A weak U.S. dollar has encouraged investment in commodities, resulting in positive activity for agriculture, according to a Texas AgriLife Extension Service economist.
“With regards to index investments, they (investors) buy these as a hedge against inflation, and when you have investment dollars coming out of the closet, many are putting money into commodities and that’s good for agriculture,” said Dr. Mark Welch, AgriLife Extension grain marketing economist.
A weak dollar allows foreign investors more purchasing power for U.S. products, and this has led to investment opportunities in commodities such as oil, which hit $78 a barrel recently. Index funds will also seek other commodities outside the energy sector, Welch said.
“This will also include agricultural commodities, which can lead to some positive activity for the agricultural industry as a whole,” said Welch, who recently discussed market implications at the 2009 Brock Faulkner Cattleman’s Clinic in Bryan.
This activity will affect the cattle market, Welch said. Coupled with declining numbers of cattle across the U.S., Welch said, beef producers can likely expect to see higher prices in 2010.
“We’re reducing numbers as a result of drought over the past two years, and that could put us in a very profitable situation in the future,” he said. “We slaughtered a lot of cows last year and this year, which has exceeded 2008 in some cases.”
Heifer retention rates have also been on the decline, down 2.2 percent compared to 2008 and the fewest in over 30 years, Welch said.
“We’re not going to have as big of a production beef plant (number of calves produced) in 2010 as we did this year,” he said. “When the economy increases and supports the demand, in general I think we can predict prices are going to increase next year, and especially going into 2011.”
Meanwhile, Welch said, grain demand could increase substantially in the coming months, coinciding with an economic turnaround and increased demand for energy.
Currently, more than 4 billion bushels of corn are being used for ethanol, and growth is expected to approach 5 billion. He said the nation’s corn crop is projected to be the second-largest on record. However, carryover stocks are going down as a result of the demand for corn from ethanol producers returning to profitability.
“What does that mean if we have a disruption in the corn supply?” Welch said. “We’re riding a razor's edge between supply and demand reflected in current price volatility.”
He said fertilizer prices may play a major role in how many corn acres are planted next year. Last April the national price for anhydrous ammonia averaged $680 a ton. Welch predicts $430 a ton in 2010, which is the cheapest price since 2005.
“Those are the kinds of prices we need to encourage lots of corn production,” he said.
To receive Welch’s grain market reports, e-mail him at [email protected].
Editor's note: There is an accompanying video segment for this report at http://www.youtube.com/watch?v=GTRDuAlvr0s.