Tuesday, August 21, 2012

Europe not insulated from agricultural commodities shock

Some readers have commented that Europe is unlikely to be impacted as dramatically by the North American drought conditions and rising agricultural commodity prices as the US. But in these markets a local exogenous shock quickly becomes a global one. And this year the shock was actually global to begin with as crop damages, though most severe in north America, have been seen around the world. Given the recession in the Eurozone, the area is particularly vulnerable to these price increases.

Meanwhile prices continue to rise. The US agricultural commodities hit new records today.
Reuters: - Soybeans rallied 2.5 percent on Tuesday to hit another peak, while corn rose nearly 2 percent on evidence that the worst drought in half a century has shrunk the crop and that demand must be tempered through even higher prices.

Corn and soybean futures at the Chicago Board of Trade resumed their climb after a setback last week, making a push to retest record highs as money managers bet that end-users would scramble for the dwindling supplies.

Chicago wheat rose more than 2 percent in tandem with corn and soybeans and on a sharp drop in the dollar amid growing expectations that European officials will put together a plan to tackle the region's debt and economic crisis.
US corn futures

But things are not much better in Europe. Here is the price of corn (futures) traded in Paris. This spike is not just due to arbitrage opportunities with the US corn prices, but also to poor crop conditions in southern and eastern Europe.

NYSE Liffe Corn futures (euros per tonne)

The fact that the French wheat harvest is expected to be decent this year is not helping matters, as prices are driven by global fundamentals and livestock feed substitution (farmers substituting wheat for corn). Substitution has driven feed wheat price in London to new highs.

NYSE Liffe Feed Wheat futures (GBP per tonne)

As much as some in Europe think they are insulated from this food price shock, the futures markets are telling a different story.

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