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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Sunday, November 16, 2008
Sunday, November 9, 2008
Caught in a vortex
Commodity markets seem to be caught in a vortex at the moment. For corn and beans, there are enough concerns about production to prevent heavy selling but not enough confidence in demand to turn sellers into buyers.
The USDA will release new reports tonight (Monday 10 Nov) with updated corn and bean yields – the last ‘special’ reports released just a fortnight ago focused only on acreage. Heavy winds in late October and only average bean harvest results should mean that there are no nasty surprises to the upside.
Plus, meat values have fallen enough to encourage value buying at the meat retail counter – the fall in oil values has left some fat in budgets this month. Lower livestock values and stabilizing retail prices should help re-build a demand base for corn and feed grains.
Lower bean production across South America
On the bean front, the main nearby positive will come from news of lower production across South America. CONAB has reduced its Brazilian estimate to 58-59mmt – down from 60-61mmt. Although planting is underway, there are concerns that dry conditions and access to finance will restrict planting before the window closes in late November. Fertilizer applications have already been trimmed to the bone and production costs at $11-12.50/bu ($8.50/bu) have taken the spring out of the South American farmer’s step.
Oilseeds set to lead comeback
Oilseed export activity and demand remains relatively brisk (at record levels out of the US), which will position this sector well to lead a comeback in commodities. Conversely, export demand for US corn and wheat has fallen in a hole. The bulk freight market has fallen to its lowest level in six years as contract defaults on higher priced earlier contracts start to wash through the system.
The best hope of a near-term recovery in wheat and barley would be poor winter weather across the Northern Hemisphere that may shut down exports for a period of time.
Local grower selling light
Locally, inclement weather, quality issues and poor prices are seeing growers stand on the sidelines, with grower selling very light despite not too many reasons for a nearby recovery in prices, particularly on cereals.
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The USDA will release new reports tonight (Monday 10 Nov) with updated corn and bean yields – the last ‘special’ reports released just a fortnight ago focused only on acreage. Heavy winds in late October and only average bean harvest results should mean that there are no nasty surprises to the upside.
Plus, meat values have fallen enough to encourage value buying at the meat retail counter – the fall in oil values has left some fat in budgets this month. Lower livestock values and stabilizing retail prices should help re-build a demand base for corn and feed grains.
Lower bean production across South America
On the bean front, the main nearby positive will come from news of lower production across South America. CONAB has reduced its Brazilian estimate to 58-59mmt – down from 60-61mmt. Although planting is underway, there are concerns that dry conditions and access to finance will restrict planting before the window closes in late November. Fertilizer applications have already been trimmed to the bone and production costs at $11-12.50/bu ($8.50/bu) have taken the spring out of the South American farmer’s step.
Oilseeds set to lead comeback
Oilseed export activity and demand remains relatively brisk (at record levels out of the US), which will position this sector well to lead a comeback in commodities. Conversely, export demand for US corn and wheat has fallen in a hole. The bulk freight market has fallen to its lowest level in six years as contract defaults on higher priced earlier contracts start to wash through the system.
The best hope of a near-term recovery in wheat and barley would be poor winter weather across the Northern Hemisphere that may shut down exports for a period of time.
Local grower selling light
Locally, inclement weather, quality issues and poor prices are seeing growers stand on the sidelines, with grower selling very light despite not too many reasons for a nearby recovery in prices, particularly on cereals.
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Sunday, November 2, 2008
Sprinters never win
ProFarmer is in Melbourne for the Cup this week. I know; bad timing with harvest on and all, but it is our one chance a year to catch up with about 20 close mates from all walks of life. Consensus of opinion is that Septimus is the best credentialed international runner to ever make the trip. It will be very hard to beat and it is at relatively juicy odds compared to other international raiders of the same ilk. By the time some of you read this, the Cup will be run and won – apologies if you get the tip late – or maybe not.
Road to recovery
Speaking of long journeys, the canola market looks like it may be on the long road to recovery. North American prices appear to be building quite a firm base and our bet is that there will be a few more surprises to the downside with regards to US bean production. Oilseed prices generally start to recover seasonally over the next few months as North American harvest supplies clear.
While prices remain susceptible to more bad economic news, given the amount of outside money that has flowed out of the past six months, the influence of this is diminishing.
In Canada, cash canola demand remains very strong with the domestic crush and exports currently running at a record strong pace. Commercial buyers seem to have re-assumed control of the markets. Again, while there are fears of demand slowing, there really is no evidence of such at this time; canola usage is record large so far in 2008/09 and the lower prices continue to draw in the end user.
Canola is now pretty attractively priced relative to US soybeans with prices about parity, whereas canola traditionally carries a notable premium. Also, the Chinese government a few weeks back started buying domestic soybeans to help support prices and to provide the incentive for its farmers to grow oilseeds. But as world prices tanked, it made more sense for importers to buy cheap global supplies.
Soybean import tax
According to Dow Jones last week, China's Finance Ministry is currently considering a boost to its soybean import tax from 3% to as much as 9%, though there's nothing firm yet. A move to that 9% level would position canola on a more competitive footing with beans, as canola is already subject to the tax at 9%. So if tax change occurs, it will mean that canola has a pricing edge at today's canola/soybean price relationship.
Concerns over the impact of a global recession on demand for commodities will limit speculative interest in commodities for the time being and mean that prices are not going to sprint higher. But this market seems to me to be building a firm fundamental base that will see prices stay the journey. And we all know that sprinters never win the Melbourne Cup.
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Road to recovery
Speaking of long journeys, the canola market looks like it may be on the long road to recovery. North American prices appear to be building quite a firm base and our bet is that there will be a few more surprises to the downside with regards to US bean production. Oilseed prices generally start to recover seasonally over the next few months as North American harvest supplies clear.
While prices remain susceptible to more bad economic news, given the amount of outside money that has flowed out of the past six months, the influence of this is diminishing.
In Canada, cash canola demand remains very strong with the domestic crush and exports currently running at a record strong pace. Commercial buyers seem to have re-assumed control of the markets. Again, while there are fears of demand slowing, there really is no evidence of such at this time; canola usage is record large so far in 2008/09 and the lower prices continue to draw in the end user.
Canola is now pretty attractively priced relative to US soybeans with prices about parity, whereas canola traditionally carries a notable premium. Also, the Chinese government a few weeks back started buying domestic soybeans to help support prices and to provide the incentive for its farmers to grow oilseeds. But as world prices tanked, it made more sense for importers to buy cheap global supplies.
Soybean import tax
According to Dow Jones last week, China's Finance Ministry is currently considering a boost to its soybean import tax from 3% to as much as 9%, though there's nothing firm yet. A move to that 9% level would position canola on a more competitive footing with beans, as canola is already subject to the tax at 9%. So if tax change occurs, it will mean that canola has a pricing edge at today's canola/soybean price relationship.
Concerns over the impact of a global recession on demand for commodities will limit speculative interest in commodities for the time being and mean that prices are not going to sprint higher. But this market seems to me to be building a firm fundamental base that will see prices stay the journey. And we all know that sprinters never win the Melbourne Cup.
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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