In our experience, commodity markets are far more volatile than you ever expect. The $A is a case in point. We changed our minds on the direction of the $A on 10 January this year when we wrote ‘In contrast to 2007, it appears that the $A may be supportive to Australian grain prices in 2008'. But a couple of RBA rate hikes and aggressive easing by the US Fed had many commentators suggesting that the $A was heading to parity.
On 21 February, we wrote ‘We feel that the US is close to recession, or entered recession at the end of last year… Around mid-2008, the US will be finished cutting rates, and the $US should start recovering into the second half of this year. Continue to watch for the $A to ease into the mid to low 80s by year’s end as the $US begins to recover.’ If we wrote it today, we couldn’t have put it better!
The drivers of the $A retreat have been: $US strength, lower commodity prices and global growth forecasts, a weakening in the outlook for our interest rate differential, a sharply weaker domestic growth environment and some unpopular moves by our rookie federal government (carbon and wealth taxes).
China may not save us
With the engine that has driven the stellar performance of the $A slowing (China’s blue-sky demand for our commodities), and other bits and pieces starting to loosen (strong interest rate differentials, and strong domestic economy), it is hard to see how the $A will mount another attack on parity.
But don’t expect the $A to continue to fall at the same rate it has done in the last month. Our strong terms of trade will support the $A at well above its longer-term average of 72US¢. The recent slump in demand for hard commodities may be arrested when manufacturing in China resumes after the Olympics. But growth for the next couple of years will be constrained compared to the previous couple.
The fate of the $US could well determine how far the $A falls. We suspect that the US economy will have to negotiate a few more hurdles before it finds its feet again.
ProFarmer perspective
Watch for the $A to ease into the mid to low 80s by year’s end as the $US begins to recover. Deeper than expected cuts to local interest rates or further shocks to world growth could drive the $A below 80US¢. A quick resumption in world growth, a turnaround in commodity values or further easing in US interest rates (all unlikely in our view) may be the catalysts for the $A to buck the lower trend.
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Wednesday, August 27, 2008
Monday, August 18, 2008
External events continue to push markets around
Grain markets continue to be tossed around by external events – largely movements in the $US, crude oil and sentiments about future world growth. At some stage in the next few months, given differing fundamentals, grain markets should detach from commodities.
Shipping industry early indicator of sharp global downturnThere is no doubt we are in the early stages of a global downturn – we just don’t know how steep or for how long. The Baltic Dry Index – the benchmark for shipping costs – fell for 23 consecutive sessions through to 12 Aug. People are not buying cars and building houses, and when that stops, it travels backwards all the way back to the mine.
In the second quarter of 2008, China – the world's biggest consumer of coal, iron ore and industrial metals – expanded at the slowest pace since 2005. Manufacturing in China contracted in July for the first time in three years. Steel mills and other factories were closed to cut pollution during the Olympics. Slowing global growth comes as shipyards have almost as many cape-size vessels on order as already exist in the fleet.
Lower shipping costs will eventually work in favour of higher grain prices. Demand for grains should improve when Chinese buying resumes after the Olympics and already we are seeing importers build strategic grain reserves in acknowledgement of the heightened risks of shortages from production hiccups over the next few years. You don’t need a car to get where you are going – you can walk – but to walk, you need food.
Don’t think about it too much
The big rally in wheat – after the USDA forecast a whopping wheat crop this year – was unexpected, and threw up some excellent hedging opportunities when combined with the much weaker $A.
Sometimes it’s best not to over-analyze such movements. When we spoke to growers last week, we didn’t talk them out of making forward sales. And where production risks are low, we are also quite relaxed about using multi-grade this year, given the schizophrenic nature of Chicago futures lately – just make sure it is only about production that you are absolutely confident. East-coast growers could consider using swaps based on ASX futures if they want greater flexibility.
Do I or don’t I?
We updated our Aussie crop forecasts last week. We increased our production estimate to 24.5mmt, based on confirmation of record large wheat plantings in our July survey and a solid July across most cropping areas. With average spring rainfall, we are on target for slightly above-average yields.
But with August rain disappointing so far and not much on the 14-day forecasts, we were tempted to leave our forecasts unchanged. If we get a decent spring, we will have a large crop on our hands; if not, it will peel back to the low 20s.
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
Shipping industry early indicator of sharp global downturnThere is no doubt we are in the early stages of a global downturn – we just don’t know how steep or for how long. The Baltic Dry Index – the benchmark for shipping costs – fell for 23 consecutive sessions through to 12 Aug. People are not buying cars and building houses, and when that stops, it travels backwards all the way back to the mine.
In the second quarter of 2008, China – the world's biggest consumer of coal, iron ore and industrial metals – expanded at the slowest pace since 2005. Manufacturing in China contracted in July for the first time in three years. Steel mills and other factories were closed to cut pollution during the Olympics. Slowing global growth comes as shipyards have almost as many cape-size vessels on order as already exist in the fleet.
Lower shipping costs will eventually work in favour of higher grain prices. Demand for grains should improve when Chinese buying resumes after the Olympics and already we are seeing importers build strategic grain reserves in acknowledgement of the heightened risks of shortages from production hiccups over the next few years. You don’t need a car to get where you are going – you can walk – but to walk, you need food.
Don’t think about it too much
The big rally in wheat – after the USDA forecast a whopping wheat crop this year – was unexpected, and threw up some excellent hedging opportunities when combined with the much weaker $A.
Sometimes it’s best not to over-analyze such movements. When we spoke to growers last week, we didn’t talk them out of making forward sales. And where production risks are low, we are also quite relaxed about using multi-grade this year, given the schizophrenic nature of Chicago futures lately – just make sure it is only about production that you are absolutely confident. East-coast growers could consider using swaps based on ASX futures if they want greater flexibility.
Do I or don’t I?
We updated our Aussie crop forecasts last week. We increased our production estimate to 24.5mmt, based on confirmation of record large wheat plantings in our July survey and a solid July across most cropping areas. With average spring rainfall, we are on target for slightly above-average yields.
But with August rain disappointing so far and not much on the 14-day forecasts, we were tempted to leave our forecasts unchanged. If we get a decent spring, we will have a large crop on our hands; if not, it will peel back to the low 20s.
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
Monday, August 11, 2008
Too much for markets to handle
The weight of fund money exiting commodities, a sharp appreciation in the $US and steadily improving crops was again too much for grain markets to handle this week. Investors are pulling out funds invested in commodities, forcing fund managers to cut commodity positions to fund redemptions. Investor sentiment regarding commodities is being driven by thoughts that demand for energy and hard commodities has peaked in the short-term.
Interest rate cuts
Plus, news that non-US interest rates were about to be cut has rekindled interest in $US investments and propelled the $US higher – $US weakness was one of the reasons why commodities have garnered so much support in recent times. Australian growers have been spared some of the commodities bloodshed from the rapid easing of the $A.
Critical USDA report
While sentiment continues to turn against commodities, grain prices will most likely remain under pressure. But markets can’t ignore compelling fundamentals across the grain complex forever. On Tuesday night, the USDA will provide its first survey based estimates of US corn and soybean crop production.
The range of US corn crop estimates is enormous, ranging from 11-12.4 billion bushels. This highlights the huge uncertainty, given the lateness of the crop and the potential for crop damage from early season floods. A crop at the upper end of current estimates is already factored into prices, but prices contain leeway if crop estimates disappoint.
If US crop estimates do not live up to increasing expectations, markets could rebound… and hard. Corn, wheat and soybeans will eventually need to engage in an acreage battle for 2009. An acreage battle in the coming year is not a matter of if, but when, and across how many commodities.
Wheat prices are being supported by quality issues in Europe and developing problems with the North American spring crop, where crop ratings declined sharply again this week.
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Interest rate cuts
Plus, news that non-US interest rates were about to be cut has rekindled interest in $US investments and propelled the $US higher – $US weakness was one of the reasons why commodities have garnered so much support in recent times. Australian growers have been spared some of the commodities bloodshed from the rapid easing of the $A.
Critical USDA report
While sentiment continues to turn against commodities, grain prices will most likely remain under pressure. But markets can’t ignore compelling fundamentals across the grain complex forever. On Tuesday night, the USDA will provide its first survey based estimates of US corn and soybean crop production.
The range of US corn crop estimates is enormous, ranging from 11-12.4 billion bushels. This highlights the huge uncertainty, given the lateness of the crop and the potential for crop damage from early season floods. A crop at the upper end of current estimates is already factored into prices, but prices contain leeway if crop estimates disappoint.
If US crop estimates do not live up to increasing expectations, markets could rebound… and hard. Corn, wheat and soybeans will eventually need to engage in an acreage battle for 2009. An acreage battle in the coming year is not a matter of if, but when, and across how many commodities.
Wheat prices are being supported by quality issues in Europe and developing problems with the North American spring crop, where crop ratings declined sharply again this week.
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
Sunday, August 3, 2008
Markets remain under pressure
Grain markets remained under pressure last week as improving crop conditions around the world boost expectations of a bumper harvest. Grain markets are also feeling the backwash of pressure from outside markets such as oil that up until recently had been supportive (in last week’s newsletter, we examined whether the crude oil bull was dead). Helping to offset the impact of losses in international grain markets on local prices was a sharp easing in the $A, as the local economy shows signs that it is choking on debt.
Wheat/corn spread
The widening spread between wheat and corn has been bugging me somewhat. The wheat balance sheet looks far more comfortable than the corn balance sheet, but the spread has been widening in favour of wheat – plus, corn has far more yield hurdles to jump. Emerging concerns with eastern European wheat quality could be the explanation.
Double-edged sword
Last year’s Ukrainian wheat harvest yielded a crop that was rated 75% milling quality. Reports are suggesting this year’s crop could be just the opposite – around 80% feed wheat. It’s a double-edged sword: it means more competition for corn and coarse grain markets (sorghum, feed barley). But for wheat, it keeps the world picture for milling-quality supplies tight. That resumes the watch on global wheat output and will maintain the premium for higher quality wheat.
Aussie dollar in trouble?
We expect the $A to become a supportive influence in the medium-term. Before year’s end, the RBA will be forced to slash rates, and capital will pour out of our bond markets as our interest rate advantage is eroded and international investors are exposed to unacceptable levels of currency risk. If our Asian trading partners show signs that they are not handling high rates of inflation, the $A could be in trouble.
In this week’s newsletter, we look at whether or not the local wheat market is overpriced.
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
Wheat/corn spread
The widening spread between wheat and corn has been bugging me somewhat. The wheat balance sheet looks far more comfortable than the corn balance sheet, but the spread has been widening in favour of wheat – plus, corn has far more yield hurdles to jump. Emerging concerns with eastern European wheat quality could be the explanation.
Double-edged sword
Last year’s Ukrainian wheat harvest yielded a crop that was rated 75% milling quality. Reports are suggesting this year’s crop could be just the opposite – around 80% feed wheat. It’s a double-edged sword: it means more competition for corn and coarse grain markets (sorghum, feed barley). But for wheat, it keeps the world picture for milling-quality supplies tight. That resumes the watch on global wheat output and will maintain the premium for higher quality wheat.
Aussie dollar in trouble?
We expect the $A to become a supportive influence in the medium-term. Before year’s end, the RBA will be forced to slash rates, and capital will pour out of our bond markets as our interest rate advantage is eroded and international investors are exposed to unacceptable levels of currency risk. If our Asian trading partners show signs that they are not handling high rates of inflation, the $A could be in trouble.
In this week’s newsletter, we look at whether or not the local wheat market is overpriced.
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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