Monday, October 13, 2008

Will the credit crunch make grain prices slingshot higher?

Market mayhem contributed to further significant falls in ALL asset prices last week as investors retreated towards cash. Soft commodities weren’t helped by a bearish USDA report, which boosted end-stock projections of most grains, contributing to mostly limit down moves across the grains complex on Friday night.

The full extent of falls in international commodities prices hasn’t been reflected in local prices, as the $A made new multi-year lows. With harvest imminent, prices are falling to unpalatable levels and many growers will opt to sidestep current market turmoil by opting to use pools or by storing.

Production uncertainty still reigns
It is estimated that around 20% of SA and VIC Mallee and northern Wimmera wheat crops will get cut for hay; many more crops will be grazed and of the crops with harvest potential, yields are sliding badly (it was 30 degrees and windy on Sunday). Further south, crops will need rain soon to hold strong yield potential. Until this occurs, rising local basis levels will help offset losses in international values. Canola will largely be a southern Wimmera and Western District affair in Vic. Like last year, barley has faired best.

But this is not the case in WA, where barley seems to have borne the brunt of the recent frost event. Our WA crop tour last week observed crops being cut for hay right through the south-east and central wheat-belts. Is this the reason the malt premium is creeping out in WA and holding at an unusually large $100/t on the east coast?

But unless credit markets work out how to get finance to growers to plant the next crop, soft commodities could slingshot higher.

Brazilian beans
US ProFarmer reports that Brazilian farmers need 100 billion real for 2008-09 crop production and 60% of that needs to come from grain companies, input suppliers or private banks. Credit from these private sources is almost nonexistent: grain companies say they must restrict credit to guard resources and banks say the credit market is frozen. Throw in a break-even price on beans of about $12.50 to $13/bu ($2/bu above current prices) and it’s time to lower expectations on the size of the 2008-09 Brazilian bean crop.

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1 comment:

Colin said...

G'Day Richard, i have a couple of questions. Firstly do you think all the funds (index and hedge) have left the grains building? Or could they be doing the reverse of this time last year as these markets are the only thing left to short?
Secondly, as a grower a fair way south of the river - is there a better way to manage basis - other than physical sales - using ASX? We got torn a new one last year on basis trying to unwind ASX hedges and we are now a bit gun shy - do you think there is room for a Vic track contract or for that matter SA and WA track as well given that there are now east and west coast pools?
Thirdly, how close is Cousins to training at the Lexus Centre?