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Burgeoning demand, coupled with last year’s Russian grain crisis, floods in China and Pakistan, dry weather in Argentina, and other crop adversities have sharply reduced supplies of major agricultural commodities, pointing to “a need for more planted acres in 2011,” says Steve Freed. Barring another meltdown in the economy, commodity prices “probably won’t trade much below current levels” near term, says Freed, vice president of commodity market research for ADM Investor Services, who gave his insight on grain markets at the Mississippi Farm Bureau Federation’s Winter Commodity Conference.
Strong flow of money into commodity funds
Money going into commodity investment funds will also be an influence on markets, he says. “One projection is that money going into commodity markets will reach a half-trillion dollars, up from $360 billion last year and $270 billion in 2009. With low interest rates, a lagging housing market, and a lethargic economy, investor money is looking for other places to go. The investment firms are saying that commodity markets will continue to trade higher, at least for the first half of this year.
“We also have to look at U.S. debt, which going out to 2030 is projected at $20 trillion, and the impact that will have on the dollar. Most economists will tell you that long term they’re negative to the dollar, which would be positive for commodity prices.”
U.S. farmers “are doing very well right now from the standpoint of net farm income,” he says, but a recent survey of growers across the Midwest showed “their major concern is that, as grain prices go up, so do costs. What happens, they ask, if they have a perfect crop this fall and prices drop below what it cost for them to put it in the ground? That can happen in any year. I think this year crop insurance is going to be critical.”
Commenting on farm land values, Freed says, “When I graduated from college in 1976, I planned to farm, but land in central Illinois was going for $5,000 an acre. Recently, land near us sold for $9,700 an acre. In Iowa just recently, there was a bidding war in which land went for $13,000 an acre.”