With the global economy mired in its worst slump in 80 years, companies are putting a greater emphasis on purchasing strategies and risk management to maintain profitability.
In an effort to gain valuable information about the commodity markets that impact their businesses, nearly 600 executives from various segments of the food industry attended Sosland Publishing Company’s 32nd Annual Purchasing Seminar May 31-June 2 in Kansas City, Missouri, U.S.
"It’s hard to recall a time when so many impactful factors have been aligned together as we now seem to have," Sosland Publishing President Mark Sabo said in his opening remarks. "Certainly for purchasing it is a challenging period to formulate strategies for managing risk, sourcing inputs and holding costs in line. Yet, food processors, overall, have maintained equilibrium and fared well comparatively."
Although the prices of raw materials essential to the food industry — corn, wheat, soybeans and other grains and oilseeds — have fallen significantly from the record highs of 2008, most speakers at the conference agreed that these markets will remain volatile for the foreseeable future, with the lower end of the price range decidedly higher than in the past.
"We’re not going back to $2.20 to $2.40 (per bushel) corn and we’re not going back to $5.80 to $6 soybeans, not under the current global growth circumstances, unless we find ways to mess (that economic growth) up through wars, bad policy and the like," Bruce Scherr, CEO of Informa Economics Inc., told the audience.
Scherr cited the insatiable demand for commodities in fast-growing economies such as China and India as a primary force that helped end the era of nominally declining commodity values, which lasted roughly from the late 1960s through the early part of this decade.
Scherr noted that during that era, dramatic commodity price increases were due to supply glitches, such as short crops or OPEC limiting the supply of oil. However, the rise and fall of commodity values in this new era have had little to do with supply and have mostly been driven by demand that stems from global income growth, he said.
He predicted that another explosion in commodity prices is looming as the global economy has begun to show signs of strengthening, and China, whose economy has been less adversely affected by the recent recession than many developed countries, continues to demand commodities to modernize its infrastructure and feed its 1.3 billion people.
Scherr issued this warning to food industry executives: "You better have risk management capabilities that are better than ever before; you better have sound risk management procedures, policies and approaches; you better be up to speed to the ways various instruments work; and you better understand markets. You will not just be plagued by rising prices plaguing your margins; you will also be plagued by extraordinary volatility. The rest of the world’s quest to grow at a rapid rate is going to drive commodities even higher."
When the recession ends — which Scherr said will likely be sometime in the fall of 2009 — developed economies such as the United States, Canada, Western Europe and Japan will grow, but not as rapidly as they have in past post-recession rebounds because they are "deleveraged," with limits on banks’ ability to loan money. Meanwhile, the "G-20" developing nations, including China, India, Brazil and Argentina, are going to grow at fantastic rates, he said, and exhibit growth through commodity inflation as they continue to buy commodities and build infrastructure.
"It’s a very challenging environment … a very different environment," Scherr said. "You used to be safe because of nominally declining commodity values, but that savior, that life preserver, in my opinion, now has a big hole in it, and it’s not going to help you out. It’s not going to be there."
On the first day of the seminar, a panel of four grain market experts discussed current market conditions and offered their opinions on potential short- and long-term trends for the various grain commodities.
Mike O’Dea, risk management consultant for FC Stone, said grain processors and other segments of the food industry should be prepared for volatility in the markets to continue for the foreseeable future.
"We’re still on the razor’s edge with stock levels," he said. "It only takes a couple of bad crops around the world, particularly in the United States, to get us to that part of the stock-to-use and price curve where it moves up pretty quickly."
Paul Meyers, vice-president, commodity analysis, Connell Purchasing Services, said that while a higher pricing plateau has been established for grain commodities, he sees a more gradual rise in prices than the one that took the world by storm a year ago.
"I think the increase is going to be more modest over the next 3 to 5 to 10 years for commodity prices," Meyers said.
Steve Freed, director of research, ADM Investor Services, said the impact of the weakening U.S. dollar, which is likely to remain weak for the foreseeable future, on grain prices should not be overlooked.
"If the dollar goes lower, commodity prices are going to go higher," he said.
Another factor influencing the value grain commodities is the price of crude oil. With oil prices trekking upward at the time of the conference, the panel was asked what impact $90-per-barrel oil would have on grain prices. In the summer of 2008, record-high oil prices, which reached nearly $150 per barrel, coincided with record-high corn, wheat and soybean prices.
"It would probably mean more profitability in the ethanol sector for corn," Meyers said. "It would mean more profitability or some profitability out of soybean oil use for biodiesel. It would firm up prices in those two crops, which would lead to higher wheat. You could add 50¢ to 75¢ on a bushel of corn and a dollar-plus on beans … and 35¢ to 50¢ on wheat."
The panelists agreed that wheat prices likely reached their lows for 2009 earlier in the year. But the price of corn could still swing significantly, depending on whether the late planting in the United States’ eastern Corn Belt due to wet weather has a significant impact on corn yields.
TIGHTENING CORN ENDING STOCKS
Corey Dencklau, director of grain products, Gavilon, LLC, in his presentation on corn, feed grains and millfeed, said the continued growth of the U.S. ethanol industry and with global corn production expected to be flat this year compared to 2008, world ending stocks are forecast to drop 12 million tonnes.
He said China’s corn stocks have increased with its aggressive buying program last year, but the rest of the world’s stocks have declined to the lowest levels since 2003. "I think it’s important to note that the Chinese stocks are stocks that are mostly not for sale to the rest of the world market," Dencklau said.
Meanwhile, world corn trade is expected to increase by 4 million tonnes, he said, with the key drivers being the reduced amount of wheat for feed use around the world as well as reduced barley for feed use in the U.S.
Dencklau noted that ethanol is now responsible for 33% of total corn usage in the U.S., while corn for feed use has fallen to 42%.
"The Renewable Fuels Standard calls for ethanol production in the U.S. to reach 10 billion gallons this year, 12 billion next year and 15 billion by 2015," Dencklau said. "This will require 5.4 billion bushels of corn for ethanol usage by 2015. We simply cannot afford to have a reduction in any crop cycle or we will see prices move swiftly higher."
He projected corn ending stocks in the U.S. this year at 1.6 billion bushels but forecast ending stocks next year dropping close to 1 billion bushels, due to increased demand for ethanol and increased trade. If the forecast is realized, it would mean the lowest stocks-to-use ratio since 1995-96.
WHEAT MARKET OVERVIEW
Even with the USDA estimating a slight decrease in world wheat production in 2009-10 — 657 million tonnes compared to 683 million last year — its forecast also calls for global ending stocks to rise to 182 million tonnes, up from 168 million in 2008-09 and 119 million in 2007-08.
Still, there are several factors that could push wheat prices higher as the 2009 progresses, Freed said during his presentation on the world wheat market.
"From a wheat standpoint, one of the most important factors is whether we’re going to have an export market bigger than what we’re forecasting," Freed said. "Will the Black Sea (wheat) prices continue to surge higher on a lower Russian crop? What’s going to happen to the Canadian wheat crop? What will be (the U.S.) export demand given the small Texas and Oklahoma crops? Everyone is going to want the same Kansas crop, whether it’s domestic or export buyers. That keeps the basis firm and keeps futures higher than you or I would like them to go."
The USDA’s U.S. winter wheat production forecast released in June pegged the 2009 crop at just under 1.5 billion bushels, about 20% below last year’s production total.
Besides these short-term concerns, Freed said wheat buyers must also be aware of the longer-term problem of wheat continuing to lose acreage to corn and soybeans, which are more lucrative crops due to their biotechnology advances, which have not taken place with wheat. U.S. wheat acreage in 2009 was 14% lower than a year ago.
"Wheat is not going to be able to compete for acres with $13 soybeans and $5-plus corn," said Freed, who added that the only way to reverse that trend would be to develop biotech wheat varieties. In May, organizations representing the U.S., Canadian and Australian wheat industries announced that they would work together toward the goal of synchronized commercialization of biotech traits in wheat, but it will likely take years for that to be accomplished.
As for the immediate future, Freed said it was important for wheat buyers to carefully manage their cash positions and protect their positions with options.
"More and more, risk management has to do with managing your cash position," he said. "There’s too much uncertainly for 2010 to go in and start buying wheat out that far."
We want to hear from you — Send comments and inquiries to