Tuesday, October 7, 2008

Global concerns dominate the landscape

Agricultural commodities are in the process of overshooting to the downside as global economic concerns dominate the trading landscape. Very few commodities have been spared the sell-down, with gold the only notable exception (although gold too has lost some of its lustre). The $A has followed commodities down and is helping to offset some of the pain. The US seems to be paving the way to slash rates, which could act to weaken the $US.

With prices heading quickly towards breakeven, one problem that may start to hit headlines is financing of the next global crop (our banks are as good as any, so we shouldn’t have a problem), particularly if prices keep heading southward and input costs don’t follow suit. However, fertiliser prices may be in the process of adjusting lower. US fertilizer stock prices plunged as analysts tap in the impact of lower US fertilizer demand on prices.

Input belts tightening
Already in South America, the high cost of inputs has shifted planting intentions away from corn to beans and has producers ‘tightening their input belts’ by cutting fertilizer use as much as 25%. South American growers are waiting for a good rain to commence planting (some planting has commenced in Brazil). These developments point to slower acreage expansion and potentially lower yields.

Finance issues may not be confined to growers trying to plant crops. Sources indicate some vessels loaded with US grain are sitting at buyers’ ports waiting to unload because importers can’t get a letter of credit to pay for the load.

Crop conditions plummet
We have just received our September stats on the local crop and conditions have plummeted, particularly across SA and Vic. Plus, indications that the frost event in WA is worse than first thought has us sharpening our pencil to make a decent cut to our current Australian wheat crop production estimate of 22.7mmt.

Battle with beans
Early harvest reports indicate that US corn yields are slightly better than expected but bean yields are coming in slightly below. Even based on stronger than expected yields, US corn and bean carryovers will fall to about one month’s supply by year’s end, which will set the scene. US corn use will be around 5% more than production, which means that this situation can not be allowed to happen again next year, thus setting the scene for a battle with beans. This battle should help to support soft commodity prices in 2009, once the negative influence of the flow of fund money subsides.


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