Monday, November 17, 2008

Markets remain on the defensive

Global grain markets remain on the defensive due to a combination of increased supply, aggressive selling and stalling demand. Last week the USDA edged global production estimates higher across most grains and there are now mounting concerns about the ability of demand to keep growth in stocks in check.

Feed grains staring down the barrel
Larger crops across Europe are being sold aggressively into markets now awash with feed grains. Reports last week that UK feed wheat was being sold into US east-coast markets does not augur well for US feed grain prices. Plus, there is talk that Russia may introduce export subsidies to help it clear stocks. Across the EU, buying into intervention stocks is occurring in a bid to shore-up values.

On the demand side, there are also major cracks starting to appear; VeraSun – the largest ethanol producer in the US – has filed for bankruptcy while Pilgrim’s Pride – the largest poultry producer in the US – is also virtually insolvent. Other feed grain buyers are standing on the sidelines, mostly happy to watch prices fall, but in some cases access to finance is hampering their ability to participate.

Food / feed spread widening
Such activity has opened up a wide spread between food and feed grain values. The spread between milling and feed wheat has blown out to $80/t, while the malt barley spread is out to well above $100/t. Only production issues across the southern half of the east coast have prevented significant falls in feed grain values.

Milling wheat and malt barley values are hanging in there but unless there is serious weather damage to crops in northern and central parts of NSW, harvest will continue to exert some pressure on prices. A recovery in international values appears some way off and will be tied to a stabilisation in global financial markets and the realization that current prices will not sustain production at required levels. Already we are seeing signs globally that growers are cutting back plantings and inputs, but don’t expect these to come to the fore until early spring in the Northern Hemisphere – around March next year.

Some light from oilseeds
The one bright spot is oilseeds, which have stabilized at levels above $600/t (east coast). Oilseed demand remains relatively strong and with South American production estimates back-pedaling, oilseeds will have to fight harder to win acres in the northern hemisphere spring.

Last week Informa Economics out of the US estimated record plantings of beans next year at over 77m acres. To cement these plantings, the bean price would need to do some work. If this eventuates, it will restrict corn plantings to around 2008 levels at 86m acres, which begs the question – how will the corn balance sheet fund another rise in corn-for-ethanol demand (lower exports and lower feeding most probably)?

But if you think you have it bad, spare a thought for ship owners. Bulk freight rates have come off 90% since they peaked in May. The Baltic Dry Index has caved in from its peak of 12,000pts in May and was last week trading around 1650pts. Some operators were offering to charter vessels on some routes at operating cost in a bid to position them into more attractive markets.

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