Africa: 2008 Promises Good Returns for Farmers

Wheat, corn and soy have all rallied in recent weeks and analysts say grains will continue to be hot into the New Year. When Barclays Capital asked 150 clients at a commodities conference this month which sectors they expected to produce the highest returns next year, 45 per cent voted for agricultural markets, well above the 19 per cent going for precious metals.

Investor interest, a new phenomenon, is largely thanks to strong fundamentals. Robust demand in emerging economies has drawn down stocks to record lows and despite a record food harvest this year, farmers cannot replenish grain stores fast enough to buffer them from weather-related shocks. In China, cereal stocks fell significantly between 2000 and 2004 and have not recovered in recent years.

Its booming economy means people are spending more on meat, and feeding more animals requires greater amounts of corn and soy. This year China became a net importer of corn, also known as maize.

That is one of the reasons why corn prices will stay high into 2008, despite a substantial rise in plantings in the US, says Luke Chandler, a commodities analyst at Rabobank in Australia. The other is the pressure from biofuels. "The US already uses a quarter of its crop for biofuel and there is talk of it increasing this to 40 or 50 per cent by 2020."

Corn prices passed record prices of $175 a tonne earlier this year, and although it has fallen from its peak, at $150 a tonne it is still 50 per cent above the average for 2006.

Weather forecasts suggest that next year's production may be hurt by dry weather, says James Nuttall, director of the UBS bank's commodities business in London. "We could see a fairly dry period in some of the corn-growing regions in North America and that could lead to production volatility."

All that creates a tempting world market for African farmers who manage to produce a surplus for export. Corn production could decline again this year if farmers switch to growing wheat, now priced at $400 per ton after bad weather conditions in Europe and Australia drastically reduced supplies.

Rabobank's Mr Chandler says there could be an extra 40-50 million tons of wheat entering the market next year and that would take much of the squeeze out of the market. Farmers should expect high volatility in pricing however. There may be brakes put on using corn for biofuels in countries like China where food security is a major issue.

Biofuel production is leading a major structural change to the soft commodities market. While cereal use for food and feed increased by four and seven per cent respectively since 2000, the use of cereals for industrial purposes, such as making biofuels, increased by more than 25 per cent, according to a recent report from the International Food Policy Research Institute (IFPRI). That shows the extent to which demand has changed in recent years, and why supply responses must be much quicker.

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