The impact of the worst U.S. drought since the 1930s on grain markets is opening up opportunities for trade house Glencore, especially after its planned friendly takeover of Canadian grain handler Viterra, Glencore officials said.
"In terms of the outlook for the balance of the year, the environment is a good one. High prices, lots of volatility, a lot of dislocation, tightness, a lot of arbitrage opportunities," Chris Mahoney, director of agricultural products, told a conference call on Tuesday.
"I think we will both be able to provide the world with solutions, getting stuff to where it’s needed quickly and timely, and that should also be good for Glencore."
Mahoney said the hot, dry weather in the United States, the world’s biggest maize (corn) producer, will force a change in trade flows.
"The U.S. weather starting in mid-May… has been among the worst three or four years of the century, comparable to the dust bowl years of the mid-(19)30s," he added.
The drought has sent corn and soy prices to all-time highs, prompting G20 nations to mull an emergency meeting and raising the threat of a global food crisis such as the one in 2008, when surging prices of staple crops provoked rioting in some countries.
Earlier this month, Germany’s Commerzbank removed agricultural products from a commodity index fund after accusations that speculation has pushed up food prices and fuelled unrest in some poor countries.
Mahoney questioned whether production and export forecasts from the U.S. Department of Agriculture would have to be revised again after being slashed in August.
"The U.S. corn crop, which in May was estimated to be 380 million tonnes is now estimated to be only 270 million tonnes, but that may still be high," he said.
He also questioned whether the United States would be able to export 33 million tonnes of corn, as forecast this month by the USDA, down from a previous estimate of 48 million tonnes.
"This is a very unusual situation, we’ve had crop losses in 2008, there was a wheat problem, but I think we’ve seen nothing on the scale of this."
Glencore reported a smaller than expected drop in first half profit on Tuesday and said its US$30 billion bid for miner Xstrata was not a "must-do" deal.
Russia, also hit by drought, last week ruled out a ban on grain exports during 2012, but Mahoney said the situation would have to be monitored closely.
In 2010, Russia shocked markets with a ban on exports when the scale of harvest losses became clear.
"I think if the current export pace continues and if… they get most of the way through their exportable surplus by November or December, they could possibily have a rethink," he said.
Glencore has a hedging strategy in place so even if there was a ban on exports, there would be scant impact on the group, Mahoney added.
The takeover of Viterra was timed well, before the sharp run-up in grain prices, CEO Ivan Glasenberg said.
In March, Glencore offered Viterra C$6.l billion for the company, which owns the biggest share of Western Canada’s grain storage and farm supply outlets, as well as nearly all grain storage capacity in South Australia.
"Viterra makes our business more global and where you might have some issues from time to time in Russia or Ukraine, in Canada and Australia we’re not going to have such issues," Mahoney said.
The acquisition will allow Glencore to compete in the big leagues of agriculture trading, which are dominated by Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus.
— Eric Onstad is a correspondent for Reuters in London, specializing in commodities in the EMEA (Europe, Middle East, Africa) zone.