Poor global harvests in the last twelve months plugged together with increasing demand from China have squeezed the price for the major food commodities - wheat, corn and soybean. Moving up the food chain, higher prices for the source have impacted food ingredients suppliers and their food maker clients.
But according to investment bank Goldman Sachs, the volatility is slated to continue, marked in particular by uncertainty over Chinese imports that is exacerbating the seasonal volatility normally associated with planting and growing seasons.
" With stocks at minimal levels any positive demand or negative supply shocks will likely require price spikes to ration demand," said the bank in new report issued this week.
Recent credit tightening measures and moves by the Chinese government to slow the pace of economic growth has led to growing concern over the level of Chinese demand. For example, writes Goldman Sachs, Chinese imports of soybeans more than doubled in 2002/2003 over prior year levels, in large part due to increased feed use for livestock, and this was a significant contributor to the tightening of the soybean market.
While tightness in soybean stocks is slated to begin to ease in the US, the increased supply will not be available until late this year, leaving soybean prices, like corn and wheat, vulnerable to supply shocks, they added.
Soy price volatility tends to rise starting in June, which is the middle of the planting season in the US, and then peaks in August towards the end of the flowering season, dropping in October and November when harvest progresses.
According to Goldman Sachs, as of 15 June the 60-day volatility for the Chicago Board of Trade (futures trading) soybean contract was at 42 per cent, a 7 year high, while wheat was at 34 per cent, an 8 year high.
Historically low inventory levels leave no cushion to absorb any shortfall in supply, weather or 'China related surprises'. As such, they have had an exaggerated impact on price.
Once again, further pressure on soybean prices has come from China in the shape of importing decisions. Recently Chinese importers have attempted to forgo delivery of imports from Brazil, apparently because of the presence of an unacceptable level of fungicide. "But it is also worth noting that the Chinese crushers have seen their margins collapse in recent months and that the beans being shipped were contracted at a time when both market prices and demand expectations were higher," said the bank. "In the short term the rejection of the Brazilian soybeans may result in some incremental demand for US soybeans."