How Ags Will React to Last Year's Drought

By Commodity HQ  FEB 19, 2013 12:25 PM

The severe 2012 drought will have a real impact on commodities prices this year.

 


The agricultural industry was hit hard by the most severe and extensive drought in at least 25 years in 2012, which had an impact on crops, livestock and food prices at all levels. While prices have already started to increase in the fourth quarter of 2012, the majority of the impact on retail food prices will likely be seen throughout 2013, according to a recent report by the United States Department of Agriculture (“USDA”) analyzing the drought.

Effects on the Commodity Supply Chain

The largest impacts may be seen in beef, pork, poultry and dairy products, despite a temporary reprieve in prices due to herd culling in response to higher feed costs. The October Consumer Price Index (“CPI”) data suggests that this reprieve has ended and prices are likely to rise throughout 2013. Meanwhile, the full effects of increased corn prices on packaged and processed foods will likely take 10-12 months to move through to retail food prices, according to the report.

Looking into 2013, the USDA expects the following impacts:

Analyst Takes on Ag Commodities in 2013

Many analysts are mixed on the prospects for agricultural commodities in 2013, after experiencing such a turbulent year in 2012. On the whole, analysts seem to expect to see stronger corn prices, weaker soybean prices, and are mixed on other agricultural commodities with a bias towards the downside on the whole. Meanwhile, many recommend a long/short strategy to hedge against potential downside to the asset class as a whole.

Here are some specific analyst opinions to consider:

The Bottom Line

The takeaway from the 2012 drought and outlooks for 2013 is likely one of mixed results. While the drought undoubtedly led to sharply higher prices, especially in late 2012, the prospects of higher supplies and a global response (in Brazil for instance) have dampened prices moving into 2013. But, according to some analysts, there may be opportunities hidden within the industry, particularly in corn and wheat, where supplies remain tight and future supply is uncertain.

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Editor's note: This article by Justin Kuepper was originally published on Commodity HQ.
No positions in stocks mentioned.