Monday, August 11, 2008

Too much for markets to handle

The weight of fund money exiting commodities, a sharp appreciation in the $US and steadily improving crops was again too much for grain markets to handle this week. Investors are pulling out funds invested in commodities, forcing fund managers to cut commodity positions to fund redemptions. Investor sentiment regarding commodities is being driven by thoughts that demand for energy and hard commodities has peaked in the short-term.

Interest rate cuts
Plus, news that non-US interest rates were about to be cut has rekindled interest in $US investments and propelled the $US higher – $US weakness was one of the reasons why commodities have garnered so much support in recent times. Australian growers have been spared some of the commodities bloodshed from the rapid easing of the $A.

Critical USDA report
While sentiment continues to turn against commodities, grain prices will most likely remain under pressure. But markets can’t ignore compelling fundamentals across the grain complex forever. On Tuesday night, the USDA will provide its first survey based estimates of US corn and soybean crop production.

The range of US corn crop estimates is enormous, ranging from 11-12.4 billion bushels. This highlights the huge uncertainty, given the lateness of the crop and the potential for crop damage from early season floods. A crop at the upper end of current estimates is already factored into prices, but prices contain leeway if crop estimates disappoint.

If US crop estimates do not live up to increasing expectations, markets could rebound… and hard. Corn, wheat and soybeans will eventually need to engage in an acreage battle for 2009. An acreage battle in the coming year is not a matter of if, but when, and across how many commodities.

Wheat prices are being supported by quality issues in Europe and developing problems with the North American spring crop, where crop ratings declined sharply again this week.

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