In wake of tragedy: Commodity markets seen quickly returning to fundamentals

MANHATTAN, Kan. – Tragedy that hit the United States on Sept. 11 may well take an unprecedented toll on the U.S. business community, but within a short time, fundamental supply and demand forces will likely return to drive commodity prices, a Kansas State University economist said.

Predictions. “At this time, it does not seem likely that last Tuesday’s events will dramatically alter the pre-existing supply and demand for wheat, feed grains and oilseeds,” said Bill Tierney, crops marketing specialist with K-State Research and Extension.

He referred to the collapse of massive twin towers of the World Trade Center, destroyed when hijacked planes crashed into them. Another hijacked plane slammed into the Pentagon and a fourth crashed in Pennsylvania.

The news shut down trading on Wall Street as well as commodity markets throughout the United States, leaving farmers, traders and exporters wondering what impact the disaster will have on prices in the short term as well as the long run.

Looking at the past. “In the 20 years that I’ve been doing analysis of the crop markets, I can think of a number of events that had the potential or actually did rattle the commodity markets,” Tierney said.

He cited the Gulf War; Chernobyl; the assassination of Anwar Sadat; the Falklands War; the shooting down of the Korean airliner by a Soviet fighter; and the attempted coup by Soviet hardliners.

“To the best of my recollection, the annual average prices for the principal crops during those years were determined by changes in the supply and demand for those commodities,” he said.

What will be affected. Energy prices may be affected, the economist said, if the supply of oil from the Middle East or other OPEC member countries is increased or decreased.

“Unless the U.S. were to take dramatic military action that was perceived to be hostile to Saudi Arabia, Kuwait and other Gulf states, it is not expected that Middle East or OPEC oil supplies will change,” he added.

“On the other hand, energy demand – and prices – would certainly be affected if the U.S. and world economy were to fall into a recession.”

If energy prices did jump, Tierney said, that may discourage production in the Southern Hemisphere-producing countries, but would not change production in the northern Hemisphere.

On the other hand, a spike in energy prices would likely place further pressure on the world economy.

“However, assuming that a worldwide recession were to occur, the impact on demand for basic agricultural commodities would not be dramatic,” he said.

Possible effects. “The most likely effects would be to reduce or reverse the growth in world consumption, particularly of higher value food products such as meat, dairy products and vegetable oils.

If the value of the U.S. dollar were to decline, it’s unlikely that would lead to a significant strengthening in demand for U.S. crops, Tierney said.

“The U.S. is the world’s ‘residual’ supplier of wheat, crops and oilseeds,” he said. “As such, on a marketing-year basis, U.S. exports of these crops are dependent on the exportable surplus (and agricultural and trade policies) of our major export competitors, such as the EU, Brazil, Australia, Argentina, China and Canada.”

A lower value of the U.S. dollar will not significantly reduce these countries’ exports this year, he noted. It could, however, increase the cost of their export subsidies, if any are used.

“Barring any bullish surprise in the crop report, harvest pressure can be expected to have its traditional effect on crop prices,” Tierney said.

If there’s a recession… “Should the world’s economy tip into recession, it would take at least several months or more before that could be confirmed. If that were to occur, export demand for U.S. crops would be expected to decline. That would, in turn, reduce U.S. crop prices from what they otherwise have been.”

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