Shale gas to drag world agro prices lower

Aug 19 2014, 01:54 IST
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SummaryDiminishing ethanol demand will trigger a fall in corn prices and also lead to lower wheat/rice values.

The “gale of shale” is hitting the US and the world with surplus energy. In 2000, shale was 2% of natural gas supply; in 2012, it was about 37%; and will be about 65% within the next two decades. The US is poised for shipping out shale gas in liquefied form as net exporter of energy. According to some analysts, crude oil prices may be clipped by 30% (say, from $100 to $70 per barrel) in the foreseeable future. American motorists are consuming less gasoline, thereby limiting the blend of biofuels like ethanol. The “energy security” lobby of the US is no longer supportive of biofuels.

Ethanol is produced from corn in the US. (Brazil and India produce ethanol from sugarcane.) Apart from human consumption, corn is extensively consumed by livestock as animal feed. About 970 million tonnes of corn is produced worldwide—the largest single crop in the world. Wheat is around 700 million tonnes, rice is 470 million tonnes and soybean about 300 million tonnes.

The US’s maize output, the highest among all countries, is about 360 million tonnes. Out of this, 36% (130 million tonnes) of corn is consumed for ethanol. With sufficiency and viability of shale gas, the future demand of ethanol will shrink, resulting into demand compression of corn, especially in the US, and its price will move southwards in the coming years. As of now, corn and wheat are trading, respectively, at $190/200 and $240 per tonne FOB—lesser by 20% from last year.

There exists an empirical equation of corn with other agro commodities. For easy understanding, if corn is priced at $200 per tonne in any future exchange, wheat will be around $250-260 and soybean will be traded at $450-500. Barring unforeseen conditions, trade tentatively assumes ratio of 1:1.25-1.30 for corn versus wheat and 1:2.25-2.5 for corn versus soybean.

Rice of Asian origins is not traded at future exchanges so corn versus rice ratios cannot be established directly but can be inferred from “price/demand” elasticity of 39 countries of Sub-Saharan Africa. This region imports about 11-12 million tonnes rice annually, out of 35 million tonnes of non-Basmati that is traded worldwide. If rice becomes expensive, say about $600 per tonne FOB, as in 2008, there would be significant shift to corn till rice values drop to about $350-400 levels.

Bearish corn means lower food and feed prices

Corn, wheat and soymeal are active ingredients of feed compound ingested by live

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