The Agribusiness World Today

Ken Shwedel
Investigador de Agronegocios, Rabobank, México
13 - 17 de Octubre de 2008

The World

Falling commodity prices: Common wisdom says that commodities tend to be a good investment in times of economic uncertainty. Over the last couple of weeks, does it mean that common wisdom isn’t all that smart after all or is it that there has been a change in the fundamentals of the market? While we do feel that there is some panic selling, as mentioned last week, there has been a change in the dynamics of the market which has depressed commodity prices. The International Monetary Fund (IMF) has just re-projected downwards their economic outlook. They estimate that the world economy will contract from an estimated 3.9 percent growth year to three percent in 2009, with growth in the world’s advanced economies practically flat at .5 percent. The contraction in growth will result in a slowdown in the demand for a number of commodities, particularly grains and protein meal because it is expected that meat consumption will contract. Because most commodity prices are quoted in U.S. dollars, one of the reasons behind the upward movement of commodity prices was the loss of value of the dollar. Recently the dollar has recovered some of its lost value. This has been particularly the case in export countries such as Brazil and Australia. The strengthening of the dollar has also worked to push down commodity prices.

Likewise, oil prices, whose movements over the last two years have been highly coordinated with corn prices, have fallen. The exodus of many speculators from market has also worked to depress commodity prices. If all this wasn’t enough, as last week came to a close the USDA came out with their October crop production estimates. They raised corn estimates for 2008/09 by 3.3 million MT with ending stocks up by 3.5 million MT, and soybean production up by 1.3 million MT with ending stocks also up. Interestingly, they see a contraction in the ethanol related demand for corn. While all these factors have come together to pressure prices downwards, you shouldn’t forget that even with the growth in inventories, they are still low by historic standards. In other words, the market will be subject to volatility and could easily turn upwards again.

Growing to assure freshness: With consumers wanting to be assured that their produce is fresh and retailers looking for a way to stand out in the pack, MNB is reporting that some retailers have or will be starting to grow some of their own produce. Of course they can’t grow all that they sell, but it does send a message to consumers that they have “a closer understanding where [their] food comes from” and a “connection to the land”.

Mexico

Rethinking economic growth: Recognizing that the global economic turmoil will also impact Mexico, the government has modified their 2009 budget that they only just recently sent to Congress. The revised budget now projects GDP at 1.8 percent compared to the original three percent. Their FX projection was also modified from 10.60 to 11.20 pesos U.S. dollar. They also reduced the projection for oil exports from US$ 80.30 to US$75 per barrel. In order to assure some growth in the economy, the Administration has proposed in increase spending on infrastructure projects, which of course generates employment. Consequently, they will run a budget deficit equal to about 1.8 percent of GDP. The revised budget is bad news for farmers who were complaining about the cuts to agriculture in the Administration’s original budget proposal. The implied message in the revised budget is to forget about any additional money for agriculture.