Commodities

Exclusive-Iraq set to pay high price for bumper wheat harvest

Published

1 month ago

October 10, 2024

By Sarah El Safty and Muayad Kenany

DUBAI/NAJAF, Iraq (Reuters) – A bumper harvest and a hefty grain surplus in Iraq, typically one of the Middle East’s biggest wheat importers, has left the government with the prospect of a net loss of nearly half a billion dollars, according to Reuters calculations.

The 1.5 million metric ton wheat surplus, helped by better than expected rains but above all by government subsidies, is excellent news for farmers.

For the government, however, which pays them more than double the global market price to encourage cultivation of the food staple in often arid conditions, the price is high.

According to the calculations, based on official figures and conversations with more than 10 government officials, farmers, mill owners, analysts and exporters, the government will have made a loss of $458.37 million, once it has paid the farmers and assuming it manages to sell the excess to private millers in Iraq at an agreed price.

Critics say it needs to better balance the challenges of motivating farmers and limited financial and other resources.

“This is poor planning,” said Adel Al Mokhtar, former adviser to the Iraqi parliament’s agriculture committee. “Why do we produce more than we need, which also leads to wasting water?” he asked.

To meet the needs of its subsidy programme, the government needs between 4.5 and 5 million tons annually.

Historically, Iraq, as part of the Fertile Crescent from the Mediterranean to the Gulf is where farming developed more than 10,000 years ago.

In recent years, Iraqi agriculture has suffered from a lack of rainfall linked to climate change, less water flowing through its two main rivers, the Tigris and the Euphrates, and decades of conflict that have interfered with cultivation.

The United Nations puts Iraq among the five most vulnerable countries to climate change globally, making food security a priority for the government.

But the country, the second largest producer in the Organization of the Petroleum Exporting Countries (OPEC) is also facing a reduced budget in 2025 after lower oil prices.

“If oil prices start coming down the government has first to pay salaries of public service employees so how much will be left to subsidise the agriculture sector, that’s the question nobody knows the answer to,” Harry Istepanian, an independent energy and water expert in Washington and a senior fellow at the Iraq Energy Institute, said.

STORAGE PROBLEM

Baghdad could try to export its surplus but said it prefers to keep it inside the country and support its millers. Limited storage space means it cannot store the surplus for next year, Haider Nouri, director general of Iraq’s grain board, told Reuters.

Although the government was buying for 850,000 Iraqi dinars ($649.35) and selling for 450,000 dinars, it did not consider that a loss because the grain was staying in the country, Nouri said.

“There is no loss considering that the money is spent inside the country and in Iraqi currency, employing workers, supporting flour (mills), relying on the local product, and abandoning flour imports from Turkey, the Emirates, and Kuwait,” he said.

Farmers said rains had helped them, but the government subsidy was crucial.

Ashour Al Salawi, a farmer in Iraq’s southern province of Najaf, said the government price had led him to increase the area he planted with wheat by 50% to a total of 15 dunums. A dunum is a land measure of less than an acre.

In contrast to previous years, he said the money was paid on time.

“There’s a huge difference between this year and previous years,” Abbas Obeid, another farmer in Najaf, said.

“It was the compensation but we were also provided with water, electricity and subsidised fertilisers.”

Mohsen Abdul Amir Hadhud, head of the agricultural cooperative in Najaf, said most farmers had seen a major improvement in their lives.

“The farmers’ living conditions have improved due to government support for the wheat crop. They have restored their homes, increased the cultivated areas, and purchased good agricultural supplies,” Hadhud said.

The government also provided support for other crops such as rice, buying it at a price between 850,000 and 1 million Iraqi Dinars depending on its quality.

MILLERS BARGAINING POWER?

The decision to keep the surplus wheat in Iraq could lead to pressure on the government from the millers for lower selling prices given that they potentially can import for less.

“The price set by the government, which is 450,000, is not final, and we expect the price to be reviewed by the government, since the price that the government will sell to mills is higher than the global price,” Ali Fadhel, director of Al-Aswar Company, a private sector mill, said.

Farmers, meanwhile, may find themselves less well rewarded in the 2025 season, when Nouri said Baghdad was considering cutting the price it pays them.

“It is possible that the price of purchasing wheat will decrease [next year]…but it will not be significant, and will be higher than the global market,” he said.

The farmers in Najaf, say that undoubtedly will mean less wheat.

“It would be a disaster if they decrease the price next year,” Hussein El Morshedy, whose production increased more than 60% this year, said.

($1 = 1,309.0000 Iraqi dinars)

Commodities

Natural gas prices outlook for 2025

Published

23 hours ago

November 23, 2024

Investing.com — The outlook for prices in 2025 remains cautiously optimistic, influenced by a mix of global demand trends, supply-side constraints, and weather-driven uncertainties.

As per analysts at BofA Securities, U.S. Henry Hub prices are expected to average $3.33/MMBtu for the year, marking a rebound from the low levels seen throughout much of 2024.

Natural gas prices in 2024 were characterized by subdued trading, largely oscillating between $2 and $3/MMBtu, making it the weakest year since the pandemic-induced slump in 2020.

This price environment persisted despite record domestic demand, which averaged over 78 billion cubic feet per day (Bcf/d), buoyed by increases in power generation needs and continued industrial activity.

However, warm weather conditions during the 2023–24 winter suppressed residential and commercial heating demand, contributing to the overall price weakness.

Looking ahead, several factors are poised to tighten the natural gas market and elevate prices in 2025.

A key driver is the anticipated rise in liquefied natural gas (LNG) exports as new facilities, including the Plaquemines and Corpus Christi Stage 3 projects, come online.

These additions are expected to significantly boost U.S. feedgas demand, adding strain to domestic supply and lifting prices.

The ongoing growth in exports to Mexico via pipeline, which hit record levels in 2024, further underscores the international pull on U.S. gas.

On the domestic front, production constraints could play a pivotal role in shaping the price trajectory.

While U.S. dry gas production remains historically robust, averaging around 101 Bcf/d in 2024, capital discipline among exploration and production companies suggests a limited ability to rapidly scale output in response to higher prices.

Producers have strategically withheld volumes, awaiting a more favorable pricing environment. If supply fails to match the anticipated uptick in demand, analysts warn of potential upward repricing in the market.

Weather patterns remain a wildcard. Forecasts suggest that the 2024–25 winter could be 2°F colder than the previous year, potentially driving an additional 500 Bcf of seasonal demand.

However, should warmer-than-expected temperatures materialize, the opposite effect could dampen price gains. Historically, colder winters have correlated with significant price spikes, reflecting the market’s sensitivity to heating demand.

The structural shift in the U.S. power generation mix also supports a bullish case for natural gas. Ongoing retirements of coal-fired power plants, coupled with the rise of renewable energy, have entrenched natural gas as a critical bridge fuel.

Even as wind and solar capacity expand, natural gas is expected to fill gaps in generation during periods of low renewable output, further solidifying its role in the energy transition.

Commodities

Citi simulates an increase of global oil prices to $120/bbl. Here’s what happens

Published

23 hours ago

November 23, 2024

Investing.cm — Citi Research has simulated the effects of a hypothetical oil price surge to $120 per barrel, a scenario reflecting potential geopolitical tensions, particularly in the Middle East.

As per Citi, such a price hike would result in a major but temporary economic disruption, with global output losses peaking at around 0.4% relative to the baseline forecast.

While the impact diminishes over time as oil prices gradually normalize, the economic ripples are uneven across regions, flagging varying levels of resilience and policy responses.

The simulated price increase triggers a contraction in global economic output, primarily driven by higher energy costs reducing disposable incomes and corporate profit margins.

The global output loss, though substantial at the onset, is projected to stabilize between 0.3% and 0.4% before fading as oil prices return to baseline forecasts.

The United States shows a more muted immediate output loss compared to the Euro Area or China.

This disparity is partly attributed to the U.S.’s status as a leading oil producer, which cushions the domestic economy through wealth effects, such as stock market boosts from energy sector gains.

However, the U.S. advantage is short-lived; tighter monetary policies to counteract inflation lead to delayed negative impacts on output.

Headline inflation globally is expected to spike by approximately two percentage points, with the U.S. experiencing a slightly more pronounced increase.

The relatively lower taxation of energy products in the U.S. amplifies the pass-through of oil price shocks to consumers compared to Europe, where higher energy taxes buffer the direct impact.

Central bank responses diverge across regions. In the U.S., where inflation impacts are more acute, the Federal Reserve’s reaction function—based on the Taylor rule—leads to an initial tightening of monetary policy. This contrasts with more subdued policy changes in the Euro Area and China, where central banks are less aggressive in responding to the transient inflation spike.

Citi’s analysts frame this scenario within the context of ongoing geopolitical volatility, particularly in the Middle East. The model assumes a supply disruption of 2-3 million barrels per day over several months, underscoring the precariousness of energy markets to geopolitical shocks.

The report flags several broader implications. For policymakers, the challenge lies in balancing short-term inflation control with the need to cushion economic output.

For businesses and consumers, a price hike of this magnitude underscores the importance of energy cost management and diversification strategies.

Finally, the analysts cautions that the simulation’s results may understate risks if structural changes, such as the U.S.’s evolving role as an energy exporter, are not fully captured in the model.

While the simulation reflects a temporary shock, its findings reinforce the need for resilience in energy policies and monetary frameworks. Whether or not such a scenario materializes, Citi’s analysis provides a window into the complex interplay of economics, energy, and geopolitics in shaping global economic outcomes.

Commodities

Gold prices rise, set for strong weekly gains on Russia-Ukraine jitters

Published

2 days ago

November 22, 2024

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