Bullish economics may force grain prices lower

by World Grain Staff
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KANSAS CITY, MISSOURI, U.S. — If history repeats itself, U.S. wheat and corn prices, along with other commodities, may be expected to continue firming in the short term amid economic turmoil in Russia, but higher values, propped by continued dollar strength, will eventually start to choke off export demand and bring lower prices, said Mike Zuzolo, president of Global Commodity Analytics & Consulting LLC in Atchison, Kansas, U.S.

Zuzolo based his outlook on Commodity Research Bureau Index data and contended that current world economic conditions showed an uncanny resemblance to market conditions of the late 1990s, including sharp declines in the value of the Russian ruble, much lower world oil prices, a rising U.S. dollar and slowing Asian economies, especially China and Japan, major importers of U.S. crops.

In 1997 and 1998, “Russia was in the midst of a currency crisis, the U.S. had what was called a ‘Goldilocks economy,’ there was a 30% decline in the price of crude oil and Asia was weakening,” he said. From 1997 to 2002 he noted that the trend for the U.S. dollar was higher. A higher dollar makes U.S. commodities more expensive for other countries to import, and tends to reduce export demand.

On a microeconomic level, Russia’s current economic problems could have a negative impact on farmers’ costs of production, despite obvious benefits of lower energy prices. Zuzolo said that producers were paying significantly less for diesel fuel compared with the period before crude oil began its tumble of the last few months. He estimated farmers were paying about $2.10 to $2.15 a gallon for diesel fuel, a significant drop from previous levels of about $3.30 a gallon. But he noted that other important crop inputs such as fertilizers containing phosphate from Russia were likely to become harder to buy and more expensive over the coming months.

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