Olam International Ltd., one of the world’s largest food commodities traders, forecasts that grain prices will remain low into 2017 as oversupply and softening Chinese demand weigh on crops.
"Prices will stay low for the next six months," Olam’s chief executive officer, Sunny Verghese, said in an interview in Singapore last week. "We have very burdensome balance-sheets across the entire grain complex.”
Wheat prices have fallen to their lowest in 10 years, while corn is at levels last seen during the global financial crisis, as farmers in key growing regions, including the U.S. and Russia, harvest bumper crops. Low grain prices have been a boon for consumers and companies such as Nestle SA and Kellogg Co. but are hurting farmers and agribusiness including Deere & Co., the world’s largest manufacturer of tractors and combines.
"We see a significant increase in exportable surpluses and stocks build-ups in most growing countries; the weather has been very benign," he said. "On the demand side, there is some softening in China.”
The views of Olam and its larger rivals, including Archer-Daniels-Midland Co., Bunge Ltd., Cargill Inc., Louis Dreyfus Co. and Glencore Plc, are closely followed by commodity investors because their trading relationships give them insight into global supply, demand and inventories trends.
La Nina
Verghese downplayed the risk that the potential emergence of the La Nina weather phenomenon could boost prices, saying Olam’s in-house meteorologists have almost ruled out its arrival. "We see a very low prospect of La Nina event," he said. "We have proprietary research, and all the leading indicators show that we are unlikely to see one."
La Nina is an on-and-off weather phenomenon that could make parts of the U.S. colder, Brazil drier and Australia wetter, boosting prices for commodities including natural gas, soybeans and coal. While Japan’s weather bureau last week said the pattern has already set in, other meteorological agencies, including the U.S. Climate Prediction Center, have recently lowered the chances of the phenomenon emerging this year or in early 2017.
Verghese painted a particularly bearish outlook for corn, saying that the trading house largely agreed with U.S. Department of Agriculture projecting a record corn yield this year. Olam, however, sees a yield of 169-170 bushels per acre, below the 174.4 projected on Monday by the USDA. "Even at 169, it doesn’t really matter. We are going to have a big crop." he said.
Front-month corn futures prices in Chicago fell as low as $3.1475 a bushel in late August, the lowest since September 2009 and less than half the record high set in 2012 of $8.49 a bushel. Near-month wheat prices in Chicago fell last month to a 10-year low of $3.8675 a bushel, down more than 70 percent from the 2008 all-time high.
Despite large crops and bumper stocks, Verghese said the world isn’t entering into a sustained period of ultra-low grain prices. "It’s a cyclical phenomenon. It’s not a structural one," he said.
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