Hot News

2.12.2008

By SEAN CLOUGHERTY
Associate Editor

WILLIAMSBURG, Va. — “We’re looking at new times — situations we simply haven’t seen before.”
That was one of Darin Newsom’s first comments about commodity markets given to Virginia grain and soybean farmers at the groups’ annual conference. Newsom, senior commodities analyst for DTN, said the changes in markets should cause strategic changes in how farmers sell their commodities.
The rising commodities markets have attracted a lot of non-commercial investment. Hedge funds and large international index funds are growing in the commodity markets, causing more volatility in prices, he said.
Until now, the major commodities were largely driven by supply, and that is still the case with wheat, Newsom said, but corn has shifted to a demand-driven market and time will soon tell for soybeans.
Ending stocks in wheat have declined for years and with poor harvests around the world last year, wheat stocks are at a 30-year low. Newsom said once harvesting begins this year, wheat prices should fall some, in anticipation of an increased supply.
The surging ethanol industry has put a new demand on the corn market, causing the shift to demand driven. The shift is changing the perception of what high and low prices are, and the market has yet to find its “price trading range,” Newsom said.
“The extraordinary has become the ordinary,” he said. “These markets are changing the perception of what’s extraordinary.”
Newsom said the fate of the soybean market hinges on the upcoming harvest in South America, and if prices come down, it will remain a supply-driven market.
The volatility caused by noncommercial investment has led some local elevators to stop hedging because of the risk and high capital needs. That is leaving large commercial buyers to hold more cash grain, causing a “lack of convergence” between the delivery price and futures market, and that is causing basis levels to weaken, he said.
The weak dollar in the United States is making exports more attractive to other countries and is helping to sustain the trend, Newsom added, as well as the strength of the Brazilian real.
With new investors in commodity markets, Newsom said farmers can have “the oppurtunity to handle this like any other investment.” He said there will be more limited forward contracting with farmers spreading out their sales while the rising trend continues.
Rising fertilizer prices have accompanied the rising commodity prices, but Jerry Gulke, analyst for Strategic Marketing Services in Rockford, Ill., said there’s more going on with fertilizer than supply and demand.
When natural gas prices spiked in 2005, it sent a signal to nitrogen suppliers that farmers would accept higher prices for the fertilizer, Gulke said. Now, however, natural gas wholesale prices are less than half what they were in 2005 and have remained flat since the spike, but nitrogen prices have gone up more than 200 percent. Why? Gulke said nitrogen suppliers are taking advantage of the profitability in agriculture and fertilizer has become the “new commodity” on the world stage.
Gulke said by his figures, the cost of production for nitrogen fertilizer domestically is about $230 per ton and $270 per ton for imported fertilizer. A price of $500 per ton to the farmer would carry more than a 100 percent markup on domestic fertilizer, Gulke said. In past years, he said a 15 percent markup was the norm.
“They’re on a roll and they know that we’ll pay for it,” he said.
For smaller countries, higher commodity prices make growing grain more attractive than buying it, and it has created a worldwide demand for nitrogen fertilizer, Gulke said.
The weak dollar in the United States, while good for commodity prices, makes importing fertilizer less attractive and is helping keep the price up, Gulke added.
Both Newsom and Gulke said the one “wild card” in the markets is if the United States falls into a steep recession.
Gulke said the surge in biofuels production will need new price models that incorporate energy needs, and market analysts will start to look two to three years out rather than a year at a time.
“I think for all intents and purposes, we are creating history,” he said.