Supply shock set to keep commodity prices high




Commodity prices will continue to rise worldwide as a result of a sharp decrease in supply of some essential grains, the continuing weakness of the US dollar and the threat of a global recession, analysts said.


Grain prices gained during the past week in what is becoming a supply shock as countries that rely on imports are increasingly unable to access their traditional sources, according to experts.
In addition, the rush by developed countries to use crop-based ethanol to offset crude oil has helped to create a global food crisis. Weather conditions have also contributed to rising food prices and now wheat and rice staples across the world are rising as fast as high-fructose crops.


Rice, the staple food of half the world, proved to be the main mover last week as it jumped to record highs after the Philippines, the world’s biggest importer, sought to buy one million metric tonnes, increasing concern there is a global shortage of the staple. South Korea also announced plans to farm rice and other grains overseas to ensure a stable supply amid soaring global prices.


Rice in Chicago surged to more than $22.67 (Dh83.25) per 100 pounds (45.35kg) on rising demand and export curbs from some producing nations, stoking global concern about inflation.
Ali Hamoudi, senior vice-president of Orion Brokers, said: “Commodity prices are rising after comments from the G7 meeting failed to change the overall market outlook, which remains bearish. Rice prices surged rapidly last week due to rising demand, reduced exports from producing countries and floods in the US.”


Wheat prices also advanced sharply at the beginning of the week, immediately after Kazakhstan announced its decision to suspend all wheat exports until September to curb rising domestic bread prices.
Kazakhstan, the world’s fifth-biggest wheat exporter, is following similar steps taken by several countries, including Pakistan and Argentina, to ban or restrict exports.


Sherif Sanad, head of marketing and commodities expert at One Financial, said wheat prices have surged in the past year, triggering riots in some countries.

And with more restrictions on trading of the grain, he predicted prices will go higher. “Wheat futures for July delivery reached $9.105 a bushel on the Chicago Board of Trade. The price at one point was up to $9.42 a bushel.”


Prices of other foodstuffs continued to surge during the week. “Corn and soya beans rose throughout the week on speculation global demand will increase as countries seek to slow inflation and avoid food shortages. Corn advanced to $6.06 a bushel in Chicago and soybeans surged to $13.97 a bushel,” Orion Brokers’ Hamoudi said.


“Sugar also rose to a four-week high on speculation oil’s rally to a record and higher corn prices will boost demand for fuel made from sugar cane. Sugar rose to 13.31 cents a pound in New York,” he said.


Sanad said the statement from the G7 meeting that recent sharp fluctuations in exchange rates posed a risk to global economic stability had raised expectations the dollar’s precipitous decline may be coming to an end.

But the dollar renewed its fall during the week following a modest bounce after the meeting. There are high expectations about further rate cuts by the Federal Reserve on April 30, so talks of a reversal in the fortunes of the dollar can be put on hold until later in the year when the Fed begins raising interest rates again.


Hamoudi said the euro could hold slightly below the record high of $1.59 but traders are looking for more strength and a rise above $1.6. The sterling pound recorded a new record low against the euro touching 80.64 pence per euro and is expected to decline below its support level of $1.9650 and head towards $1.9340.


However, Standard Chartered predicted the euro-dollar was powered up to new record highs and the upmove towards the 1.6 level is expected to be broken before too long. The bank’s mid-year forecast is 1.65.


“Gold stayed above the psychologically important $900 level last week, despite a slight rally by the dollar, which tends to trade in the opposite direction to the precious metal. Gold is likely to continue to be bought by investors as a hedge against spiralling inflation, driven primarily by the emerging economies of India and China.
We are watching closely indicators for continued weakness of the dollar and further gains in crude oil prices to take gold back towards $1,000,” Sanad said.


“The market is looking for positive news and the Asian growth story is going to grab more momentum. China now accounts for almost a quarter of global copper consumption. Copper continues to perform strongly based on surging demand from China.
China’s statistics bureau last week announced a gain in GDP of 10.6 per cent during the first quarter, indicating demand for copper should remain buoyant,” he said.


Platinum also rose in New York at the end of the week – to $1,986.40 an ounce – after declining two sessions at the beginning. Crude oil surged to a fresh record in New York this week as supply disruptions slowed exports from Mexico and Nigeria, and China announced diesel imports soared almost 50 per cent in March, indicating rising fuel demand is likely to more than compensate any predicted decline in demand from Europe and the US. Gasoline prices hit their highest mark ever in the US, further adding to inflationary pressures in the world’s largest economy.


“Oil broke through the $114-level and is showing no sign of slowing down as crude inventories are not expected to increase significantly. Gasoline inventories are also expected to decline, while demand is expected to rise ahead of the summer season, supporting energy prices,” Hamoudi said.


Natural gas also advanced sharply on concern supplies may fall short of demand. Inventories of the heating and factory fuel dipped to 1.234 trillion cubic feet this month, the lowest for this time of the year since May 2004. Natural gas for May delivery rose to $10.205 per million British thermal units, a 36 per cent increase so far this year.