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Agricultural commodity prices continue to climb

One thing which we can predict with great certainty that the New Year will bring is continued high commodity prices. Agricultural product prices continue to hit record levels. In the US, futures prices for the 2008 crops of corn, wheat and soybeans all hit new highs in recent trading sessions. We review some of the evidence in this post.

Although the US corn price fell back last July to a low of $3.50 per bushel, it has steadily increased since October and is currently trading at $4.50 per bushel. US export prices have also increased since July. US corn export prices (Yellow No. 2 fob Gulf) averaged around $100 per tonne in the early years of this decade and peaked at around $174 per tonne in February 2007. Prices fell back to around $148 per tonne in July, but in December reached a new peak of $180 per tonne, reflecting record crude oil prices, a weakening dollar and massive US exports. The USDA predicts that US corn exports will hit a new record of 62 million tonnes in the current marketing year, even though use for bioethanol is also expected to be a record 85 million tonnes (both figures are consistent because the US maize harvest this year is expected to be around 335m tonnes, or more than one quarter higher than last year).

US wheat prices have also charged ahead, jumping from around $5 per bushel in June to hit $9.75 per bushel last month for March 2008 delivery, which represents the old crop contract. The July 2008 contract, which represents the new crop, was trading at over $8.00 per bushel in early December but eased during the month to around $7.80 today. At these prices, wheat is well above its current $2.75 loan rate and $3.92 target price.

FAO reports that US export prices for Hard Red Winter No. 2 wheat, which averaged around $150 per tonne in the early years of this decade, and which was trading at $203 per tonne in May last year, jumped to $343 per tonne in September and has now reached $381 per tonne in December. Looking at crop predictions for this year, the USDA projects that global wheat production in 2007/08 will be below demand for the third successive year, leading to a further drawdown in stocks.

US soybean prices are also going through the roof on the back of higher crude oil prices which have lifted the price of soybean oil as well as due to strong import demand for soybeans. Futures prices for January delivery jumped from around $6.50 a bushel in October 2006 to over $12.00 a bushel last month. US export prices for soybeans, which were generally around $220 per tonne in the early years of the decade, were $313 per tonne in July and had rocketed to $431 per tonne in December.

Demand for bioethanol is one of the factors underpinning these price increases. We would expect higher feedstock prices to undermine its profitability and thus to slow the growth in demand for bioethanol, all other things being equal. However, not all other things have remained equal.

The ethanol price itself has almost doubled during the month of December, and is now trading in the US at over $2.35 per gallon for January delivery. While the continued high price of oil and political uncertainty in some of the main oil producers is partly responsible, the big factor behind this increase was President Bush’s signing of the new Renewable Fuels Standard into law in the US last month as part of the Energy Independence and Security Act of 2007 . This mandates the use of 36 billion gallons of bioethanol in US transport fuel by the year 2022. Although less than what President Bush had proposed in his State of the Union address, it still represents a five-fold increase over current levels. 20 billion gallons is supposed to come from cellulosic ethanol, 15 billion gallons will be corn-based ethanol, and 1 billion gallons is mandated for biodiesel.

The deadline for the 15 billion gallon mandate for corn-based ethanol is 2015, and compares to expected ethanol production this year of about 7 billion gallons. Keith Collins, the USDA Chief Economist, estimates that the additional ethanol demand will require around 5.8 billion bushels of corn by 2015, compared to about 3.2 billion bushels today. Some estimates suggest that this policy will cost the US taxpayer between $140 and $205 billion over the next 15 years mainly through an extension of the 51-cent-a-gallon ethanol tax credit as well as aid for research, pipeline development and loan guarantees for the construction of ethanol plants.

The varied consequences of higher food prices were well explored in an excellent Economist article last month. For our purposes, the key question is what impact it will have for national government reactions to the Commission’s Health Check proposals and also for the next round of CAP reform which is beginning to take shape as part of the debate on the EU’s budget priorities after 2013. There are indications that President Sarkhozy of France plans to work closely with the Slovenian EU Presidency which started yesterday to present proposals on the future of the CAP which could then be brought to fruition under the French Presidency in the second half of this year.

2008 may well turn out to be a year of surprises for EU agricultural policy. May it be a peaceful and prosperous New Year for all our readers!

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