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Something to Chew On: Riding the commodity roller coaster
Anyone trying to follow the trajectory of crop prices could suffer whiplash
Up, down, all around. For people whose job is to track and, ideally, predict the prices of commodities that are common ingredients in petfood, living through the last year must have seemed like riding a roller coaster.
In July 2008, the price of a bushel of corn was US$7.38, according to Jacobsen Publishing Co. By mid-December, it had fallen to US$3.79. As of this writing, the price on ww.cnnmoney.com is US$3.36, down from US$4.63 just a month before. Anyone trying to follow the trajectory of crop prices could easily suffer whiplash.
Many economic and agricultural experts predict ongoing crop price volatility as the global economy continues to roil. "There is potentially a very wide, US$2/bushel range for corn prices for December Chicago Board of Trade futures, anywhere between US$3.50 and US$5.50," said University of Illinois economist Daniel Good in the May/June issue of Feed Management magazine.
Another economist, Robert Wisner of Iowa State University, said in early June during the World Pork Expo in Des Moines, Iowa, USA, that he looked for maize prices to average US$4.25/bushel, but with yield problems, the price could exceed US$5. According to www.wattagnet.com, Wisner cited several factors for potential price increases:
- Delayed planting of corn in the US Midwest;
- A huge drop in South American crops, which, according to a May 12 report from the US Department of Agriculture (USDA), could decrease as much as 675 million bushels from 2008;
- A decrease in wheat supplies, historically a competitor to corn; and
- A sharp increase in ethanol demand due to US government mandates.
Wisner seems to have made a good case for rising corn prices-but don't take that prediction to the bank (or your purchasing department) yet. USDA's Acreage Report, released on June 30, stated: "Corn planted area for all purposes in 2009 is estimated at 87 million acres, up 1% from last year but 7% below 2007. This is the second largest planted acreage since 1946, behind 2007."
So much for a shortage in supply from US sources.
But Wisner also pointed to a return of commodity investment funds in futures, which many feed and grain experts blame as a key reason for price volatility. The root cause, they say, is lax regulation of such funds by the US Commodity Futures Trading Commission (CFTC).
Richard Brock, president of Brock Associates, spelled it out in the Feed Management article: In June 2008, one commodity index fund totaled US$142 billion-66.9% in energy, 13.8% in grain and 5.6% in livestock. Such a huge investment in grains was largely responsible for the last run-up in grain prices, Brock claimed, and as a result, prices crashed harder when funds liquidated most of their positions as the recession spread. He also said the problem was largely created by CFTC not enforcing position limits.
The American Feed Industry Association (AFIA) recently submitted similar comments to CFTC. Joel Newman, AFIA president and CEO, said index speculators "increased investments in 25 commodities from US$13 billion in 2003 to US$260 billion in 2008" and "stockpiled enough corn futures to fuel the entire US ethanol industry at full capacity for a year."
Perhaps all these criticisms hit their mark: On July 7, the Wall Street Journal reported CFTC is considering setting position limits "in an effort to crack down on excessive speculation."
No jumping the ride
Though the possible changes from CFTC would mainly affect energy trading, energy prices (and their volatility) play a significant role in petfood as oil and natural gas fuel the transportation and production cogs of the industry's supply chain. These changes aren't inevitable, however; governments are notoriously slow, and their actions often have unintended effects that can worsen the situation. Couple that with the continuing economic uncertainty, and it doesn't look as though we'll be getting off the commodity price ride any time soon.