This was composed while flying to Sydney on a Friday night sitting next to a portly 50s gentleman who had enough red wine to think it was a good idea to start belting out some tunes – I was trapped with nowhere to go and sought solace in my laptop. I finished reading The Financial Review – no good news there.
Anyway, I spent part of the trip going through my communication looking for some positives because by week’s end, sentiment had turned very negative again, particularly on commodities. Jitters across Asia indiscriminately smashed global equities, oil and – of course – crommodities. So much for my ramblings on the $A last week. It was absolutely pulverized as Asian equity markets turned nasty and at the time of writing, it looks like the $A might spend sometime in the 50US¢ range.
Is the tide turning?
There were signs early last week that the tide was turning. Egypt preferred to buy French wheat last week – while this was negative for the US, it at least signaled Egyptian millers may have had enough of poor quality wheat out of the Black Sea. With prices and freight rates falling to levels not seen in years, millers are using some of their windfall gains on better quality grain – hopefully this is the case generally.
Also in the US, local corn and soybean cash prices continue to firm as farmers have stopped selling and processors are scampering to increase coverage. Cash prices have now appreciated to the point where it is cheaper to take delivery from the futures, making futures undervalued relative to cash, as opposed to what has recently been the case. In a normal fundamental market (which this market is not), this would be a bullish signal for futures as price needs to rally in order to attract farmer selling. I stole this from our mate Lachie Stevens who does the markets pages for me. Lachie has about 10 years of grain trading experience and brings a lot to our team.
Land title rights in China
Lachie was also rambling on about some policy shifts in China: 1) the resumption of domestic accumulation of grains for the state reserves; and 2) the initiation of an official transfer scheme for production rights (land title). The Chinese Government’s decision to step into local markets puts a short-term floor in prices and provides support to the local farmers and certainty to processors (who are largely unhedged), in that their feedstock and product prices won’t continue to crash leading to defaults and negative margins.
However, the big one is the potential change in land title rights. With nearly 75% of the population still living in rural areas, the move to increase land holdings, and compensate those who have reduced land holdings, has a number of impacts. Firstly, it designed to increase rural incomes 10-fold (a massive % increase in wealth across a large % of the population); secondly, it gives the rural people an asset; and lastly, with more land per person, more people will be required to move to the city. This will further stimulate urbanization in China and investment in the infrastructure that is needed to support it. This makes it more than just an Ag reform and could help stimulate global economic demand.
In our $A comment last week we alluded to the potential for China to make such moves. China is also acting aggressively to shore up its property market by slashing interest rates.
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