Michael Ferrari's  Instablog

As of April 2009, the Food and Agriculture Organization food price index had risen for the third consecutive month.  The composite index, comprised of the weighted index values for 55 commodities, has come off significantly since this time of last year and is now roughly in the same territory as it was back in mid 2007.  So at this juncture in 2009, do we anticipate a further decline or is this just a resting point before another spike?  The road ahead is somewhat more complex than it might appear upon first glance of the fundamentals at the primary origins.  The Economist reports today that world food prices are now 2.2% lower than the start of 2008, driven largely by a decrease in the price of wheat.  The May USDA World Agricultural Production report is estimating global 2009/10 corn and soybean plantings and production to be equal to or greater than 2008/09, while they expect wheat to exhibit a decrease.  With wheat and soybean reductions due to poor weather in Argentina now well documented and priced into the market, and a favorable outlook for Ukraine/FSU production, it would appear that the trend downward could be extended.  However, projected 2009/10 US stocks in the US for coarse grains, wheat, and total grains are all expected to be lower than the 2008/09 crop year.  Weather triggered planting delays in the eastern corn belt & Northern Plains and a potential shift in the planted acreage mix (replanted corn, shifting to soy, etc.) could exacerbate this situation a little more before mid summer.  Further, the Weather Trends precipitation outlook for the coming year is not extremely favorable in many of the world’s primary growing origins, so stresses to global stocks for primary grains could increase in the coming months.  Even with reduced global economic activity, people still need to eat; in fact, the economic situation amplifies stress on the supply side of the grains complex as meat and livestock consumption may be curtailed in favor of grains and cereals.  

 May09 sugar futures have been sliding since last week following market news describing a potential rebound in Indian production coupled with lower projections for crude oil futures.  However, $50+ crude is still expensive oil making cane-derived ethanol an attractive option for Brazilian mills.  In addition, despite additional sugarcane plantings by opportunistic Indian growers, the longer range weather pattern has not improved for either of the country’s primary cane belts - any increased anticipated production will be limited by water availability. The WTI current market view (this week’s move into low 12 cent territory notwithstanding) is that the current fundamentals have sugar futures underpriced for both May and July.  There is justified support for May09 futures to move back to the 12.55 to 12.9 cent range, and Jul09 shows fair value between 12.85 and 13.2 cents.  Out recommendations have stated several times in recent weeks when trading was seen in the upper 13 range, that sugar was overvalued, and profits at those levels should have been taken.  Current levels provide another favorable entry point for May.

 We also expect support across the grains complex this week, initiated by the expectations of USDA’s winter wheat crop ratings.  Most analysts we have been in contact with are expecting a poor assessment of the wheat crop as many regions have been subjected to suboptimal crop weather through the winter.  This negative pattern has continued in recent weeks with negative temperature anomalies across much of the northern plains, a negative impact for emergence from dormancy.  The cold pattern for the start of this week across the central to southern plains could bring some of the coldest temperatures for early April that the region has seen in several years, and this would serve to limit yield potential even further.  Beyond the US activity supporting wheat, the week is also starting off with additional news of decreased soybean production from Argentina; beans are currently at their highest levels since early Feb.  In the most recent FAS estimate, Argentina’s soybean production (2008/09) is at 43 mmt, which is down nearly 7% from the previous crop year, and nearly -12% vs. 06/07.  Similarly, projected yields in Argentina are down 10% vs. last year and -16% vs. 06/07.  While world soybean production is still projected to be (slightly) positive in terms of YOY total output, the marginal surplus could still move back to the deficit side, and we can start to see a scenario which is largely constructive for soybeans over the next 4 to 6 weeks.  As we progress through April, US planting conditions should be watched and monitored closely for opportunities to capitalize on short term weather-induced volatility.