(Interesting piece on energy from the Financial Times)
Grains lifted to highs as oil surges
By Chris Flood in London
Published: January 3 2008 18:25 | Last updated: January 3 2008 18:25
Agricultural commodities rose to multi-year highs Thursday following crude oil’s surge to $100 a barrel as traders anticipated higher demand from the expanding global biofuels industry.
In Chicago, wheat jumped 16 cents to $9.31 a bushel, 59 cents below its all-time high, while soyabeans rose to $12.38, a fresh 34-year high, and corn traded within touching distance of its recent 11-year high.
In Paris, rapeseed prices rose to record levels, up 1.5 per cent to €444.75 a tonne, while Malaysian palm oil futures also hit a record $961 a tonne Thursday.
As grains and oil seeds are key feedstuffs for biofuels, the oil price rise has exerted a huge push on agricultural commodities, which enjoyed their best returns for almost 30 years in 2007. The S&P GSCI agricultural commodities index returned 31 per cent last year, its best performance since 1981.
Support is also coming from population growth and demand for animal feed.
“This combination of food, feed and fuel demand for crops has created an upward shift in the trend demand growth for agriculture products,” said Jeffrey Currie, head of commodities research at Goldman Sachs.
He said global biofuel demand could increase from 10bn gallons a year in 2005 to 25bn gallons annually by 2010, an annualised growth rate of 20 per cent.
Extreme weather events and drought have hit harvests and exporting countries, such as Russia and Ukraine, have imposed export tariffs to ensure their domestic supply base remains secure. Key consuming countries, such as India and Egypt, have been scrambling to secure supplies, ensuring that overseas demand for US wheat and corn is running at near-record levels.
As a result of supply disappointments and rising demand, stocks have fallen to historic lows in many agricultural markets, leaving prices very susceptible to upward price shocks.
Many analysts believe the rally for agricultural commodities is only just beginning.
“In inflation-adjusted terms, prices for agricultural commodities today are still significantly below their real highs, so their valuations remain very attractive,” said Michael Lewis, head of commodities research at Deutsche Bank. “We believe the rally for agricultural prices is still only in its infancy.”
[And this from the WSJ....]
$100 Oil Could Eat Away at Consumer Spending
Oil prices only briefly touched $100 a barrel today, but a prolonged stay at that level could threaten a U.S. economy already weakened by an ailing housing market and increasingly cautious lenders.
In the U.S., which remains the most oil-dependent industrialized nation, oil at $100 would threaten consumer spending, which accounts for more than two-thirds of U.S. economic activity and is already expected to soften as home values decline. Oil’s rise is sending up the price of gasoline — the most visible price in the U.S. economy — and that has major impact on consumer psychology. Readings of consumer confidence have been weakening recently.
“If oil stays at the price it’s at, you could see gasoline prices at $3.60 or $4 a gallon, which is absolutely frightening,” said Paul Ashworth, senior U.S. economist at Capital Economics, a London-based research firm. “It’s going to have a fairly devastating impact.”
Until recently Federal Reserve officials downplayed the inflationary impact of higher energy prices, noting inflation excluding food and energy had edged lower. And consumers’ and investors’ long-term expectations of inflation, as revealed by surveys and bond trading behavior, have remained relatively stable. But Fed officials recently have signaled a rising degree of discomfort with the inflationary implications of energy prices. The statement accompanying their last interest-rate move said that, along with higher prices for other commodities, energy prices “may put upward pressure on inflation.” Those concerns suggest the Fed feels little latitude to lower interest rates to cushion the shock of steeper fuel bills, since doing so could aggravate inflation.
Economic forecasting firm Global Insight says that, in the U.S., each additional $10 per barrel increase in oil prices raises gasoline prices by roughly 19 cents a gallon, cuts growth in consumer spending by a third of a percentage point, reduces employment by 100,000 and adds one-half percentage point to consumer price inflation. Those factors combined will subtract two-tenths of a percentage point from the already slow 1.1% pace of growth the firm expects for the first half of 2008, Global Insight says.
Growth in consumer spending slowed from an inflation-adjusted annual rate of 4% in the first quarter to about 1.4% in the second quarter as gasoline prices climbed in the spring and early summer, then rebounded to 3% in the third quarter. Economists now anticipate a slower fourth quarter, though not as slow as they feared earlier. Macroeconomic Advisers, a St. Louis forecaster, estimates that consumer spending increased in the fourth quarter at a 2.8% annual pace.
“If gasoline prices go up, that means less to spend on everything else,” said David Greenlaw, Morgan Stanley’s chief U.S. fixed-income economist. “Whatever you get on gas prices eats into other forms of consumer spending.” –Sudeep Reddy
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