Monday, September 22, 2008

Massive rescue package from US treasury

We spent last weekend in Brisbane – a cousin got married to one of our subscribers – small world hey! But through the weekend, my mind was tormented by how to deal with the tectonic shift in the plates that hold together the global financial market system.

In last week’s newsletter, we advised to take some cover (in 2009, 2010) against likely ongoing commodity fund liquidation, using $US swaps to take advantage of the probable easing in the $A over the longer-term.

But the ‘mother of all rescue packages’ announced over the weekend by the US treasury seems to have arrested the rally in the $US and settled markets for a while. The US Government will pump up to a trillion dollars of tax payers’ money into the US financial market system to calm fears of a meltdown and buy enough time for finance gurus to sort things out. In the short-term, this should limit the panic, weaken the $US and allow a more orderly exit from investments. But over the medium and longer-term, the outcome is far less clear.

Price threats in the near-term
We have run through the likely scenarios in our minds and none of them is very palatable for commodities. Even if the US rescue package is successful, it is hard to see how the world can avoid a sharp slowing in growth. This will pressure commodities and encourage ongoing fund liquidation. Our best hope is that finance markets recognize that soft commodities are different from commodities generally – possible over the longer-term, but unlikely in the short to medium-term unless there is a major production issue that forces markets to focus on encouraging plantings. Over the longer-term, costs of production, low stocks and the need to encourage production will support grain values at around current levels, but don’t expect that markets will act this rationally in the short to medium-term.

So, with real threats to prices in the near-term, we are looking for hedging opportunities that will secure a good return on investment and help protect us against ongoing near-term pressure on commodities. Prices for wheat in 2009/10 and 2010/11 offer this.

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