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Global grain market changes increase risk to Midwest farmers

By Jean Caspers-Simmet

Date Modified: 12/06/2012 2:34 PM

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CEDAR FALLS, Iowa —Global changes in agricultural markets are like "the dog that finally caught the car" for Midwest farmers, says Sterling Liddell, vice president for Rabo AgriFinance and Rabobank International.

"We have to be careful that we don't get dragged to death, but there is a lot of opportunity," Liddell told farmers at last week's Iowa Soybean Association/RaboAgrifinace profitability summit in Cedar Falls. "To do effective marketing, you have to understand all these things and be able to deal with the risks."

Ethanol began to drive global grain demand in 2005 by taking a substantial amount of corn, Liddell said. At the same time, China, the world's population powerhouse, had its economic lift off. Brazil and India have also been population and economic engines. Higher gross domestic product in these countries means higher demand for protein.

In China fast food restaurants like Kentucky Fried Chicken and McDonald's are rapidly expanding and creating high demand for uniform, safe food products, Liddell said. To meet that demand, China is moving away from backyard livestock to more confinement operations. This is also fueling burgeoning demand for more corn and soybeans to feed hogs and poultry.

China, already a huge importer of soybeans, will also need to buy corn.

"China will always act in its own self-interest, and it will always put as much food on the plates of its people as it can because without that, you have social unrest," Liddell said. "This a key to understanding what is happening. The markets may not function logically, and we're finding tools that have always worked don't work as well any more."

On the supply side, Russia, the Ukraine and Kazakhstan now account for 26 percent of the world's wheat trade.

"This area is twice as volatile as North America for production," Liddell said.

Russia banned wheat exports in 2010 due to drought, asked Ukraine to hold enough grain for it to feed its poultry flock and essentially shut off exports out of Kazakhstan. Egypt, a major wheat customer, could not feed its people and helped cause unrest. Liddell said food inflation, which led to the inability of people to feed their families, was a factor in the Arab Spring.

"Not only are we reliant on Russia, Ukraine and Kazakhstan for 26 percent of the world's grain trade, we're also reliant on policies coming out of those countries to supply the grain," Liddell said.

Soybean trade continues to move to South America. U.S. soybean production is down 18 percent while production is up 12 percent in Brazil.

"Brazil is also much more volatile than North American production," Liddell said. "The big challenge with Brazil is transportation logistics."

In recent years China, which needs soybeans, has become the top direct foreign investor in Brazil. It finances roads, rails and grain storage. As Brazil's grain storage improves, export patterns are changing.

"With global grain stocks, we're in a new position where we're very tight globally and we just don't have much room for error," Liddell said.

In the United States, corn production is moving west and north. Wheat is moving from these areas to the Black Sea region, and soybeans are moving west and south and to Brazil.

"This is changing the dynamic of how we're producing and growing," Liddell said.

Managed or speculative money also has an impact on the markets more than every before.

"Speculative money can come into and out of the market very quickly," Liddell said. "It takes little bits of information and responds dramatically. The bottom line is we now have higher average prices because of this shift in demand, and we can expect double to triple the amount of volatility because of all these things together."