Volatility for cereal food prices continues as demand outstrips supply
futures market reflect volatility in prices for wheat, soybeans and
maize.
The fact that food prices are dominating the news headlines outside of the food industry reflects the enormity of this global issue. From the UN's food programme to the World Bank, governments, industries and consumers are all trying to get to grips with the soaring costs today associated with basic food staples. Yet participants in the food industry have been aware for several years of the global drawdown in cereal stocks and a diminishing buffer zone. In 2004, for example, FoodNavigator.com reported that demand for wheat had outstripped global stocks, pushing prices into volatility. In January 2004 wheat was trading at £85 per tonne. And if 2004 was tough, 2008 is tougher. While £85 per tonne seemed like a startling figure four years ago, today this has been overshadowed. Last month wheat traded on the LIFFE futures market at a soaring £170 to £175 a tonne. A figure that had almost doubled on the previous year, where the nearby price on LIFFE in April 2007 saw figures for wheat of £95-£100 per tonne. And the market for this insatiable raw material is not the only one to see such surges in price. Corn and soybean follow similar patterns. In April 2007 the Chicago Board of Trade futures market witnessed prices of $270 a tonne. Last month the figure nearly doubled, signing off at $480 to $485 a tonne. Equal volatility saw maize rising on the CBOT futures market from $130 a tonne in April 2007 to a considerable $230 to $235 a tonne. Some commentators on the food industry have attributed a slice of recent price fluctuations to financial speculators from outside of the industry. But this could be putting the bull before the cart, argues a senior economist at the UKs Home Grown Cereal Authority. "The reason that the speculators are involved in the market is because it is more liquid and volatile," Mike Mendelsohn commented to FoodNavigator-USA.com. Volatility in the market for food commodities, such as wheat and soybeans, has attracted investors, spying a fruitful investment opportunity. Indeed, arguably, this is a positive step for the food industry, says Mendelsohn. "When the market is more liquid, it is arguably easier for participants to dip into. The connection between liquidity and volatility is not necessarily a bad thing," he said. Confirmation of this attraction comes from a recent report released by Lehman Brothers. Lehman estimates that total assets under management in commodity indices (of which only a slice is agricultural and livestock) soared from $70bn at the beginning of 2006 to a considerable $235bn in mid-April this year. Of this massive $165bn increase, about $90bn is accounted for by financial inflows to these indices, with the remaining $75bn stemming from price appreciation, said Lehman analyst Edward Morse.
