Armada: Oil Prices Will Affect Other Commodities

The issue of farm commodities has been front and center for the past several months already as the demand for grain by the global population is coming close to exceeding the ability of the farming community to keep pace. The droughts in Russia and Ukraine coupled with floods that ravaged parts of South Asia and China last year sent commodity prices spiking and inspired people to think about the 2008 food crisis when there were widespread riots over access to food in some parts of the world.

The situation this year is still unknown, but there are more than a few troubling signs. The harvests from the Latin producers have been compromised by very hot and dry weather, and that has the world facing a deficit already. The drought seems to have partially lifted in Russia and Ukraine, but few expect a bumper crop at this point. The burden of production will fall on the United States and Canada again this year and, thus far, the situation looks reasonable. Still, analysts point out that conditions could deteriorate very quickly.

The United States controls 55% of the world corn market, 44% of soybeans, 41% of cotton and 28% of wheat. The U.S. Department of Agriculture price index covers 44 commodities -- that index is 24% higher than it was a year ago. The price of every commodity has risen sharply in the last year, headlined by wheat settling at a price that is 80% higher than a year ago. All of this has taken place without the added impact of higher oil prices. Now that the planting season is upon domestic farmers, the cost of getting machinery in the field has risen sharply, and that will ultimately be reflected in the price of the commodities/the food products produced.

Analysis: The oil price crisis is not expected to last much longer due to the efforts on the part of the producers to convince markets that there is plenty to meet demand. The situation with farm commodities is much different as this has been far more demand driven. The fact is that the global population is eating better and, thus, demanding more food. The bulk of grains are used to feed animals and, as people in China and other fast growing nations are better able to afford meat, there is a greater need for the feed grain. There are also growing demands for corn and other products for the production of fuel. The concern is that food shortages will appear in 2011 and 2012. If so, there is fear the food riots that emerged in the last crisis will appear again and add to the ferment in vulnerable states.

Source: Armada Corporate Intelligence

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