Thursday, May 01, 2008

What Goes Up . . .

Monthly Corn Futures

Grain prices are at or near record levels, ethanol production has sky rocketed, and riots are happening around the world as food prices increase. Have you heard this story yet? It's been hard to miss as story after story covers the 'Food vs. Fuel' debate or the 'Food Crisis.'

Conventional wisdom in the mainstream media is that grain prices will stay high forever, and food prices will continue to increase. History suggests otherwise, as the chart above shows, big spikes in grain prices are not uncommon; they are usually followed by a sharp, unexpected drop. Most agricultural commodities follow a cyclical or Boom-Bust pattern. Although government support for ethanol and bio diesel certainly, helped the economics of over supply and low prices are the biggest drivers behind the higher levels of demand.

Clearly, growing grain will be very profitable this fall, especially for farmers that forward sell some of their production at these high levels. These profits will generate a supply response. Farmers around the world will grow more food, and my expectation is the response will be much quicker than many analysts predict.

North American crop yields top the world largely because of technology, but there's excellent ground around the planet. I fully expect that the production will jump by leaps and bounds, possibly this year as Western management style pushes into places like Eastern Europe. Case and point is a large Canadian livestock producer I know who is leaving the business to manage a 7,000 acre grain farm in the Ukraine. Have no fear, farmers will continue to feed the world.

All this said, the 'crisis' has brought a number of good ideas to the forefront. Governments in North America should be clear that they will not offer subsidies to new ethanol plants, governments should continue to open their borders, and in the short term food aid should be increased, as Canada has already done.

No comments: