World Grain - January 2008 - 25

FEATURE: NO END IN SIGHT FOR VOLATILITY

Although there is still a long-term
bull market in place, agricultural markets rarely move in a straight line. "We
are already at very, very historically
high prices," he said. "It's difficult to
be bullish unless you're prepared to bet
on a major weather problem. The only
cure for high prices is high prices."
For the first time since 2004, he predicted relative stability in supplies,
with an all-grains crop, including soybeans, of around 1.65 billion tonnes,
compared with 1.64 billion tonnes of
demand. "Still, we're left with grain
stocks that are only marginally higher,"
he said.
He contrasted the current situation
with what the world was used to prior
to 1999, when stocks only declined because of adverse weather.
He identified a series of bullish and
bearish factors affecting the market.
On the bullish side, there was the continuing biofuels revolution, with rising
mineral oil prices increasing the likelihood that biofuels would be profitable,
and the growth in world livestock herds.
Tight stocks meant the market could be
affected by supply dislocation. He believed hedge and index funds would
want to increase their investment in
commodities in 2008.
There was also the formation of La
Niña, which could affect weather patterns. "La Niña is around today," he
said. "You will find weather forecasters already calling for a major drought
across the U.S. next summer."
A further bullish factor was the expansion of China's economy at a rate of
11% to 13% a year. China needed additional oilseed and vegetable oil imports
to cool inflationary pressures, while the
rising yuan was boosting Chinese purchasing power.
"The one big problem that they are
seeing is the massive movement of
people from the farm to the city," he
said. "The Chinese government has to
do something to slow this inflationary
trend."

It left the Chinese government with
no choice but to slow the economy.
"China's harvested acreage is basically
holding steady," he said. "If China is to
increase production, it has to come from
yield. Whether the Chinese can get that
yield increase is going to be very important over the next five to 10 years."

"I can't leave the impression
with you enough that the
volatility in the grains market
over the next year is going to
be acute."
- Don Basse, AgResource

The fall in the U.S. dollar would
contribute to the arguments for a bull
market, by making grains more attractive as an investment. But there are also
a range of bearish factors to consider.
Slowing economies, particularly in the
U.S. and Europe, would limit China's
scope for exports and thus put a brake
on its economic growth.
"If the Chinese are making all these

goods, who are they going to export to?"
he said. "Agricultural markets are now
closely linked to financial markets."
Agricultural production is set to rise
next year in many countries. The European Union (E.U.) has abandoned its
10% set-aside requirement, while the
northern hemisphere crop has experienced better weather as it went into
winter dormancy.
To cap it all, current high prices were
creating demand rationing, with end
users cutting grain use.
The same high prices would mean
greater production. "At these high prices, I don't look at the market to continue up dramatically over time," he said.
"I would expect this bull market to run
over the next seven to 10 years."
The hugely increased role of the
funds in grain markets could add to the
volatility. He put the total fund investment in agricultural commodities at
$150 billion in 2008. "If they were to
liquidate a third of those positions, that
would have a sizeable impact on price
levels at the CBOT (Chicago Board of
Trade)," he said.
For example, AIG/Goldman funds will

Don Basse, president of AgResource, talks about
the uncertainty of the current grain market.
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World Grain - January 2008

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