Mid-way through July we predicted that UK household bills were set to rise because of the most arid conditions to hit rural areas in the US and South America in a quarter of a century. The latest update from the US Department of Agriculture (USDA) makes it plain that, despite relief provided by rains in some key US farming states, the problems for the all-important corn and soybean crops remain acute.
The proportion of US corn and soybean crops rated in "good" or "excellent" condition by the USDA remains at historically low levels. But it is now likely that overall farm revenues in the US will increase substantially as soaring grain prices will more than offset the fall in yields. This wasn't a given, as we pointed out in a recent reiteration of our buy case for agribusiness group Syngenta: "It's possible that the current situation could deteriorate to the point where many farmers are driven out of business."
This was obviously the worst-case scenario, but it was feasible enough to prompt fears that it could undermine sales of farm inputs and equipment from the likes of Syngenta, Monsanto and Deere & Co. A point brought home by Deere's chief executive, Samuel R Allen, who recently said that: "dryness in several key markets warrants some caution in coming months". But it now appears that these fears may have been overdone, and market sentiment may well turn wholly positive ahead of next April's sowings in the US.
Away from the Occident, Investors Chronicle, along with many agricultural analysts, failed to anticipate the precipitous fall in Asian palm oil prices since April. Share prices for the likes of New Britain Palm Oil and Asian Plantations have reversed, as exports to China, the world's biggest end-user after India, were artificially held in check while Beijing sought to keep the lid on cooking oil prices. This caused the unexpected decoupling of the crude palm oil price from the crude oil price, which it has closely tracked for several years.
But the US drought has pushed soybean prices to all-time highs in recent weeks, thereby stretching soya oil's premium over palm prices to prohibitive levels. Malaysian crude palm oil futures duly hit a six-week high on Monday, as traders bet on a tightening market in edible oils and this should feed through to share prices in due course.
