By TOM CLEVELAND
For the Capital Press
As much as things change, they stay the same. The agricultural industry has been dealing with price volatility for centuries, but even with modern financial market tools in play, wide fluctuations can still take place at a moment's notice. Markets suddenly gyrate to find a new equilibrium after either an external shock or a new supply-and-demand dynamic has rippled through the industry.
Why does this extreme pricing behavior occur in the first place? Chris Harris, editor-in-chief for The Cattle Site, writes that there are three major reasons:
* "Agricultural output varies from period to period because of natural occurrences such as weather and pests." This reason is foremost since it includes things like drought, geo-political crises, economic downturns, export restrictions, commodity speculators, the value of the U.S. dollar and shortages of badly needed raw materials such as water, oil, energy or fertilizers.
* "There is little flexibility in supply and demand as regards price to cope with sudden shocks in the market." This factor has more to do with timing and supply inventories that may or may not be present when demand rises or falls. Market intervention attempts to quell sudden spikes are limited, especially if stocks are low.
* "Because production takes considerable time in agriculture, supply cannot respond much to price changes in the short term, though it can do so much more once the production cycle is completed." This factor is unique to the industry and will remain as long as there are specific harvesting cycles that rule both the timing and delivery of output.
Commodity futures markets have been utilized to level out most of these related distortions that frequently occur, but the general investment community has increased interest in speculation. Speculators claim that they bring much needed liquidity to market that should result in more stable pricing, but industry pundits have been quick to blame many problems on speculator manipulation.
With these reasons as a backdrop, many industry analysts are predicting an increased bout with price volatility in commodities in 2013, reminiscent of the global food crisis that occurred in 2007-08. Crops in the United States have had to buckle under the worst drought in our nation since 1936. From a global perspective, water shortages have also severely impacted the prime farming regions in Russia and South America. Whether these are more signs of global warming or cyclical changes by nature is not the issue. The negative results are the same under either scenario.
The analysts at Rabobank, a specialist in agricultural commodities, have been more specific, projecting a 15 percent increase in a United Nation's benchmark for global food prices by June of 2013. They go on to say, "The coming year will see the world economy re-enter a period of agflation as grain and oilseed stocks decline to critically low levels, pushing the FAO (Food and Agricultural Organization) Food Price Index above record nominal highs set in February 2011."
Many insiders also point to the weakness of the U.S. dollar, citing that most agricultural prices are based in dollars and naturally rise when our central bank chooses to print more money, a process called "quantitative easing." Recently, the Fed announced a new "QE4" program to expand the money supply, an effort designed to add stimulus to our economy. The dollar had strengthened by nearly 10 percent over the past year, but for the last two years, it has declined by 5 percent.
Wheat and rice shortages were paramount in 2008. The situation is different this time around, but expect increased demand and higher prices as 2013 unfolds.
Tom Cleveland is a financial analyst for Forex Traders ( www.forextraders.com ) and has had an extensive career in the international payments industry with over 30 years of experience in executive management, corporate governance and business development.