Monday, September 8, 2008

Grain markets slip on oil

International grain markets were hammered last week as crude oil retraced its hurricane-inspired gains and the $US continued its surge higher. As US oil supplies escaped damage from Hurricane Gustav, traders quickly sold off oil on indications that credit woes are starting to have secondary effects. US unemployment rose again to 6.1% (highest since 2003), potentially increasing the number of people unable to meet debt repayments.

Without any bullish fundamental news, grain markets are struggling to buck the negative trends in outside markets. Northern hemisphere spring crops are now largely through the high risk frost period and southern hemisphere crops are improving – an Australian wheat harvest of at least 18-20mmt now seems assured. Only a rapidly depreciating $A has spared local prices a worse fate.

The wash-up from Gustav on the grain markets was actually bearish. A lot of rain stormed up from the Gulf and was dumped on a wide swath of the US Plains and western/central Corn Belt. In Iowa and Illinois, the rains were welcomed to help relieve a very dry August.

Crop production estimates vary widely
Contributing to the downward trend last week was a lift in US crop production estimates by respected forecaster Informa (although we reckon US ProFarmer has been much closer to the mark than Informa in recent years). But Informa is in the minority, with its expectations of corn/soybean crops bigger than USDA's August forecast.

Both Allendale and US ProFarmer recently lowered yield forecasts and pulled crop estimates lower than the USDA. Dr. Michael Cordonnier of US ProFarmer lowered his yield estimates (by 1 bu/ac for corn, to 150 bu/ac, for a crop of 11.89 billion bu, and by 0.5 bu/ac for soybeans, to 39.5 bu/acre, for a crop of 2.89 billion bu) to reflect stressful conditions in August with a bias towards further crop reductions.

If US crops turn out lower than the USDA August forecast (12.3 billion bu for corn and 3 billion bu for beans), this could trigger a reversal in grain market fortunes. A run of important reports out this week could also assist. On Wednesday, StatCan estimates Canadian grain stocks and on Friday, the USDA releases its September global S&Ds.

Sell wheat on spikes
We still think wheat is a sell at levels near $350/t, but can’t get enthused about selling feed barley ($240/t) or canola (circa $600/t) at current values. With the $A slipping towards 80USc, it doesn’t take much of a rally on CBOT to get prices back to attractive levels.

For those confident about producing malt barley, it is also a sell on the proportion that you are absolutely confident about producing, as the malt spread will ease when Canadian and Aussie supplies hit the market.

How much barley do you reckon will be sown next year at current price levels? Wouldn’t it be better to sell Dec 09 and Dec 10 wheat at an average near A$400/t and increase your wheat plantings?

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