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FACTBOX; Why grain prices are at record highs
May 7, 2008 / 4:59 PM / 9 years ago

FACTBOX; Why grain prices are at record highs

(Reuters) - Grains prices set record highs this year that helped to pushed up prices for food items like cooking oil, bread, cereals, chicken meat, beef, milk and eggs.

Here are the main reasons behind the rise in grain prices.

BIOFUELS

U.S. legislation passed last year would require U.S. gasoline supply to include 36 billion gallons of renewable fuels by 2022. About a quarter of the U.S. corn crop will be used to produce ethanol.

Some 2.95 billion pounds of soyoil will be used to produce biodiesel.

LIMITED FARMLAND

The finite amount of farm land available for crops in the United States, the breadbasket to the world, means farmers will plant crops that give them the best returns. Last year, farmers planted the most land to corn since 1944 as demand from the ethanol sector boosted prices. This year, farmers are forecast to raise their soybean seedings by about 18 percent to 75 million acres. To do this they will plant less corn. About 86 million acres of corn are expected to be planted this spring, down from 94 million acres in 2007.

WEAK DOLLAR

Most agricultural commodities are priced in dollars. The dollar’s weakness against major currencies has been pivotal in boosting grain exports from the United States. This has reduced domestic grain stocks, which has helped to bolster futures prices at the Chicago Board of Trade. The weakness in the greenback also made dollar-valued commodities relatively cheap for investors.

SLOWER GROWTH IN PRODUCTION VS RAPID GROWTH IN DEMAND

The annual growth rate in the production of aggregate grains and oilseeds has been slowing, according to the U.S. Agriculture Department. Between 1970 and 1990, production rose an average 2.2 percent per year. Since 1990, the growth rate has declined to about 1.3 percent. USDA’s 10-year agricultural projections for the United States and world agriculture see the rate declining to 1.2 percent per year between 2009 and 2017.

MORE MEAT NEEDS MORE GRAINS

As the demand for meat rises, especially from fast-developing countries like China and India, the demand for grain and protein feeds used to produce the meat grows proportionally more quickly. It takes 1.2 lbs of corn to produce 1 lb of chicken; 3.6 lbs of corn for 1 lb of pork and 6 lbs of corn for 1 lb of beef (all live weight).

DROUGHT

Australia was in the third year of a drought last year, which cut wheat production and slashed exports. Drought last year in Black Sea states, including Russia, reduced wheat production.

A hot and dry summer in Canada last year resulted in lower yields for wheat, barley and rapeseed.

EXPORT CURBS

Kazakhstan has suspended wheat exports until September 1 to combat double-digit inflation.

In February, Russia set a prohibitive export tariff on wheat to keep grain at home and stabilize prices. It banned wheat exports to neighbors Kazakhstan and Belarus in March.

Argentina restricted wheat exports to keep domestic prices stable. It also raised export taxes on corn, soybeans, soyoil, sunseed oil and soymeal.

China said it would halt most grain exports this year to put a lid on surging domestic prices. It said in December it would scrap 13 percent tax rebates on exports of grains, including corn, wheat, rice and soybeans, to discourage sales.

Ukraine suspended wheat exports in the first week of April, and reduced barley exports through it Black Sea ports. Exports were practically reopened by the last week of April.

Pakistan last May suspended wheat exports.

India banned exports of non-basmati rice in October, but eased the ban later in the month. Vietnam has banned rice sales until June.

INVENTORIES

U.S. wheat surplus stocks for the marketing year ending May 31 is forecast by the USDA to be the lowest in 60 years, and global wheat stocks to be the lowest in 30 years.

FUNDS

Investors have pumped massive amounts of money into commodity markets in recent years as they diversified away from equities and bonds. Investment banks estimate that $150 billion to $200 billion from pension funds, endowments and other funds are tracking passive commodity indexes, up four-fold from five years ago. These inflows, as well as undisclosed investments from loosely regulated hedge funds, have generally kept commodity prices, including those of grains, in an upward trajectory since 2003.

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