Tuesday, September 30, 2008

Wall St bailout plan

The big news over the weekend was agreement on terms of the Wall St bailout plan. While this is likely to weaken the $US in the short-term it is good news for near-term growth prospects and the impact on the $A is now being viewed as neutral.

If the plan acts to reduce pressure on commodities, it may allow strong grain market fundamentals to assert themselves again. Early US corn and bean yields are all over the place with little discernible trend evident - US ProFarmer is maintaining its yield estimates below those of the USDA.

The first real threat of a killing frost has made its way into the nth American weather forecast for this week. At risk are yet-to-mature corn and soybean crops northern corn and soybean belts. The potential for freezing temps comes towards the end of this week and while forecasts can change, with outside market influences settling down, this could turn out to be a major market-driver this week.

Our Sth American crop production consultant reports that Sth American growers are waiting for a good rain to commence planting and are ‘tightening their input belts’ by cutting fertilizer use by as much as 25%. High input costs will keep acreage expansion in check for the 2009 crop, but growers in Brazil and Argentina are likely to favor soybeans over corn production this year.

With recent good rain across NSW and WA, Australian crop production has stabilized above 20mmt. Areas of concern are now SA and VIC which are very susceptible to some adverse early spring weather. Grower selling is starting to step-up with sales hardest to find in the south-east region.

Quality and protein premiums are starting to creep up and this may start to make pools that pay quality increasingly attractive. With supplies of coarse grain plentiful, there will be heavy penalties for missing quality specifications this year (hence the widening multi-grade discounts for ASW and AGP with some providers).

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Monday, September 22, 2008

Massive rescue package from US treasury

We spent last weekend in Brisbane – a cousin got married to one of our subscribers – small world hey! But through the weekend, my mind was tormented by how to deal with the tectonic shift in the plates that hold together the global financial market system.

In last week’s newsletter, we advised to take some cover (in 2009, 2010) against likely ongoing commodity fund liquidation, using $US swaps to take advantage of the probable easing in the $A over the longer-term.

But the ‘mother of all rescue packages’ announced over the weekend by the US treasury seems to have arrested the rally in the $US and settled markets for a while. The US Government will pump up to a trillion dollars of tax payers’ money into the US financial market system to calm fears of a meltdown and buy enough time for finance gurus to sort things out. In the short-term, this should limit the panic, weaken the $US and allow a more orderly exit from investments. But over the medium and longer-term, the outcome is far less clear.

Price threats in the near-term
We have run through the likely scenarios in our minds and none of them is very palatable for commodities. Even if the US rescue package is successful, it is hard to see how the world can avoid a sharp slowing in growth. This will pressure commodities and encourage ongoing fund liquidation. Our best hope is that finance markets recognize that soft commodities are different from commodities generally – possible over the longer-term, but unlikely in the short to medium-term unless there is a major production issue that forces markets to focus on encouraging plantings. Over the longer-term, costs of production, low stocks and the need to encourage production will support grain values at around current levels, but don’t expect that markets will act this rationally in the short to medium-term.

So, with real threats to prices in the near-term, we are looking for hedging opportunities that will secure a good return on investment and help protect us against ongoing near-term pressure on commodities. Prices for wheat in 2009/10 and 2010/11 offer this.

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Monday, September 15, 2008

Why is the $US appreciating?

Something that has been bugging us of late is… why is the $US appreciating while the US economy is on the brink of disaster? But is it?

June quarter stats indicate that, on a quarterly basis, US economic growth is now out-pacing the rate of growth in Europe, Japan, Australia and (most likely) New Zealand. Despite the fact that the catalyst for the current global slowdown originated in the US, the quick response by US authorities, and the competitive benefits of a six-year depreciation in the $US, have combined to lift the relative rate of US growth and the relative attractiveness of the $US.

But as the impact of US fiscal stimulus measures ease into year’s end, the rally in the $US may pause until the US fed starts raising rates. This is not likely until the US housing market has bottomed, probably sometime in 2009. Higher US interest rates (and low rates in Australia) will remove a pillar of support for the $A and force it back into the low 70s, where it will be supported by investors attracted to the exposure of the Australian economy to Asian growth.

Wait for spikes in soft commodities to throw up good hedging opportunities on the back of a weakening $A.

It didn't take long
The release of another six bulk export licences last week set-off a flurry of competition in WA – previously the world's most undervalued wheat market. Almost overnight, WA wheat prices moved to a $10/t premium to the east coast. Prior to last week, WA prices were carrying a discount of some $10-30/t on east-coast values.

The move was probably a little illusionary, with east coast basis and the domestic premium easing on the excellent rain in sth QLD and nth NSW. Underpinning the rally in west-coast basis was buying by South-East Asian exporters for Dec/Jan/Feb shipping slots.

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Monday, September 8, 2008

Grain markets slip on oil

International grain markets were hammered last week as crude oil retraced its hurricane-inspired gains and the $US continued its surge higher. As US oil supplies escaped damage from Hurricane Gustav, traders quickly sold off oil on indications that credit woes are starting to have secondary effects. US unemployment rose again to 6.1% (highest since 2003), potentially increasing the number of people unable to meet debt repayments.

Without any bullish fundamental news, grain markets are struggling to buck the negative trends in outside markets. Northern hemisphere spring crops are now largely through the high risk frost period and southern hemisphere crops are improving – an Australian wheat harvest of at least 18-20mmt now seems assured. Only a rapidly depreciating $A has spared local prices a worse fate.

The wash-up from Gustav on the grain markets was actually bearish. A lot of rain stormed up from the Gulf and was dumped on a wide swath of the US Plains and western/central Corn Belt. In Iowa and Illinois, the rains were welcomed to help relieve a very dry August.

Crop production estimates vary widely
Contributing to the downward trend last week was a lift in US crop production estimates by respected forecaster Informa (although we reckon US ProFarmer has been much closer to the mark than Informa in recent years). But Informa is in the minority, with its expectations of corn/soybean crops bigger than USDA's August forecast.

Both Allendale and US ProFarmer recently lowered yield forecasts and pulled crop estimates lower than the USDA. Dr. Michael Cordonnier of US ProFarmer lowered his yield estimates (by 1 bu/ac for corn, to 150 bu/ac, for a crop of 11.89 billion bu, and by 0.5 bu/ac for soybeans, to 39.5 bu/acre, for a crop of 2.89 billion bu) to reflect stressful conditions in August with a bias towards further crop reductions.

If US crops turn out lower than the USDA August forecast (12.3 billion bu for corn and 3 billion bu for beans), this could trigger a reversal in grain market fortunes. A run of important reports out this week could also assist. On Wednesday, StatCan estimates Canadian grain stocks and on Friday, the USDA releases its September global S&Ds.

Sell wheat on spikes
We still think wheat is a sell at levels near $350/t, but can’t get enthused about selling feed barley ($240/t) or canola (circa $600/t) at current values. With the $A slipping towards 80USc, it doesn’t take much of a rally on CBOT to get prices back to attractive levels.

For those confident about producing malt barley, it is also a sell on the proportion that you are absolutely confident about producing, as the malt spread will ease when Canadian and Aussie supplies hit the market.

How much barley do you reckon will be sown next year at current price levels? Wouldn’t it be better to sell Dec 09 and Dec 10 wheat at an average near A$400/t and increase your wheat plantings?

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Monday, September 1, 2008

Markets garner some support

Grain markets garnered support last week from concerns that Hurricane (Cyclone?) Gustav may damage US oil supplies. Corn and beans also gained support from nagging thoughts that the USDA is overestimating yields. Many expect that a very dry August across the US Midwest may break the back of crops that have been struggling all year from a disastrous start. Growers are telling US ProFarmer that it has the trends right but it still has yields too high (they are currently estimating corn yields as the second highest ever).

Wheat and canola down
In contrast to corn and beans, wheat and canola values were significantly weaker this week. An improvement in conditions across major southern hemisphere producers Australia and Argentina, renewed strength in the $US, and thoughts that US wheat was overvalued sent CBOT wheat futures lower. Without ongoing support from corn and beans, CBOT wheat futures will struggle to hold at current levels. Growers should look to take some price cover as yields shore up.

Only a further fall in the $A (to a four-month low) and stronger basis levels stopped heavy wheat futures losses from flowing into local values. Lower local inflation data has cleared the way for the RBA to opt for the larger 50 basis point cut this week to relieve the pain of local debt holders. That said, we expect the $A will remain a supportive influence in the lead-up to harvest.

Canola was hammered (unjustifiably in our view) by an adjustment to last season’s Canadian production estimate. Canola could be catapulted higher if important mid-September data releases indicate lower US corn or bean yields, or if the revision to the old season Canadian canola crop estimates doesn’t show up in larger canola stocks.

Much needed rainfall
Over the week, rain fell across most areas where it was desperately needed. We expect that the rain has negated the need for us to take the knife to our production estimates when we update them over the next couple of weeks.

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