Last updated: February 1, 2013 4:32 pm

Crops lead the field for commodities

Over the past decade, iron ore, copper or gold have topped the ranking of annual price increases in the commodities market. This year, however, a more prosaic raw material has replaced the metals at the top: black tea.

The strong performance of wholesale tea – up about 50 per cent since January – tells the story of 2012, with bad weather in key regions triggering a strong rally across most of the agricultural commodities sector.

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The cost of wheat, the most important commodity for global food security, is up nearly 30 per cent this year; corn and soyabean prices are also up. In comparison with the rally in food commodities, oil prices are up a mere 2 per cent, while copper and gold are up 2 and 4 per cent, respectively. Iron ore prices are down 2 per cent from January, even after a strong rally in recent weeks.

The current surge in food commodities prices is the third since 2007, leading some policymakers, industry executives and analysts to worry that there is a structural problem: from climate change to years of underinvestment in farming.

David Nelson, global strategist at Rabobank, the Dutch bank that is one of the biggest lenders to the agribusiness industry, sees “structurally higher and structurally more volatile prices” persisting in the future.

“I think it’s the new normal,” he says.

The first big price rise was in 2007-08, when the cost of wheat, rice, corn and soyabeans surged to a nominal all-time high, triggering the first global food crisis in 30 years. Food riots in countries from Haiti to Senegal followed, and exporters and importers engaged in beggar-thy-neighbour tactics, including export bans and hoarding.

The second price surge came in 2010-11 after the Black Sea region of Russia, Ukraine and Kazakhstan, which normally accounts for roughly a third of global wheat exports, suffered a crop failure. Russia shocked the market by banning all grain exports, triggering a wave a panic buying in the Middle East and North Africa, the world’s biggest regional importers of cereals.

Interactive graphic: US drought

Cornfield

View the effects of the extreme drought faced in the US heartland in our interactive graphic.

The year just ending has seen the third major price rise, with the price of corn reaching an all-time high. The culprit has been bad weather in almost all of the world’s top food producing regions: the Black Sea area of Russia, Ukraine and Kazakhstan, the Latin American farmland belt of Brazil, Uruguay, Paraguay and Argentina, and the US Midwest. Only Australia, India and the rice-producing nations of South East Asia have enjoyed relatively good weather.

Grain analysts and traders are expecting prices to remain high in early 2013 as inventories are depleted. But after that prices could fall sharply if, and it is a big if, good weather allows for bumper crops. High prices are encouraging farmers to put more marginal farmland into production, increasing output.

Corn prices have fallen back to their lowest in five months this week amid concerns about the potential for a huge harvest in late 2013. Analysts forecast that farmers in the US, the biggest grower of the cereal, will sow more acres even than in 2012, when they dedicated 96.4m acres to the crop, the most since 1937, attracted by historically high corn prices. Informa, a closely watched crop forecaster, this week said US farmers would plant 99m acres with corn in 2013.

Yet, the potential for large price falls appears limited due to extremely low inventories and bad weather threats. Colin Fenton, head of commodities research at JPMorgan in New York, says: “Because of the low stocks environment for corn, wheat, and soyabeans, changes in weather for the worse hold higher upside risk for prices than they would in a scenario with more average stock levels.”

In addition, if prices fall, consumption will increase once again, particularly in the livestock industry, propping up prices quickly, traders say. Importing nations such as China could use lower prices to re-stock their strategic grain reserves.

Moreover, the weather could be a problem once again in 2013. Winter wheat crops in the US are suffering from lack of rain. Kansas, the top US wheat producing state, is in severe to exceptional drought, according to the US Department of Agriculture.

Bill Spiegel, at the Kansas Wheat Commission, a marketing agency, says while wheat is a resilient plant, dry soils during planting sent up a “red flag” for the coming year. “We had a good crop last year for wheat. But oftentimes we find that when drought occurs the after-effects are generally the next year,” he says.

In agriculture generally, it is often said that “high prices are the cure for high prices”: farmers respond by trying to boost production, either by planting more area or applying more fertiliser.

The tea market is a case in point: after a big rally in 2010 prices reached a record $5.45 per kg, then collapsed 40 per cent in 2011 as production rebounded. But in tea, which has suffered this year from a drought in Kenya, the largest exporter, as in other agricultural commodities, the efforts of farmers will mean nothing if the weather does not help.

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