The reassuring thing about most roller coaster rides is that no matter how extreme the ups and downs, you always know when and where it will end. Unfortunately commodity prices are not quite as predictable. Following a year of many record- or near-record-high prices and the expectation of continued market fluidity, organizations around the world have released projections of many commodity prices, including feed corn, oats, wheat, cocoa, sugar, livestock, and crude oil with caution and caveats. They agree that, although their forecasts are based on historic, current, and anticipated production and consumption estimates, those numbers can undergo and have undergone dramatic changes due to a number of factors.
Soaring crude oil prices and the subsequent ramped up production of ethanol were the two greatest news-making factors for commodity price fluctuations in 2008. However, according to the Farm Foundation’s “What’s Driving Food Prices?” report, issues are more complex. They include rapid economic growth in developing countries, which resulted in increased food demand and a dietary transition from cereals to more animal protein; reduced global productivity levels; depreciation of the U.S. dollar; restriction of less expensive imports; and unfavorable growing weather conditions.
Recessionary fears have also led to a decrease in demand for commodities such as cocoa and coffee, resulting in lower prices, says Dax Wedemeyer, a broker/analyst with Iowa-based grain and livestock investment and management firm U.S. Commodities. But, as confidence in the economy increases, prices for these commodities should stabilize.
According to Robert Derrington, managing director at Tennessee-based investment firm Morgan Keegan and Co., Inc., weather conditions, specifically flooding in the Midwest last spring played a major role in driving futures up for grains, creating “a dramatic spike in prices which continued to the middle of 2008.” Later in the year, he says, the prices of many key agricultural commodities, including corn and wheat, declined from their mid-summer highs.
Profitability for cattle, hog, and chicken farmers has been what David Maloni, principal of American Restaurant Association, a food commodity economics research company headquartered in Sarasota, Florida, describes as “extremely poor,” in large part because of higher feed costs. To bring back prices to more acceptable levels, many producers have been reducing the size of their breeding herds for the past nine to 12 months. As a result, he predicts beef will trend down 1–2 percent in 2009. Pork production in 2009 should drop 2.5 percent and again in 2010. Chicken will go even lower, down 2–4 percent in 2009 and flat in 2010.
Projected ranges reflect the uncertainty of supply and demand. Should conditions change, chicken prices would be able to rebound faster than those for other livestock. As Maloni explains, “It takes months to raise chickens, quarters to raise hogs, and years to raise cattle.”
The good news is that supply and demand, rather than speculation or inflation, will likely influence future commodity prices. “That is likely to keep a lid on prices as global demand is expected to be subdued as the dollar strengthens and foreign economies border on recession,” Derrington says.
To help you prepare, below are projections for 2008–2009 and 2009–2010 by some of the leading commodity analysts and organizations.*