production of these crops would outpace demand in the coming months.

The price declines have offered some relief to meat, poultry and egg producers as well as to bakeries, all of which faced soaring input costs earlier this year as prices of feed and flour followed the commodities markets' rise.

The decline in wheat prices has been most pronounced. In late February, with global stocks at a 60-year low, concerns about drought in Australia helped push the most active wheat futures to a record high of $13.49 per bushel on the Chicago Board of Trade.

The price of flour spiked as a result, and many suppliers, as well as many in-store bakeries, were forced to raise their prices on bread and other baked goods. Since then, prices have declined 45%, reaching $7.43 per bushel last week — a three-month low — according to a report by Bloomberg newswires.

The declines have happened in part because the U.S. Department of Agriculture has repeatedly raised its yield estimates this year.

In August, analysts at the USDA's Economic Research Service wrote in a report that “forecast all wheat production, at 2,462 million bushels, is up 2 million bushels from the July forecast and up 396 million bushels from 2007. Production for 2008, if realized, would be the highest since 1998. Harvested area is forecast at 56.6 million acres, unchanged from July, but up 5.6 million acres from 2007 … Projected U.S. 2008/09 ending stocks are up 37 million bushels from July.”

Similarly, soybeans were trading as low as $11.73 per bushel early last week, down from a record high of $16.37 in early July. Unlike wheat, the decline in soybean prices has occurred despite tightening supplies. USDA's ERS attributed the rapid drop to several factors, noting in an August report that mild summer weather has reduced built-in risk premiums for the crop, and that falling oil and fuel prices have helped ease inflationary pressures on the farm sector. Other market analysts, however, have noted that the strengthening U.S. dollar has made agricultural exports less palatable to world markets, increasing domestic supplies, while simultaneously leading non-commercial speculators to drop commodities as a hedge against inflation.

Corn also fell to $5.20 per bushel — a four-week low, and a significant drop from a record high of $8 per bushel in July. Last month, the USDA said that U.S. farms would likely produce the second-highest corn yield on record at 12.3 billion bushels. Yet, like soybeans, the price of corn has appeared to be tightly linked to energy prices and the strength of the U.S. dollar in recent months, and analysts mostly attributed last week's drop to the federal bailout of mortgage firms Fannie Mae and Freddie Mac, which helped strengthen the dollar against a basket of other currencies.

“The renewed rally in the dollar is a dominating factor moving grains, and the commodities markets are likely to be pressured until later this week when U.S. data provides some certainty over crop conditions and output,” a trader at KB Futures told Reuters.

Despite these recent price declines, the cost of wheat and corn is still significantly higher than average when compared with recent years. As recently as 2005, corn was trading at $2 per bushel. Federal mandates for ethanol production are one of the primary reasons that demand for the crop has risen so steeply during the intervening years.

And, since the U.S. Environmental Protection Agency recently reiterated its commitment to the mandates, the rise and fall of corn prices will likely continue to mirror fluctuations in oil and energy markets for the foreseeable future, until viable alternatives to corn-based ethanol, such as ethanol from switchgrass or plant cellulose, are introduced on a large scale.

45%
The decline in wheat prices since late February, to $7.43 per bushel.
Source: Bloomberg newswires