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Top Economist Says, "Higher Crop Prices Are Permanent." What Are Your Thoughts On The Future Of Farming?
Any opinions on this article.....what do you think?
Higher crop prices 'permanent', top economist says.
From Agrimoney.com
Chinese demand for food commodities may be playing a bigger role than analysts believe in the rally in grain prices, and betrays a shortfall which may lead to "permanently higher prices", one of Europe's most respected economists has said.
While Russia's drought-hit harvest created a spark for the surge in grain markets, which has seen Chicago wheat prices stabilise 60% above late-June levels, China's dependence on agricultural imports may fuel long-term strength, Dylan Grice said.
Mr Grice, with Albert Edwards, forms one of the City's best-respected economic teams, at Societe Generale, the French bank which on Wednesday advised investors to sell down soft commodity positions, citing concerns over regulation.
However, Mr Grice's paper, which advised investors that shares in groups such as America's Archer Daniels Midland, Australia's Incitec Pivot, Europe's Syngenta and Singapore Golden Agri Resources "might be worth looking at", represents a longer-term view.
'Permanent structural shift'
He compared the rally in grain markets to the jump in oil prices in 1973 caused by an embargo by producers' cartel Opec, which worked so "spectacularly" because the US had by then run out of spare production capacity.
A similar embargo in 1967 had no impact, because the US at the time still had a surplus of its own supplies.
The" violence" of the 1970s' jump in oil prices, which have never recovered in real terms to levels before the embargo, and their "continued volatility was caused by a permanent structural shift", Mr Grice said.
"Real oil prices would have eventually risen anyway because underlying conditions reuired.
"A similar shift seems to be playing out in grain markets today."
Farms vs factories
Unlike 1972, when a poor Russian grain harvest also sent crop prices soaring, Chinese demand, stoked by its decision to turn from a farm-based to factory –based economy, could keep crop prices high.
"The logic of industrialisation in such a land and water constrained country implies scarce water and land be effectively imported via grain and livestock, while abundant labour is exported through manufactured products," Mr Grice said.
China, with 7% of the world's land but 22% of its population, wasn't "coming close" to raising its agricultural productivity in line with demand from its increasingly demanding consumers.
"The strain first started to show in the collapse of Chinese inventories in the early 2000s. Now, as China tries to rebuild them, it is showing up in China's surging import dependency.
"It seems reasonable to think that it will soon be showing up in price."
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Replies to This Discussion
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Permalink Reply by Joann on
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I believe Mr. Grice is ignoring a number of key elements in his summation.
1. The price of commodities is set in $US at CBT but the effect of the basis price is not mentioned.
2. The U.N. has presented papers to support the argument of price manipulation as a result of use of commodities in derivatives markets. The rise and fall of the price of commodities has less to do less supply and demand than with banksters greed on Wall Street. Quoting Olivier De Schutter (U.N.) 'A significant contributory cause of the price spike [has been] speculation by institutional investors who did not have any expertise or interest in agricultural commodities, and who invested in commodities index funds or in order to hedge speculative bets.'
3. The $US is the currency of choice in global crude oil trade. Oil companies sell the crude in $US around the world while using local currencies to pay for taxes, wages, benefits, and other associated costs. Consumers in countries with non-dollar appreciating currencies enjoy cheaper oil, while citizens in $US-pegged countries pay a higher premium for the same barrel. A $US devaluation affects world oil supply and demand along with other commodities.
4. In the early 1800's, China and India were the world's two largest economies. In 1900 the sterling was the global reserve currency but as the British Empire collapsed in 1948, and the $US became the global standard (now also along with the Euro). But America and many European countries are in severe financial difficulties with trillions of $ of debt while China maintains surpluses.
A few things are happening today.
The U.N. is talking about "bolstered global governance system for world food security". Stating; “We have to build a more coherent and effective system of governance for world food security; we have to correct the policies and international trade system that have resulted in more hunger and poverty." An international body seeking to control the price of commodities.
There is much chatter of replacing the $US as the world's reserve (while fearing the effects of the yuan) to a new international currency (proposed in a IMF report: Bancor). "The global central bank could serve as a lender of last resort, providing needed systemic liquidity in the event of adverse shocks and more automatically than at present. Such liquidity was provided in the most recent crisis mainly by the U.S. Federal Reserve, which however may not always provide such liquidity."
In my opinion, I don't see prices going up permanently. I see a real shift of control of agricultural commodities...production and marketing....hence the wild card with pricing.
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China has a problem with its rice crops, and the same with all south east asia. Coastal areas are being flooded raising sea water. Also the work force once in the country producing food is now producing shitty products. I know I bought one, a pellet machine piece of . As a result they are changing their diet to wheat. rather an rice. The day I believe an economist any ecconomist, with wishy washy facts. For one they have the word con in their title. I get my facts from people, not the world bank or a stock market milipulated by them. Farming is governed by the seasons, weather, enveroment and supply and demand. Not ecconomist who theorizes, all they are nothing but modern day sathsayers. More filth we farms have to deal with. Anyone can prodic the future after the fact.
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Permalink Reply by Joe Dales on
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I am bullish about the short and medium term for agriculture prices....China, India want more and better food...and they are beginning to be able to afford it....
Production is hard to ramp up quickly and if there is drought etc like in Russia....we don't overproduce.
I am becoming very concerned with the extreme volatility of agriculture commodities....
One USDA report, can move markets and swing billions of dollars in minutes....soybeans moving $.50/bu in a day???
It cuts both ways...in June, I was concerned about low grain prices...it looked like a huge crop in the USA...
Obviously major players are involved...governments....spec funds....I doubt things will change in the medium term.
Food is still important.
While I am bullish....I also think it is going to be a wild ride.
Joe Dales
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There are many things happening in the US. The Bill concerning current low interest rates the Americans enjoy today is about to expire. Congress recently passed the Currency Reform for Fair Trade Act. "It's an amendment that gives dangerous new protectionist powers to the notorious Smoot-Hawley Tariff Act, the proximate cause of the global Great Depression, which after all these years is still on the books."
The link provides a graph comparing Wall Street in 1936-1938 and 09-10. The similarities are very curious.
http://online.wsj.com/article_email/SB10001424052748704116004575521...
"The bill, if passed by the Senate and signed by the president, would mandate that the Department of Commerce take a foreign country's currency interventions into account in determining whether its trading practices are unfair".
China and its undervalued currency is the main target/
If there is a trade war......money will be tight. When money is tight..... commodity prices drop.
I will not predict a bear or bull environment...... I will just predict a wild ride. I believe our government is already tuned as Mr. Flaherty announced yesterday that the "Boom times" are over.
so much for recovery confidence! As the markets goes... so do commodity prices.
Joe Dales said:I am bullish about the short and medium term for agriculture prices....China, India want more and better food...and they are beginning to be able to afford it....
Production is hard to ramp up quickly and if there is drought etc like in Russia....we don't overproduce.
I am becoming very concerned with the extreme volatility of agriculture commodities....
One USDA report, can move markets and swing billions of dollars in minutes....soybeans moving $.50/bu in a day???
It cuts both ways...in June, I was concerned about low grain prices...it looked like a huge crop in the USA...
Obviously major players are involved...governments....spec funds....I doubt things will change in the medium term.
Food is still important.
While I am bullish....I also think it is going to be a wild ride.
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