General weakness in commodities has wreaked havoc over the grain sector over the past fortnight. There is evidence that recent massive price rises have now caught up with the consumptive sector, leading to a slowdown in demand for commodities. Weaker oil and hard commodity prices have encouraged an exodus of fund money from the soft commodity sector as well.
Some of the consumptive weakness may be related to China’s finalization of its pre-Olympics buying spree; trader folk there getting ready to celebrate China’s coming of age, as evidenced by an easing in the bulk freight market in recent weeks.
Regulation threats
Threats of stiffer regulations of commodity markets are also at work. This has no doubt frightened some speculative interest away from the sector for the time being. Are fund managers around the world sending fervent US regulators a message ‘what do you want – high or low prices?’
Better weather is also playing a role. Northern hemisphere winter crops are getting larger; fragile US summer crops are leading a charmed life; and lo and behold – it is raining where and when it should in Australia.
Wheat/corn spread blown out again
We have been surprised at the extent of the sell-off in corn. This market now contains very little risk premium. Unless corn recovers, wheat is susceptible to further falls. The wheat/corn spread has blown out again, even though wheat has a much more comfortable balance sheet and a big crop is nearly in the bin. Sometimes markets don’t make much sense.
But strong end-user demand should now start to pull corn prices up by the ears. The break lower in prices has put a lot of profitability back into sectors that use thecorn. Moth-balled ethanol plants are now coming back on line, and some profitability is creeping back into the livestock feeding sector. The corn market could fire on any hint of a supply issue, which would provide good support for prices across the entire grains sector.
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Sunday, July 27, 2008
Sunday, July 20, 2008
Grain markets held hostage by speculators
The commencement of the northern hemisphere winter harvest, signs of lagging demand, improving North American spring crops, and pressure from outside markets all weighed on grain markets this week. But the major influence was probably the move by speculators to cut positions in commodity markets and shift some money back into equities.
Grain markets will remain hostage to whims of speculators until mid-August when the USDA issues its first survey-based assessment of US corn and soybean yields. US ProFarmer has just finished an aerial assessment of crop damage in Iowa… and in the words of ProFarmer VP Chuck Roth – ‘I expected to see damage, but was stunned by what I saw’.
Although crops are improving by the day, if the USDA confirms poor yields, this will trigger the need to ration current supplies and set off a new battle between corn and soybeans for 2009 plantings. At current corn and oil prices, ethanol margins have moved back into the black, which should aid demand.
Beans were hammered by tanking crude oil prices and news that the Argentine Senate had rejected a proposal to lift export taxes. But with the Argentine administration calling farm leaders ‘greedy’ and ‘coup plotters’, we may not have heard the last of this.
Locally, barley and sorghum did not escape the wrath of the price pressure across grain markets. Local traders have been aggressively liquidating sorghum positions on concerns about the price implications of the Black Sea selling cheap barley into North Asian feed grain markets. Expect price pressure to continue for a little while until confirmation of poor US corn yields changes market sentiment.
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Grain markets will remain hostage to whims of speculators until mid-August when the USDA issues its first survey-based assessment of US corn and soybean yields. US ProFarmer has just finished an aerial assessment of crop damage in Iowa… and in the words of ProFarmer VP Chuck Roth – ‘I expected to see damage, but was stunned by what I saw’.
Although crops are improving by the day, if the USDA confirms poor yields, this will trigger the need to ration current supplies and set off a new battle between corn and soybeans for 2009 plantings. At current corn and oil prices, ethanol margins have moved back into the black, which should aid demand.
Beans were hammered by tanking crude oil prices and news that the Argentine Senate had rejected a proposal to lift export taxes. But with the Argentine administration calling farm leaders ‘greedy’ and ‘coup plotters’, we may not have heard the last of this.
Locally, barley and sorghum did not escape the wrath of the price pressure across grain markets. Local traders have been aggressively liquidating sorghum positions on concerns about the price implications of the Black Sea selling cheap barley into North Asian feed grain markets. Expect price pressure to continue for a little while until confirmation of poor US corn yields changes market sentiment.
If you are interested in receiving this information and more on a regular basis, please call us toll free on 1300 302 143 to organise your subscription.
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Monday, July 14, 2008
International grain values under pressure
International corn values have eased as concerns over the impact of US Mid-west floods subsided. This and the commencement of the northern hemisphere winter harvest placed pressure on international grain values over the past fortnight.
On Friday night, the USDA actually increased 2008/09 US corn end stock estimates, largely on weaker demand. But this market is in no position to relax, as threats to yields from hot weather have only just started. Expect prices to stabilise around current levels, with the potential for savage breakouts to the upside on adverse weather in the US Midwest.
Concerns over US corn production should help limit downside potential in global coarse grains and wheat values over the next few months, despite the commencement of a large northern hemisphere wheat harvest. Importers may look to buy aggressively as a hedge against the US corn crop falling over.
Razor thin US soybean stocks continue to dominate the global vegetable oil complex. With the cupboard bare in the US, importers will be forced to scour the globe for substitutes, which should support strong demand for European and Canadian rapeseed/canola over the next few months. European crops are almost ready for harvest and look good, while the Canadian crop is improving after an ordinary start.
Local crop improving
Back home, feedlot margins across the northern region are on the improve. A step-up in buying for the Japanese Obon holiday period has led to export beef values to Japan, plus weaker sorghum values have helped push margins back into the black.
Our local crop is improving, with scattered showers across the majority of cropping areas over the past fortnight. But growing season rainfall remains well below average in most regions and there are significant cropping areas that are off to an indifferent start. While the crop is reportedly looking okay, until we get a general fall of 50mm+, the crop remains at the mercy of the elements (hot and dry spring).
There is not enough downside risk and too much production risk to warrant any action at this stage.
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On Friday night, the USDA actually increased 2008/09 US corn end stock estimates, largely on weaker demand. But this market is in no position to relax, as threats to yields from hot weather have only just started. Expect prices to stabilise around current levels, with the potential for savage breakouts to the upside on adverse weather in the US Midwest.
Concerns over US corn production should help limit downside potential in global coarse grains and wheat values over the next few months, despite the commencement of a large northern hemisphere wheat harvest. Importers may look to buy aggressively as a hedge against the US corn crop falling over.
Razor thin US soybean stocks continue to dominate the global vegetable oil complex. With the cupboard bare in the US, importers will be forced to scour the globe for substitutes, which should support strong demand for European and Canadian rapeseed/canola over the next few months. European crops are almost ready for harvest and look good, while the Canadian crop is improving after an ordinary start.
Local crop improving
Back home, feedlot margins across the northern region are on the improve. A step-up in buying for the Japanese Obon holiday period has led to export beef values to Japan, plus weaker sorghum values have helped push margins back into the black.
Our local crop is improving, with scattered showers across the majority of cropping areas over the past fortnight. But growing season rainfall remains well below average in most regions and there are significant cropping areas that are off to an indifferent start. While the crop is reportedly looking okay, until we get a general fall of 50mm+, the crop remains at the mercy of the elements (hot and dry spring).
There is not enough downside risk and too much production risk to warrant any action at this stage.
If you are interested in receiving this information and more on a regular basis, please call us toll free on 1300 302 143 to organise your subscription.
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Monday, July 7, 2008
The US corn bank is nearly bust
While all the attention has focused on how the sub-prime mortgage market is sending the US banking sector to the wall, the failure of a lesser known US bank – the US corn bank – will have far deeper ramifications for the international grain trade.
Last year, the US corn crop acted like a bank to the global grain importers. As other grain prices rose, importers turned to plentiful supplies of relatively ‘cheap’ US corn. The US exported over 70mmt of corn to destinations far and wide – to put this into perspective, the world wheat trade in total is only just over 100mmt. Australia felt the impact of this in Saudi – our premium feed barley market – where US corn displaced some barley.
A senior figure in the international barley trade once told ProFarmer that Saudi would never use anything other than corn – never say never…
But this year, the tide has turned and the US corn bank is nearly bust. US corn prices are rising to keep its corn at home. Prices should remain high until they know how much the crop will put in the bank and how much they can lend. Currently, US corn is trading at over US$300/t FOB – around US$40/t higher than SRW wheat at US gulf ports.
Global importers will not be able to bank on the US corn crop meeting their needs and will to ‘borrow’ from a larger wheat and European coarse grain crop to help fill the void. But this has even far greater significance than at first glance.
In effect, at least in the coming year, the lender of last resort is gone and global importers will now be reliant on much less stable sources of supply – Black Sea is notoriously unreliable and who would lend against southern hemisphere crops at the moment? Australia, Argentina and the Black Sea are expected to supply around 44% of the global wheat trade this year.
The situation in the global oilseed trade is even more tenuous. This year South America has been penciled in to supply around 50% of the world soybean trade. But farmers in Argentina have been battling the Government for the right to export beans.
The political situation in Brazil seems stable now, but is it a matter of time before rising food costs and unrest place political pressure on the Brazilian Government to keep more food at home?
If you are interested in receiving this information and more on a regular basis, please call us toll free on 1300 302 143 to organise your subscription.
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Last year, the US corn crop acted like a bank to the global grain importers. As other grain prices rose, importers turned to plentiful supplies of relatively ‘cheap’ US corn. The US exported over 70mmt of corn to destinations far and wide – to put this into perspective, the world wheat trade in total is only just over 100mmt. Australia felt the impact of this in Saudi – our premium feed barley market – where US corn displaced some barley.
A senior figure in the international barley trade once told ProFarmer that Saudi would never use anything other than corn – never say never…
But this year, the tide has turned and the US corn bank is nearly bust. US corn prices are rising to keep its corn at home. Prices should remain high until they know how much the crop will put in the bank and how much they can lend. Currently, US corn is trading at over US$300/t FOB – around US$40/t higher than SRW wheat at US gulf ports.
Global importers will not be able to bank on the US corn crop meeting their needs and will to ‘borrow’ from a larger wheat and European coarse grain crop to help fill the void. But this has even far greater significance than at first glance.
In effect, at least in the coming year, the lender of last resort is gone and global importers will now be reliant on much less stable sources of supply – Black Sea is notoriously unreliable and who would lend against southern hemisphere crops at the moment? Australia, Argentina and the Black Sea are expected to supply around 44% of the global wheat trade this year.
The situation in the global oilseed trade is even more tenuous. This year South America has been penciled in to supply around 50% of the world soybean trade. But farmers in Argentina have been battling the Government for the right to export beans.
The political situation in Brazil seems stable now, but is it a matter of time before rising food costs and unrest place political pressure on the Brazilian Government to keep more food at home?
If you are interested in receiving this information and more on a regular basis, please call us toll free on 1300 302 143 to organise your subscription.
Click HERE to subscribe online or Click HERE for a 4-week FREE Trial
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