Why crop prices saw a boost on concerns of lower supply
Higher corn prices
On March 10, 2014, corn traded at ~$4.80 per bushel in the United States. While corn prices benefited from higher export demand and milk prices, much of the large jump that we’ve seen over the last few weeks appears to be driven by ongoing droughts in South America as well as the crisis in Ukraine.
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The differences in corn prices around the world reflect regional supply and demand balances. As the U.S. is the largest producer and exporter of corn, prices in the United States have an important influence over global prices. To a lesser extent, global prices will also impact U.S. prices. On March 7, 2014, corn traded at $6.12 a bushel in Brazil, compared to $4.81 a bushel in the United States, and $9.47 a bushel in China. The Chinese government has policies in place to support domestic farmers and keep prices stable. For that reason, domestic prices are set above global market prices.
Drought in South America
Although Brazil was expected to have a record output for soybeans this year and take over the United States’ position as the number-one world producer, one of the worst droughts in decades has forced traders, analysts, and government forecasters to cut production estimates. This has fueled a rally in the PowerShares DB Agriculture Fund ETF (DBA) and PowerShares DB Commodity Fund ETF (DBC) alike, as agri-commodities—from soybean to corn to coffee to sugar—rose.
Corn and wheat also received some boost since the start of March on concerns that supplies from the third and fourth largest respective exporter, Ukraine, will be disrupted if tensions between Russia escalate. As global supply falls, global prices will rise.
As long as drought continues in South America and tensions in Ukraine persist, crops should see higher prices. This could benefit key fertilizer producers such as Mosaic Co. (MOS) and Potash Corp. (POT) as well. But if the situation in Ukraine resolves, which is likely to happen sooner or later, there’s one fewer reason to get bullish.