Commodities seeing short-term tightening, with prices easing by mid-2013Commodities are experiencing immediate impacts from the drought, with all key agricultural commodity markets having tightened dramatically on the deteriorating outlook for supply. The immediate result is high prices. Corn and soybean prices are expected to stay elevated in the near term. Although further spikes cannot be ruled out, grain prices are expected to cool off by mid-2013. In the U.S., the government could issue a temporary waiver of its ethanol-blending mandate, which could alleviate the tightness in the corn market, since 40 percent of U.S. corn is used to produce ethanol. In the agricultural and chemicals sectors, there are short-term opportunities and risks. Providers of agricultural inputs such as seeds, fertilizers and crop-protections chemicals stand to benefit from increased incentives for growers to maximize production. As a result, there are attractive investment opportunities in all major regions of world. In the consumer sector, weather conditions should have minimal impact on packaged foods. There could be some low- to middle-single-digit cost impacts on certain European Union members in 2013, negative impacts for agribusiness companies and higher grain prices that could test the pricing power of food companies. In the industrials and insurance sector, drought conditions are actually a positive for farmers as soft commodity price increases more than offset production decline and help extend the global agriculture cycle. According to disaster modeler AIR Worldwide, the drought could cause losses of $1-3 billion after recoveries, a manageable event for crop insurers and their reinsurers. Economic consequences of the drought should be muted in the U.S. Although the drought is likely to curb farm production and boost food prices, the macroeconomic impact should be limited in the U.S., since the farming industry is a small share of the economy and higher crop prices are only partially passed through into processed food prices. The drought should not affect the overall outlook for the economy in the coming months.
The global impact of weather conditions, including a possible El Niño, should be similarly moderate, with limited, but generalized, upward inflation pressures resulting from an increase in grain prices. The effect will be greater in global emerging markets, since food prices command a bigger share of expenditures there than in developed economies, but that should be limited to a one-time spike in inflation.The impact should be similarly moderate in the growing Chinese and Indian economies. As China becomes wealthier, higher meat consumption is likely to push corn imports sharply higher due to animal feed demand, with resultant tightening of prices. In India, an autumn harvest drought could slow growth to 5 percent for the second half of 2012, but projected late rains should protect next summer's crop and avoid an impact in 2013. BofA Merrill Lynch Global Research The BofA Merrill Lynch Global Research franchise covers more than 3,300 stocks and 1,060 credits globally and ranks in the top tier in many external surveys. Most recently, the group was named Top Global Research Firm of 2011 by Institutional Investor magazine; No. 1 in the 2012 Institutional Investor All-Asia survey for the second consecutive year; and No. 2 in the 2012 Institutional Investor All-China, All-Europe, All-Japan and All-Latin America surveys. The group was also named No. 2 in the 2012 Institutional Investor All-America Fixed Income survey, as well as in the inaugural Institutional Investor Emerging Markets Equity and Fixed Income survey, covering Emerging Europe, Middle East and Africa. Additionally, BofA Merrill Lynch Global Research was named the No. 1 Global Broker by Financial Times/StarMine, as well as ranking No. 1 in the U.S. and Europe and No. 2 in Asia. The group was also named No. 1 in Asia and No. 2 in the U.S. in the Wall Street Journal Best on the Street 2012 Analysts Surveys. The group was also the winner of the Emerging Markets magazine’s EM Research Global Award for 2010 and 2011.
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