Monday, August 18, 2008

External events continue to push markets around

Grain markets continue to be tossed around by external events – largely movements in the $US, crude oil and sentiments about future world growth. At some stage in the next few months, given differing fundamentals, grain markets should detach from commodities.

Shipping industry early indicator of sharp global downturnThere is no doubt we are in the early stages of a global downturn – we just don’t know how steep or for how long. The Baltic Dry Index – the benchmark for shipping costs – fell for 23 consecutive sessions through to 12 Aug. People are not buying cars and building houses, and when that stops, it travels backwards all the way back to the mine.

In the second quarter of 2008, China – the world's biggest consumer of coal, iron ore and industrial metals – expanded at the slowest pace since 2005. Manufacturing in China contracted in July for the first time in three years. Steel mills and other factories were closed to cut pollution during the Olympics. Slowing global growth comes as shipyards have almost as many cape-size vessels on order as already exist in the fleet.

Lower shipping costs will eventually work in favour of higher grain prices. Demand for grains should improve when Chinese buying resumes after the Olympics and already we are seeing importers build strategic grain reserves in acknowledgement of the heightened risks of shortages from production hiccups over the next few years. You don’t need a car to get where you are going – you can walk – but to walk, you need food.

Don’t think about it too much
The big rally in wheat – after the USDA forecast a whopping wheat crop this year – was unexpected, and threw up some excellent hedging opportunities when combined with the much weaker $A.

Sometimes it’s best not to over-analyze such movements. When we spoke to growers last week, we didn’t talk them out of making forward sales. And where production risks are low, we are also quite relaxed about using multi-grade this year, given the schizophrenic nature of Chicago futures lately – just make sure it is only about production that you are absolutely confident. East-coast growers could consider using swaps based on ASX futures if they want greater flexibility.

Do I or don’t I?
We updated our Aussie crop forecasts last week. We increased our production estimate to 24.5mmt, based on confirmation of record large wheat plantings in our July survey and a solid July across most cropping areas. With average spring rainfall, we are on target for slightly above-average yields.

But with August rain disappointing so far and not much on the 14-day forecasts, we were tempted to leave our forecasts unchanged. If we get a decent spring, we will have a large crop on our hands; if not, it will peel back to the low 20s.

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