Angry weather gods skewer agri markets

That the weather gods were rather upset with earthlings in 2010 is by now well known. Will the foul mood spill into 2011? Developments from the beginning of the New Year do not inspire much confidence that the weather conditions would turn benign soon.

It started last year with too much wet weather in Canada during May-July period that hurt crop planting, harvest quality and quantity of pulses, wheat and canola. Even before the setback was absorbed came the drought conditions in Russia and surrounding region. This forced the governments there to restrict export of grains, which, in turn, forced the global agricultural markets to absorb the supply shock, obviously through the price mechanism.

While Pakistan suffered devastating floods that hurt agricultural crops, extended southwest monsoon affected crops in parts of India, the effects of which are seen in rising prices of vegetables and other food crops the government is still fighting.

Later in the year, La Nina-induced dry conditions started to affect crop planting in Argentina. In the last few days, floods in Australia and Brazil and closer home in Sri Lanka have caused consternation.

Lower stocks

As a result of adverse weather conditions in different parts of the world from time to time last year, crop production was affected and inventory built up over previous 2-3 years has been pared down. In other words, the world is entering 2011 with tight stock levels. In some cases the stock to use ratio is dangerously low, creating anxiety over possible turn of events in the coming months.

It is of course common knowledge that weather is a key driver of agricultural markets around the world. But in 2010, weather or more appropriately, weather aberrations drove agri-commodity markets.

Peak prices

Prices of many commodities reached newer highs. For instance, cotton prices reached unprecedented levels while sugar prices reached 30-year highs. Palm oil and soyabean oil are trading at elevated levels of $1,200-1,300 a tonne.

The key concern therefore is whether disturbing weather patterns will repeat in 2011 and how they would affect the food market. If for any reason the supply side concerns that characterised 2010 persist, then agricultural markets will turn even more vulnerable to wild price swings and extreme speculation.

Daunting prospect

How the world, especially food importing countries and poor nations, will handle the situation is unclear; it may well turn out to be a daunting challenge.

Already global sugar, cotton and wheat stocks are at such low levels that the panic is reflected in the price, which are at elevated levels. Over the coming months, further supply shocks from the southern hemisphere cannot be ruled out. Sugar, corn and soyabean are the principal commodities to come out of South America. It is also believed that dry conditions are set to affect oil palm plantations in Malaysia and Indonesia, and that palm oil production growth will slow in 2011.

Even as high food inflation is now a global phenomenon and governments are using all tricks in the book to contain rising prices, if the weather gods don't smile, 2011 could turn out to be a worse year in which governments will use trade and tariff policies to indulge in protective measures.

Political risks are sure to transform into business risks. Meanwhile, on the bourses, speculators are expected to have a field day, or should we say, several months of free play in the agri-commodity markets.