How low can corn prices go?

Corn futures prices fell almost 2% on Friday last week to reach $3.85 per bushel, the first time the grain has been below $4 per bushel for almost four years. Corn prices have fallen almost 30% since late April on expectations of favourable prospects for global corn supplies. The latest decline in prices was caused by reports of almost perfect growing conditions in the US corn belt (at 75% good-excellent it is the 5th highest rating for the past 25 years) and a higher than expected forecast from the USDA for US and global corn stocks.

According to the latest forecast from Macquarie the rout may be near an end. According to the bank, plugging historic pricing levels to stocks-to-use figures suggests that corn should be heading for about $2 a bushel. However, higher costs in recent years mean factors like increased US land values and Brazil’s transportation charges also need to be taken account of. Based on data since 1990 when the stocks-to-use ratio falls below 10% prices tend to trade 20-100% above the cost of production. Meanwhile when the stocks to use ratio is at 10-15%, prices trade, at best, with a 20% premium to production costs.

The current situation meanwhile, with stocks-to-use over 15%, implies prices can stay at the cost of production, but with a potential fall of 20% below, Agrimoney reports. With Macquarie estimating the cost of production at $4.12 per bushel, “we forecast the cash price in Illinois should trade about $3.75 a bushel”, according to Macquarie analyst Chris Gadd. “In reality there is maybe not that much more downside from here.”

Related article: New forward-looking index sees food price deflation till 2015


Cotton prices hit 21-month low

Cotton futures prices fell below 70 cents per lb on Wednesday, the lowest level since November 2012. High cotton prices at the start of the planting season (they peaked at 94.75 cents per lb in May) and weak prices for other crops such as corn encouraged US farmers to increase the amount of land they devoted to the crop. According to the USDA cotton growers in the US planted 11.4 million acres, up 9.3% compared with 2013. An easing in drought conditions in key producing state Texas also helped – a year ago more than 12% of the state was experiencing exceptional drought, now that area is down to 5%.

Reflecting better prospects for US output and weaker growth in consumption the International Cotton Advisory Committee (ICAC) forecast that cotton stocks in countries outside China (more readily available to the world market) will rise by 7% to 8.7 million tonnes at the end of this season (31 July) and by a further 15% to 9.7 million tonnes at the close of the 2014-15 season. With China’s reserve policy also coming to an end (previously guaranteed high prices for domestic Chinese mills encouraged significant imports into China), high stock levels suggest continued downward pressure on cotton prices over the next year.


Scrapping fuel subsidies could cut carbon emissions and oil prices

Last week in an effort to get on top of its surging budget deficit the Egyptian government decided to cut its $20 billion fuel subsidies, resulting in fuel prices rising by almost 80% overnight. For countries from Egypt to Indonesia rising oil prices have made costs balloon but in the face of precarious government finances also provide an incentive for change. The cost of fossil fuel consumption subsidies rose from around $300 billion in 2009 to almost $550 billion in 2012. Meanwhile the recent volatility in many emerging market currencies which saw their value decline versus the US dollar also had the effect of raising the cost of importing fuel.

Although energy subsidies tend to be introduced with the intention of alleviating poverty, promoting economic development and in the case of oil producers providing a visible benefit of the country’s oil wealth. However, cheap fuel has a number of side effects including encouraging over-consumption, discouraging investment in energy infrastructure, threatening security by increasing the reliance on imported fuel and disproportionately benefiting the middle class and rich. On a global basis the effects are also damaging. All this over-consumption also results in increased carbon emissions. According to the International Energy Agency, eliminating fossil-fuel subsidies would reduce global carbon emissions by 6% by 2020.

Energy subsidies also dampen the global demand responsiveness to high fuel prices. Eliminating fuel subsidies will result in lower oil consumption overall (as over-consumption is discouraged) and will mean that the oil market will balance more rapidly as demand will be quicker to respond in the face of surging demand or supply cuts. All of which should mean that the outlook for long-term oil prices will be lower. Any progress is likely to be gradual however with politicians loath to antagonise their urban elite while fearing the angry reaction of ordinary citizens who rarely believe they will be compensated.