Crop prices need to fall along with the rain

With the current outlook for crop yields, who can blame them? Droughts across most of Europe have caused deep concern in the agricultural industry this spring.

Over the past three months, rainfall has been 50pc lower than usual, so even if June has a downpour, yields will still be lower.

And as the healthy fields begin to wilt, grain prices have soared in anticipation of poor harvests – by more than 70pc over 12 months in the case of wheat.

Partly due to Russia's drought and low harvests last year, the cost of a Hovis soft white loaf is already up 11.7pc in the past year, from £1.03 to £1.15.

The lack of rainfall is now being particularly keenly felt in the main producing areas of Germany, France, Britain and Poland, which account for more than two-thirds of European harvests.

Most worries are about the staple crop of wheat, with the International Grains Council cutting its forecast for world production in 2011 to 2012 by 5m tonnes to approximately 667m tonnes.

Arvalis, the grain institute, is forecasting damage of 5pc to 10pc of France's soft wheat crop, the region's biggest. It could be even worse in the UK, with estimates of a 10p to 15pc reduction.

A vast array of other produce has also been hit. One of the worst affected grains is malting barley in the UK, which has reached record price highs this week. Gleadell, a grain merchant, said on Friday that brewers are expecting serious impact on supply into 2012.

There is further concern about oilseed yields. As Jonathan Lane, trading manager at Gleadell, said in a weekly market report: "The weather continues to diminish world rapeseed prospects and the market is concerned as to where it will source imports. Traders are on edge about threats to output after weather disasters."

Dry conditions are jeopardising beet crops as the plants need moisture to access key minerals for growth. Meanwhile, livestock farmers are facing higher feed prices and grain shortages. Although Europe is the most seriously affected area, other parts of the world are also suffering, with Chinese authorities firing more than 4,000 cloud seeding rockets into the sky to try to bring rain to its river regions.

Wheat and corn are also drying out in the southern US. It was therefore a relief when Russia decided on Saturday to lift its ban on wheat exports, which should somewhat ease pressure on global supply.

"We are lifting the grain export ban on July 1," Prime Minister Vladimir Putin announced.

Ukraine, known as the bread basket of Europe, already lifted its export quota earlier in the week, causing a sigh of relief in the markets.

"Additional grain supply from Russia and the Ukraine should ease supply fears in the global market somewhat, as substantial crop losses are likely in other main export regions such as the US and the EU because of the drought," said analysts from Commerzbank, the German investment bank.

"This is likely to take the upward pressure off wheat prices."

Some more pressure may be eased if high prices make it uneconomic for biofuel producers to use wheat.

The UK's Ensus site near Teesside was last week mothballed for at least four months because of high grain prices.

Speculative investment in wheat has also dropped this week, indicating funds are not confident that prices will increase further from their current high levels.

A report from Rabobank notes that: "Managed money more than halved their net long position in wheat this week from 24,136 contracts to 11,206 contracts, the lowest level since November 2010."

All this may not be enough to puncture the high prices, maybe just to arrest their climb. Analysts say the best hope of lower prices would be a bout of rain in June – but dampening the price of grain has no easy solution.

And the cotton is high

The cotton price moved higher last week as exceptional drought conditions continued in Texas, the biggest cotton producing US state.

May is typically the wettest month in the Lone Star State, but parts of Texas haven't seen any significant rainfall since August last year, damaging crops.

Yet again the unusual weather has been blamed on the unusual patterns of La Nina, a cooling of the Pacific waters near the equator.
China braced for fall in metal output

Summer energy shortages in China will hit the country's production of metals and bolster global prices, Commerzbank said.

"It is often forgotten that China is not only the world's largest metal consumer but also its largest producer," analysts at the German bank state said. "Consequently, electricity rationing in the country in the next few months should also hit the metals industry hard and support prices."

Commerzbank believes falls in China's metal output on the back of likely electricity shortages are not yet sufficiently priced into metal prices.

"While the China Electricity Council had initially expected an electricity deficit of 30 gigawatts, the electricity provider State Grid now expects a shortage of up to 40 gigawatts, if coal shipments do not pick up soon," it said.

Rising thermal coal prices coupled with government caps on the price of energy is making electricity generation unprofitable in many parts of China.

Coal accounts for more than 70pc of the fuel requirements of power plants in the Asian nation, Commerzbank notes.

Some coal-fired power stations in provinces such as Gansu, Hubei, Hunan, Shanxi and Shaanxi have closed, resulting in the worst electricity deficit since 2004, the official Xinhua News Agency said last week.