Tuesday, February 22, 2011

Is this the new dawn for high commodity prices..?

As we enter 2011, high commodity prices continue unabated with countries across the globe increasing imports, reducing tariffs and releasing supplies from state reserves to cool inflation. Most agricultural products are not immune with coffee and cocoa at historical highs whilst cotton and sugar at their all time highs. Even wool is seeing its highest prices since the end of the reserve price scheme in the late 1980’s, which also has been exacerbated by our sheep numbers are their lowest for over a century.

The grains and oilseed complex is also at their highest prices since 2008, so is it still relevant comparing prices to say 10 years ago? Firstly the Australian market place has changed considerably especially with the removal of the single desk and deregulation of the bulk wheat export trade in 2008. And more importantly per capita income and the decline poverty rates is increasing demand for agricultural products across the globe.

For the ten-year period between 1996 and 2006, APW wheat only reached above $300/t in Sept ‘02, and nearly reached it in Sept ‘06 (both drought years). But if you take out these two brief spikes the average price paid during these 10 years would be around $170/t. With a low of $136/t in Dec 1999.

However since mid 2007, prices have become more volatile. In '07 the second drought year in a row, mixed with a smaller global crop sent wheat to new levels. A price peak of $475/t in Mar ‘08 (Port Adelaide) was recorded, with prices more or less above $300/t until July ‘09. Even with prices in the doldrums, hovering around $210/t for eight months between October ’09 and June’10, the average price during Jul ’07 and Feb ‘11 was $278/t. This is $108/t higher then the preceding ten-year average.

With today’s price of $325/t at historically very high levels and uncertainly with the 2011 global crop, prices could still continue higher. With increasing world demand, and tighter world stocks it seems Australia has seen a new “higher” floor in domestic grain prices over the last three years. Even if a new green revolution is around the corner a swelling global middle class is demanding better diets and standard of living. This will easily consume any future surpluses and hopefully for grain growers will spell the end for low priced wheat!

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