Newsletter

GIOSI February 2009 Newsletter

February 1, 2009

Organics is no different than car manufacturers, potash mines, and conventional grains for that matter; organic trade has been impacted by the world economic crisis. Logically, actually, one could argue that organics should be impacted more than conventional commodities as it is a higher valued product and for some considered to be substitutable with cheaper although less healthy alternatives.

If someone is having trouble making the mortgage payment and needs to cut corners to do so it would be reasonable to assume that some organic consumers will purchase less organic product. That said, my experience has been very mixed in the organic markets, with some organic grain markets remaining steady and some dropping in demand. Some end users in some markets are saying consumer demand has dropped for several reasons not always organic related, while others are saying demand remains steady (Note: most publications show that organic demand has grown on average between 10-15% per annum the last two decades). There are mixed signals at the moment and it is certainly not clear what the overall impact is on organic consumer demand.

The negative impacts on organic market values this year are several and not all are directly related to organics themselves. Some of the main points to mention are the:

  • Global economic crisis.
  • Increased production world wide of conventional grains.
  • Larger organic crops in North America, Europe, Eastern Europe.
  • Change in buying patterns:
    • Credit limitations and uncertainty in markets has caused buyers to go hand to mouth causing choppy markets.
  • Stronger contract risk:
    • The business environment today with volatile currency markets and tightening credit facilities greatly increase contract execution and payment risk.
      • Producers should be aware (more so than in the past) of who they are selling too and considering the where with all of the buyer of their grain to withstand the tests of this market.

The positives for organic trade this year have been:

  • Weaker dollar
    • Our dollar has weakened over 20% from the summer which makes our exports more competitive.
  • Fundamental news as of late is bullish for conventional grains like wheat:
    • "World wheat production in 2009/10 would fall to 650 million tonnes, down from a record 687 million in 2008/09" (IGC)
    • "Argentina's Agriculture Secretariat lowered its estimate for wheat production to 8.3 million metric tons from the 9 million tons forecast last month as the lingering drought took its toll on yields. Wheat production is down sharply from the 16 million tons grown last season. With domestic demand estimated at about 7 million tons this year, very little is likely to be available for export over the 1.2 million tons of new crop exports already approved by the national agricultural trade office" (Dow Jones).
  • Organic demand in the US market has overall been sideways in talking with most end users.
    • Most do not anticipate a large drop in demand; just not the expected 10-15% annual growth experienced the last two decades.
  • There appears to be little pressure on producers to sell just at any level and selective producer sales are one factor keeping the market firm (producer sales patterns are matching end user buying patterns at the moment).
  • Reduced transportation costs:
    • Bulk vessel and container freights have dropped significantly from last year.
    • Bulk vessel by as much as 60-80%.
    • Container freight by approx 20-30%.
  • It is anticipated producers world wide will use less fertilizer this coming crop year due to falling grain prices and firm fertilizer costs; thereby reducing conventional production (world wide).

At this time my best "educated" guess for organic grain markets in the short term (2009 and perhaps the first part of 2010) is that this will be a time where organics is at the mercy of the other markets (conventional grain markets, money markets, stock markets) and the overall world economic situation. We are told by the politicians that the stimulus packages will right the ship in months, or at least towards the end of 2009—this is a wait and see at best.

Based on a combination of the information above and gut feel my immediate price assumptions are that organic values will be relatively stable with small price swings moving for the most part in tandem with conventional markets. Based on my own understanding of the conventional market as a whole I believe this should mean sideways to slightly firmer prices from today's organic grain values over the next 6-12 months depending on the particular grain/oilseed and how niche / independent it is from its conventional relative.

Over the long term (last half 2010, next 5 years) one has to assume that organics demand will continue to grow. After all organics is not a fad, it is here to stay. Everyone knows someone who has finally woken up to the fact what you put into you're body matters and effects you're well being; recycling is main stream; people are using reusable bags as the norm now; and the media is catching on more and more as well. Also organics it appears under the new USA political regime is now on the agenda and will be if not supported at least not inhibited by government policy; this should also help to heighten the profile of organic in the USA. In short awareness for the well being of ones body and the planet is on the rise which will certainly benefit organic demand and market growth should resume at its previous pace when the economy has recovered.

Best regards,
Tom Cowell