Libyan unrest helps trigger drop in agricultural commodity prices

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The political turmoil in Libya is having an unexpected consequence: It could help tame food inflation.

Prices for nearly all agricultural commodities including wheat, corn, canola, rice and soybeans, have fallen sharply this week after rising to near record levels. Wheat dropped 7 per cent Tuesday on the Chicago Board of Trade, but rose slightly Wednesday. It is now down roughly 15 per cent since reaching a 29-month high on Feb. 9. Soybeans hit a two-month low this week and corn fell as much as 6 per cent this week before rallying slightly Wednesday.

There is nothing particular about the situation in Libya that's driving food prices, since the country is not a major player in grain markets. Instead, analysts say the unrest has become a trigger for big investment funds to bail out of agricultural commodities and move into other areas such as crude oil. The agriculture market is also relatively small compared with the oil market, so when large investors pull out the price fluctuations can be significant.

"Certainly the Libya situation is probably just one more reason for people to take some risk off the table," said Jonathon Driedger, a senior market analyst at FarmLink Solutions in Winnipeg. There had been signs before the Libyan turmoil that prices for many commodities may have peaked, he said. "There are a couple of signs that maybe some of the urgency of [soaring prices]had started to back off maybe just a little bit."

There have been indications in recent weeks that global supplies of key commodities are improving as weather turns for the better in many countries and farmers respond to rising prices. For example, growing conditions have improved markedly in Brazil and Argentina, two of the world's largest producers of soybeans, corn and wheat. Both countries are now harvesting near-record soybean crops thanks to some badly needed recent rainfall. Rain has also finally fallen in China's wheat growing region, raising hopes that production there will increase. And India is considering increasing exports of rice and wheat after three years of bumper crops.

The United Nations Food and Agriculture Organization, as well as the World Bank, have also noted that corn and rice production in many countries, particularly in Africa, has been strong. Rice in particular has been one of the few food crops whose price did not rise sharply recently because of an abundance of supply. Both the FAO and the World Bank track commodity prices to develop their food inflation indexes. Both indexes hit record levels recently as commodity prices soared. But if prices fall back, the indexes should fall as well.

The supply situation could improve even more this week with the release of a key report from the United States Department of Agriculture. On Friday, the USDA will release an updated forecast for planting intentions and many analysts expect the figures to be much higher. Close to 78 million acres of soybeans could be planted, up from 77.4 million last year. And up to 93 million acres of corn are expected, compared to 88 million last year. The U.S. is the world's largest producer of corn and soybeans and those crops are by far the largest grown in that country.

But many analysts say the added supply situation won't solve all the problems. Food consumption and inflation are still rising in countries like China and India, where demonstrations occurred on Wednesday as thousands of people protested rising food prices. The UN and others also warn that yields and production will have to rise far faster to meet the population growth expected in the next few decades.

Mr. Driedger is among those who believe grain prices will start heading back up again at some point, because the overall supply situation for many crops remains tight. "I think there are a lot of underlying factors that haven't necessarily changed from what they were a couple of weeks ago when prices were at higher levels," he said.