The International Grains Council (IGC) is predicting record wheat production in 2008 totaling 646 million tons, an increase of 7% over the quantities produced in 2007. Although some have taken this as a sign that 2008 will be the year when tensions abate on the market for agricultural raw materials, it is, however, more prudent to take a step back from these predictions, particularly their impact on global prices.
Current estimates may be optimistic, but nothing indicates that this situation will last until July 2008. Nothing guarantees that prices will remain high, and nothing can ensure that current conditions, particularly the favorable weather conditions, will still be in play by the next harvest in July.
Although this may sound pessimistic, the situation could very quickly be reversed, especially since one of the main indicators of market stability – global reserves – has reached an alarming level (the same as in 1947) and can no longer serve as a shock absorber. This trend is replicated in most of the world's grain storehouses. In early March, for example, the US Department of Agriculture (USDA) confirmed that American wheat reserves had dropped by 800,000 tons. Furthermore, weather hazards in limited geographical areas can have an instant and lasting impact on a given crop.
Although weather hazards affect less than 5% of global production in the majority of cases, they do exert a strong influence over market expectations of economic stakeholders, including producers, speculators and governments. That is precisely what makes agricultural markets so unique: a difference of just a few percentage points between supply and demand has always triggered substantial price swings. In 2007, 617 million tons of wheat were consumed yet only 603 million tons were produced. This shortfall represented only 2% of total production, and yet prices doubled.
It is, therefore, essential to avoid the pitfall of oversimplifying predictions by basing them on a thought process that assumes "all other things being equal" – in other words, one that assumes no impact on prices due to expectations of producers and speculators or from natural risks.
This line of reasoning is unsound and dangerous, as history has proven time and again. One recent example occurred in Australia in 2007 when, overnight, the optimistic predictions of market stakeholders were turned on their heads when the Australian government announced a total harvest that was only half of the estimated amount.
Such a serious error in judgment may be unpardonable in industry, but it is completely acceptable in agriculture because it is impossible for anyone to know in advance what quantity and quality will be produced with a margin of error below 20%.
By no means should we adopt a defeatist attitude and allow ourselves to be swept along by erratic changes in the market. It is essential to develop a better understanding of the complex realities of agriculture, as well as the various economic and psychological mechanisms that make the prices of agricultural raw materials so volatile. One of the objectives of the MOMAGRI model, which is now complete, is to provide answers to questions that remain unanswered.
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