This was composed while flying to Sydney on a Friday night sitting next to a portly 50s gentleman who had enough red wine to think it was a good idea to start belting out some tunes – I was trapped with nowhere to go and sought solace in my laptop. I finished reading The Financial Review – no good news there.
Anyway, I spent part of the trip going through my communication looking for some positives because by week’s end, sentiment had turned very negative again, particularly on commodities. Jitters across Asia indiscriminately smashed global equities, oil and – of course – crommodities. So much for my ramblings on the $A last week. It was absolutely pulverized as Asian equity markets turned nasty and at the time of writing, it looks like the $A might spend sometime in the 50US¢ range.
Is the tide turning?
There were signs early last week that the tide was turning. Egypt preferred to buy French wheat last week – while this was negative for the US, it at least signaled Egyptian millers may have had enough of poor quality wheat out of the Black Sea. With prices and freight rates falling to levels not seen in years, millers are using some of their windfall gains on better quality grain – hopefully this is the case generally.
Also in the US, local corn and soybean cash prices continue to firm as farmers have stopped selling and processors are scampering to increase coverage. Cash prices have now appreciated to the point where it is cheaper to take delivery from the futures, making futures undervalued relative to cash, as opposed to what has recently been the case. In a normal fundamental market (which this market is not), this would be a bullish signal for futures as price needs to rally in order to attract farmer selling. I stole this from our mate Lachie Stevens who does the markets pages for me. Lachie has about 10 years of grain trading experience and brings a lot to our team.
Land title rights in China
Lachie was also rambling on about some policy shifts in China: 1) the resumption of domestic accumulation of grains for the state reserves; and 2) the initiation of an official transfer scheme for production rights (land title). The Chinese Government’s decision to step into local markets puts a short-term floor in prices and provides support to the local farmers and certainty to processors (who are largely unhedged), in that their feedstock and product prices won’t continue to crash leading to defaults and negative margins.
However, the big one is the potential change in land title rights. With nearly 75% of the population still living in rural areas, the move to increase land holdings, and compensate those who have reduced land holdings, has a number of impacts. Firstly, it designed to increase rural incomes 10-fold (a massive % increase in wealth across a large % of the population); secondly, it gives the rural people an asset; and lastly, with more land per person, more people will be required to move to the city. This will further stimulate urbanization in China and investment in the infrastructure that is needed to support it. This makes it more than just an Ag reform and could help stimulate global economic demand.
In our $A comment last week we alluded to the potential for China to make such moves. China is also acting aggressively to shore up its property market by slashing interest rates.
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Sunday, October 26, 2008
Sunday, October 19, 2008
$A in the caught in the crossfire of the crisis
We are continually staggered by the speed at which markets move. In the course of completing our quarterly grain price forecasts, the $A has moved from the mid 80sUS¢ to the mid 60sUS¢.
While there were good reasons why the $A failed to reach parity, we can’t help but think that the $A has been caught in the crossfire of the current crisis. The $A is a heavily traded currency and is often seen as a proxy for global growth and commodity prices. As traders have seen markets melt in front of their eyes, the $A has been an easy target. These traders don’t have time for detailed analysis and revert to type in the heat of the moment.
This same sell-first-ask-questions-later attitude is similar to the scenario that unfolded at the height of the Asian currency crisis in 1999/2000. In that instance, the $A was sold down heavily to 47US¢. Within a year, it was well on the road to a very strong recovery that saw it challenge parity before the most recent troubles.
The current situation is much more serious and will lead to a sharp slowing in growth across developed economies. But while a developed market recession may have given the Australian economy heart palpitations in a previous life, we think there are good reasons it may be a little different this time.
The Australian economy is favourably exposed to China and in some perverse way, the slowing in global growth may allow the Chinese economy to grow in a more sustainable fashion. Over the next couple of years, China will increasingly become the major source of global growth. In the first half of the year it accounted for one-third of global growth and its contribution will rise as the developed world looks set to slip into recession.
Sure, China will not be immune to all the world’s problems. Export demand will slow considerably. There are signs that production is slowing sharply (although this may be largely due to the closure of many factories for the Olympics) – car sales have fallen and housing prices are easing.
But unlike in the US (where the Chinese banking regulator labeled lending practices as ‘ridiculous’), China is well equipped to deal with such imbalances. Housing affordability is rising and the Chinese are not hocked up with debt. A 20-30% deposit is required on housing loans, giving the banks plenty of wriggle room and total household debt is one-eighth that of the average US consumer.
Plus, the Chinese Government has plenty in its arsenal to deal with a slowing economy. It is the largest saver on earth and has the biggest cash reserves of any country. In contrast to last year, when inflation was running rampant and the Government needed to raise rates to cool the economy, inflation is now on the retreat, which gives it the ability to ease monetary policy. As the external sector slows, watch for the Government to start to turn its guns on domestic demand – maybe by reducing tax rates. It may also find that investments in infrastructure within China might be a better bet than chasing rainbows outside its borders.
While the $A was due a fall, 60% of our exports are heading into Asia, which will come out of this mess as good as anyone. Sure, commodity prices are tanking, but very strong coal iron ore prices have been locked in a year ahead and many of the major producers are likely to have hedging programs on.
Output is now ramping up as new mining projects come on stream, and the cooling in our domestic economy might help ease some bottlenecks to allow output to expand further.
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While there were good reasons why the $A failed to reach parity, we can’t help but think that the $A has been caught in the crossfire of the current crisis. The $A is a heavily traded currency and is often seen as a proxy for global growth and commodity prices. As traders have seen markets melt in front of their eyes, the $A has been an easy target. These traders don’t have time for detailed analysis and revert to type in the heat of the moment.
This same sell-first-ask-questions-later attitude is similar to the scenario that unfolded at the height of the Asian currency crisis in 1999/2000. In that instance, the $A was sold down heavily to 47US¢. Within a year, it was well on the road to a very strong recovery that saw it challenge parity before the most recent troubles.
The current situation is much more serious and will lead to a sharp slowing in growth across developed economies. But while a developed market recession may have given the Australian economy heart palpitations in a previous life, we think there are good reasons it may be a little different this time.
The Australian economy is favourably exposed to China and in some perverse way, the slowing in global growth may allow the Chinese economy to grow in a more sustainable fashion. Over the next couple of years, China will increasingly become the major source of global growth. In the first half of the year it accounted for one-third of global growth and its contribution will rise as the developed world looks set to slip into recession.
Sure, China will not be immune to all the world’s problems. Export demand will slow considerably. There are signs that production is slowing sharply (although this may be largely due to the closure of many factories for the Olympics) – car sales have fallen and housing prices are easing.
But unlike in the US (where the Chinese banking regulator labeled lending practices as ‘ridiculous’), China is well equipped to deal with such imbalances. Housing affordability is rising and the Chinese are not hocked up with debt. A 20-30% deposit is required on housing loans, giving the banks plenty of wriggle room and total household debt is one-eighth that of the average US consumer.
Plus, the Chinese Government has plenty in its arsenal to deal with a slowing economy. It is the largest saver on earth and has the biggest cash reserves of any country. In contrast to last year, when inflation was running rampant and the Government needed to raise rates to cool the economy, inflation is now on the retreat, which gives it the ability to ease monetary policy. As the external sector slows, watch for the Government to start to turn its guns on domestic demand – maybe by reducing tax rates. It may also find that investments in infrastructure within China might be a better bet than chasing rainbows outside its borders.
While the $A was due a fall, 60% of our exports are heading into Asia, which will come out of this mess as good as anyone. Sure, commodity prices are tanking, but very strong coal iron ore prices have been locked in a year ahead and many of the major producers are likely to have hedging programs on.
Output is now ramping up as new mining projects come on stream, and the cooling in our domestic economy might help ease some bottlenecks to allow output to expand further.
The Rudd Government will lower interest rates and deploy the surplus to counter the global slowing in growth, and this will apply further pressure in the medium-term. But our bet is that once this mess settles down, the $A will steady somewhere in the low 70s.
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Sunday, October 12, 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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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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Monday, October 6, 2008
Global concerns dominate the landscape
Agricultural commodities are in the process of overshooting to the downside as global economic concerns dominate the trading landscape. Very few commodities have been spared the sell-down, with gold the only notable exception (although gold too has lost some of its lustre). The $A has followed commodities down and is helping to offset some of the pain. The US seems to be paving the way to slash rates, which could act to weaken the $US.
With prices heading quickly towards breakeven, one problem that may start to hit headlines is financing of the next global crop (our banks are as good as any, so we shouldn’t have a problem), particularly if prices keep heading southward and input costs don’t follow suit. However, fertiliser prices may be in the process of adjusting lower. US fertilizer stock prices plunged as analysts tap in the impact of lower US fertilizer demand on prices.
Input belts tightening
Already in South America, the high cost of inputs has shifted planting intentions away from corn to beans and has producers ‘tightening their input belts’ by cutting fertilizer use as much as 25%. South American growers are waiting for a good rain to commence planting (some planting has commenced in Brazil). These developments point to slower acreage expansion and potentially lower yields.
Finance issues may not be confined to growers trying to plant crops. Sources indicate some vessels loaded with US grain are sitting at buyers’ ports waiting to unload because importers can’t get a letter of credit to pay for the load.
Crop conditions plummet
We have just received our September stats on the local crop and conditions have plummeted, particularly across SA and Vic. Plus, indications that the frost event in WA is worse than first thought has us sharpening our pencil to make a decent cut to our current Australian wheat crop production estimate of 22.7mmt.
Battle with beans
Early harvest reports indicate that US corn yields are slightly better than expected but bean yields are coming in slightly below. Even based on stronger than expected yields, US corn and bean carryovers will fall to about one month’s supply by year’s end, which will set the scene. US corn use will be around 5% more than production, which means that this situation can not be allowed to happen again next year, thus setting the scene for a battle with beans. This battle should help to support soft commodity prices in 2009, once the negative influence of the flow of fund money subsides.
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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With prices heading quickly towards breakeven, one problem that may start to hit headlines is financing of the next global crop (our banks are as good as any, so we shouldn’t have a problem), particularly if prices keep heading southward and input costs don’t follow suit. However, fertiliser prices may be in the process of adjusting lower. US fertilizer stock prices plunged as analysts tap in the impact of lower US fertilizer demand on prices.
Input belts tightening
Already in South America, the high cost of inputs has shifted planting intentions away from corn to beans and has producers ‘tightening their input belts’ by cutting fertilizer use as much as 25%. South American growers are waiting for a good rain to commence planting (some planting has commenced in Brazil). These developments point to slower acreage expansion and potentially lower yields.
Finance issues may not be confined to growers trying to plant crops. Sources indicate some vessels loaded with US grain are sitting at buyers’ ports waiting to unload because importers can’t get a letter of credit to pay for the load.
Crop conditions plummet
We have just received our September stats on the local crop and conditions have plummeted, particularly across SA and Vic. Plus, indications that the frost event in WA is worse than first thought has us sharpening our pencil to make a decent cut to our current Australian wheat crop production estimate of 22.7mmt.
Battle with beans
Early harvest reports indicate that US corn yields are slightly better than expected but bean yields are coming in slightly below. Even based on stronger than expected yields, US corn and bean carryovers will fall to about one month’s supply by year’s end, which will set the scene. US corn use will be around 5% more than production, which means that this situation can not be allowed to happen again next year, thus setting the scene for a battle with beans. This battle should help to support soft commodity prices in 2009, once the negative influence of the flow of fund money subsides.
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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