More wheat, larger carryout
The USDA lifted global 2008/09 wheat production another 2mmt to a new record of 684mmt – with increases mainly for Canada and the EU-27, which offset a reduction for Argentina. World wheat consumption was lowered reflecting a reduction in wheat food use in US and Vietnam. Global wheat feeding is increased owing to larger supplies of downgraded wheat in Australia and Brazil. Global wheat ending stocks were raised 2mmt this month, with the majority of the increases in our major north American competitors.
Big lift in corn stocks
Global coarse grain supplies for 2008/09 were projected another 7mmt higher this month with beginning stocks raised 1mmt and production raised 6mmt. The increase in carry-in stocks reflects upward revisions to 2007/08 production for Australia and Brazil sorghum and South African corn. Increased 2008/09 global coarse grain output is driven by higher projected corn production for China, EU-27, Canada, and Ukraine; higher projected barley production for Canada; and higher sorghum production for countries of Sub-Saharan Africa. Partly offsetting these increases was a reduction of 2mmt in Brazilian corn production estimates.Global coarse grain consumption is projected down 7mmt mostly on lower expected demand from the US ethanol processing sector. Global coarse grain stocks for 2008/09 are projected at 166mmt, up 15mmt and the highest since 2004/05.
EU malt barley prices on retreat
EU malt barley prices lost another US$5/t back to US$160-166/t with the market pressured by large amounts of unsold French and UK barley. Like in many areas of Australia, weather damage and quality issues have made contract executions difficult.Some of these issues may be related to high priced contracts with buyers being especially particular about quality. Finance is also a problem and this is causing difficulties especially in cases where sellers require the buyer to open a letter of credit. A tender for the sale of a cargo of UK barley has been issued following a default by the buyer and this has also unsettled the market with some traders concerned that this may not be an isolated case.Buyers appear to be well covered for the nearby positions and with prices continuing to fall, there is no reason to rush to buy further quantities. With quality issues in Australia, Canada looks to be the major source of export competition. StatCan recently increased its barley production estimate by 500,000t.New crop prices are at a premium US$30/t, but activity is very light with buyers in no hurry to extend cover. A fall in Denmark barley area (higher wheat plantings) is thought to be offset by higher plantings in UK and France. Ideas that EU growers would abandon barley plantings appear unfounded.The jury is still out about what the GFC (Global Financial Crisis) will do to beer, malt sales and hence malt barley demand. Rising unemployment rates will have a say, but beer sales may be protected as the average consumer moves away from higher priced beverages towards beer. Is beer a necessity?
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Sunday, December 28, 2008
Thursday, December 18, 2008
Is there any Christmas cheer?
At the ProFarmer Christmas party in Perth last week a number of people commented how depressing last week’s newsletter was. The Christmas party involved a gathering of about 40 trade types - this year we played croquet and were entertained by Brian the maniac spit roast man. But it left me thinking....are we too bearish? Is there anything to cheer about this Christmas? What things might help fill our Christmas stocking?
1. Resumption of $US weakness
The $US tumbled after the US Federal Reserve cut interest rates to a range between zero to 0.25%. Gold spiked higher and grains gained as the slide in the $US encouraged some buyers to get off the fence. But the old black gold (oil) hardly budged, laden by US Fed Reserve comments that the outlook for economic activity has weakened further. But while a weakening $US may be longer term positive for commodities (if demand holds up), it threatens to hold the $A above 70USc.
2. Oil climbing off the canvas
Like with grains, in oil it is a race to see which falls quicker; demand or supply. OPEC agreed to cut production this week, but by just enough to cover the anticipated decline in demand. With little threat of inflation, the need to own oil as a hedge has diminished.
3. Wheat demand
This week’s Fed move and associated weakening in the $US brought some buyers out of the woodwork. With grain prices and the freight market settling down, the buying environment looks better than in recent times. Saudi launched a surprise tender for 500,000t of wheat this week. Recently Saudi has signaled it’s intention to move out of wheat production and increase wheat imports to conserve its water resource. Jordan, Morocco, Pakistan, Iraq, Japan, Taiwan and Syria are all in the market for wheat Jan/Mar.
4. Wheat Supply
Black Sea selling is expected to slow with the onset of winter. Argentina is selling but this is not expected to last for long. The EU, Canada, Australia and the US have plenty of supply for future need. Cold weather across parts of the US Southern Plains this week may have led to some winterkill. Otherwise the nth hemisphere winter plant is in good condition. Despite plenty of downgrading there should be enough quality grain to meet demand. Crop problems or weak spring wheat plantings would need to develop to significantly change this.
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1. Resumption of $US weakness
The $US tumbled after the US Federal Reserve cut interest rates to a range between zero to 0.25%. Gold spiked higher and grains gained as the slide in the $US encouraged some buyers to get off the fence. But the old black gold (oil) hardly budged, laden by US Fed Reserve comments that the outlook for economic activity has weakened further. But while a weakening $US may be longer term positive for commodities (if demand holds up), it threatens to hold the $A above 70USc.
2. Oil climbing off the canvas
Like with grains, in oil it is a race to see which falls quicker; demand or supply. OPEC agreed to cut production this week, but by just enough to cover the anticipated decline in demand. With little threat of inflation, the need to own oil as a hedge has diminished.
3. Wheat demand
This week’s Fed move and associated weakening in the $US brought some buyers out of the woodwork. With grain prices and the freight market settling down, the buying environment looks better than in recent times. Saudi launched a surprise tender for 500,000t of wheat this week. Recently Saudi has signaled it’s intention to move out of wheat production and increase wheat imports to conserve its water resource. Jordan, Morocco, Pakistan, Iraq, Japan, Taiwan and Syria are all in the market for wheat Jan/Mar.
4. Wheat Supply
Black Sea selling is expected to slow with the onset of winter. Argentina is selling but this is not expected to last for long. The EU, Canada, Australia and the US have plenty of supply for future need. Cold weather across parts of the US Southern Plains this week may have led to some winterkill. Otherwise the nth hemisphere winter plant is in good condition. Despite plenty of downgrading there should be enough quality grain to meet demand. Crop problems or weak spring wheat plantings would need to develop to significantly change this.
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Sunday, December 14, 2008
Corn end stocks rise in wake of reduced demand for ethanol
Grain markets continued to play the same tune for most of last week, rising and falling with the fortunes of global equity markets. Markets shrugged off a bearish USDA report as outside markets pulled rank on hopes that a bailout plan for the US car industry would be approved. But when this failed to gain support prices fell, corn recovered somewhat on ‘shocking’ US planting estimates; with demand backpedaling, the short-term price path looks far from certain, even with a sharp reduction in plantings.
In its reports released Thursday night, USDA slashed corn for ethanol demand and corn exports which contributed to another lift in end stock projections. The USDA put ethanol use 300 million bushels lower as prospects for blending above federally mandated levels decline. Financial problems for ethanol producers are reducing plant capacity utilization for existing plants and delaying plant openings for those facilities still under construction. Falling gasoline prices have also resulted in high relative prices for ethanol, reducing blender incentives.
The net result is the USDA expects US corn stocks to be comfortable than initial estimates at 1,474 million bu, down from this summer's 1,624 million bu carry in. If ethanol demand does not improve, US may not need to increase corn area much in 2009.
One reason ethanol use is expected to decline is that its price is no longer competitive with gasoline. In July and August, the January ethanol futures contract averaged 77% of the value of the January gasoline futures contract. In November it averaged 133% and so far this month it has averaged 151% of the price of gasoline. While US government mandates require that a certain percentage of ethanol be blended with gasoline, the higher the price of ethanol, the greater the incentive to circumvent the mandates. In addition, overall energy consumption is falling as part of efforts by consumers to reduce spending to help reduce personal debt.
US ProFarmer reported that some in the industry feel USDA’s downwardly revised corn-for-ethanol usage estimate of 3.7 billion bu is still too high. USDA now sees corn exports in the current marketing year at 1.8 billion bu. – down a whopping 636 million bu. from 2007-08. Like with the corn-for-ethanol figure, some industry insiders feel the export figure is still too high as global financial woes, plentiful world feed wheat supplies and a stronger dollar threaten to reduce usage of US corn. So, while USDA upped corn carryover more than expected this month, additional decreases in usage and increased carryover may lie ahead.
The USDA also reduced the soybean crush owing to weak soymeal demand as a result of declining feed demand in Nth America, and competition from canola meal. With a lift in the North American canola crush – estimates are that it will expand by 950,000t in 08/09 with the majority of the additional canola meal (575,000t) being absorbed within the US market. The soymeal export market will be a major challenge for balance in 08/09.
For the first time in many weeks on Friday grains markets reacted to some fundamentals news with corn gaining support on indications of a cutback in US plantings in the coming year. It looks like it will be a race to see which falls quicker demand or supply. Certainly, the pressure on plantings is not as great as it looked to be early in the year and beans now seem to be clearly leading the race in the early going.
In the near-term, grains need some help. Ongoing dryness across Sth America (Argentina and southern Brazil) could be one source, while $US weakness may be another. Worsening US economic data and a widening trade deficit has seen the $US’s gains stagnate. Better interest rates across Europe and more action from EU authorities has seen the Euro gain. Although it is early day’s to declare a trend, $US weakness could help arrest recent slumps in commodity prices.
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In its reports released Thursday night, USDA slashed corn for ethanol demand and corn exports which contributed to another lift in end stock projections. The USDA put ethanol use 300 million bushels lower as prospects for blending above federally mandated levels decline. Financial problems for ethanol producers are reducing plant capacity utilization for existing plants and delaying plant openings for those facilities still under construction. Falling gasoline prices have also resulted in high relative prices for ethanol, reducing blender incentives.
The net result is the USDA expects US corn stocks to be comfortable than initial estimates at 1,474 million bu, down from this summer's 1,624 million bu carry in. If ethanol demand does not improve, US may not need to increase corn area much in 2009.
One reason ethanol use is expected to decline is that its price is no longer competitive with gasoline. In July and August, the January ethanol futures contract averaged 77% of the value of the January gasoline futures contract. In November it averaged 133% and so far this month it has averaged 151% of the price of gasoline. While US government mandates require that a certain percentage of ethanol be blended with gasoline, the higher the price of ethanol, the greater the incentive to circumvent the mandates. In addition, overall energy consumption is falling as part of efforts by consumers to reduce spending to help reduce personal debt.
US ProFarmer reported that some in the industry feel USDA’s downwardly revised corn-for-ethanol usage estimate of 3.7 billion bu is still too high. USDA now sees corn exports in the current marketing year at 1.8 billion bu. – down a whopping 636 million bu. from 2007-08. Like with the corn-for-ethanol figure, some industry insiders feel the export figure is still too high as global financial woes, plentiful world feed wheat supplies and a stronger dollar threaten to reduce usage of US corn. So, while USDA upped corn carryover more than expected this month, additional decreases in usage and increased carryover may lie ahead.
The USDA also reduced the soybean crush owing to weak soymeal demand as a result of declining feed demand in Nth America, and competition from canola meal. With a lift in the North American canola crush – estimates are that it will expand by 950,000t in 08/09 with the majority of the additional canola meal (575,000t) being absorbed within the US market. The soymeal export market will be a major challenge for balance in 08/09.
For the first time in many weeks on Friday grains markets reacted to some fundamentals news with corn gaining support on indications of a cutback in US plantings in the coming year. It looks like it will be a race to see which falls quicker demand or supply. Certainly, the pressure on plantings is not as great as it looked to be early in the year and beans now seem to be clearly leading the race in the early going.
In the near-term, grains need some help. Ongoing dryness across Sth America (Argentina and southern Brazil) could be one source, while $US weakness may be another. Worsening US economic data and a widening trade deficit has seen the $US’s gains stagnate. Better interest rates across Europe and more action from EU authorities has seen the Euro gain. Although it is early day’s to declare a trend, $US weakness could help arrest recent slumps in commodity prices.
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Sunday, December 7, 2008
How will a global recession hamper Agriculture?
I recently commented that I had witnessed the worse week in commodities. Well, it didn’t take long for that to be trumped. The past week has been almost catastrophic. Waves and waves of economic data are now suggesting that 2009 is going to be an extremely difficult year. In November ‘alone’ the US lost 500,000 jobs increasing the jobless rate to 6.7% (the US has lost 1.9m jobs this year) – a move to 10% now seems almost inevitable. As the world’s largest economy – an unemployment rate this high – signals trouble in every corner of the globe.
Lack of job security means consumers are more focused on getting two or three months of paychecks in the bank and getting ahead of the mortgage than spending money. Until job confidence returns, a market recovery is unlikely.
Trying to gauge how deep the global recession will cut into agriculture is extremely difficult. History tells us there will be some impact on agriculture from a recession, primarily on the demand side. As economic conditions tighten, spending on everything – even the essentials like food – declines. But the situation is different now than it has been in the past. There are many more mouths to feed around the world and the world’s middle class has grown considerably. This should help shorten the period of recovery.
What markets could signal an end to recession?
The first is ‘meats’. Just as meat demand is one of the first to wane when economic conditions become tight, it’s also an indicator of recovery. When consumers start ramping up meat purchases, it would signal confidence is being restored on an individual level; which would suggest overall consumer confidence is being rebuilt.
The second is crude oil. This market led the huge bull-run and is likely to lead the next round of buying. As oil prices get ‘cheap’, consumption will eventually rebound. And as demand rises, so will prices. But possibly more important, crude oil has the ability to attract strong speculative buying, which would indicate investor confidence has been restored.
Once confidence turns around, conditions are ripe for a surge in demand. There have been literally trillions of dollars pumped into economies around the world (none of which will find ProFarmer’s post box). This, plus lower interest rates and oil prices would have many households better placed than pre-crisis. However we are not seeing the impact of this because people are saving rather than spending as job security concerns increase.
Commodities are poised to make another bull run as confidence stabilizes and demand rises as prices cheapen. In addition there are already signs that supply is adjusting to lower price levels. But the downside will very likely be ‘overdone’ before there is a recovery. A recovery, which now looks unlikely until at least the second half of 2009.
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Lack of job security means consumers are more focused on getting two or three months of paychecks in the bank and getting ahead of the mortgage than spending money. Until job confidence returns, a market recovery is unlikely.
Trying to gauge how deep the global recession will cut into agriculture is extremely difficult. History tells us there will be some impact on agriculture from a recession, primarily on the demand side. As economic conditions tighten, spending on everything – even the essentials like food – declines. But the situation is different now than it has been in the past. There are many more mouths to feed around the world and the world’s middle class has grown considerably. This should help shorten the period of recovery.
What markets could signal an end to recession?
The first is ‘meats’. Just as meat demand is one of the first to wane when economic conditions become tight, it’s also an indicator of recovery. When consumers start ramping up meat purchases, it would signal confidence is being restored on an individual level; which would suggest overall consumer confidence is being rebuilt.
The second is crude oil. This market led the huge bull-run and is likely to lead the next round of buying. As oil prices get ‘cheap’, consumption will eventually rebound. And as demand rises, so will prices. But possibly more important, crude oil has the ability to attract strong speculative buying, which would indicate investor confidence has been restored.
Once confidence turns around, conditions are ripe for a surge in demand. There have been literally trillions of dollars pumped into economies around the world (none of which will find ProFarmer’s post box). This, plus lower interest rates and oil prices would have many households better placed than pre-crisis. However we are not seeing the impact of this because people are saving rather than spending as job security concerns increase.
Commodities are poised to make another bull run as confidence stabilizes and demand rises as prices cheapen. In addition there are already signs that supply is adjusting to lower price levels. But the downside will very likely be ‘overdone’ before there is a recovery. A recovery, which now looks unlikely until at least the second half of 2009.
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Monday, December 1, 2008
Continued Downgrading attracts Premium for Warehoused Wheat
Rain and a lack of grower selling has seen markets add premium for quality wheat and prompt delivery. NSW growers are following the trend set by WA growers and opting to warehouse grain and this is tightening the prompt market for quality wheat with more boats appearing on the stem each week. South Australian and Victorian growers are starting to sell small amounts. The thinking is that premiums for quality grain will continue to tighten as a result of downgrading through harvest.
Heavy rain through the Liverpool Plains of nth NSW had added to the harvest woe. Significant rain (75-125mm) over the weekend and the resultant major flooding will see the majority of crop now downgraded. As harvest was at around 20% - 25% this is 80% of crop downgraded. Significant amounts of sorghum are under water which will need to be replanted and there are reports of sunflower crops in same predicament.
Already, before that, most of the grain left to be harvested, north of Coonamble was heading for downgrades. The best estimate now is that over 1mmt of wheat will be downgraded across the northern feed zone and with another big sorghum crop in prospect and pressure on feed barley export values, this has widened the discount to feed wheat to over $100/t.
The key for milling wheat and malt barley price prospects on the east coast will be the Central West of NSW. If harvest progresses and downgrading is not too significant, there should be enough quality grain produced to satisfy domestic markets.
Exporters suggest that current prices are above what export markets are willing to pay for deferred delivery and that current premiums are associated with exporters trying to source grain to meet nearby shipments.
A large exporter recently suggested to ProFarmer that it is unlikely that China will import any Australian malt barley at current price spreads against European and Canadian barley. Given the better availability of quality grain from these destinations, it is also unlikely that they will be interested in off spec malt barley. As such, further price premiums will need to be driven domestically rather than by export markets. The fate of malt barley values lies in whether there is enough malt barley produced to satisfy local demand.
We heard an estimate that the malt percentage could be as low as 20-30% nationwide, which represents a crop of 1.2-1.8mmt on our Nov barley production estimate. Domestic demand is estimated at about 1mmt (700,000t east and 300,000t west), and Japan need about 200,000t. Even our low estimate should have inelastic demand covered. Plus, the incentive to clean and blend is there, and already we have seen standards relax to try and fit the crop to malt specs. It may take a while but domestic demand should get covered.
The key will be WA. We heard that the malt deliveries were running as high as 55% in the Kwinana north zone prior to the latest rain. If downgrading across WA is not too bad, it is hard to see tremendous upside, but at this stage it is too early to assess the true extent of downgrading.
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Heavy rain through the Liverpool Plains of nth NSW had added to the harvest woe. Significant rain (75-125mm) over the weekend and the resultant major flooding will see the majority of crop now downgraded. As harvest was at around 20% - 25% this is 80% of crop downgraded. Significant amounts of sorghum are under water which will need to be replanted and there are reports of sunflower crops in same predicament.
Already, before that, most of the grain left to be harvested, north of Coonamble was heading for downgrades. The best estimate now is that over 1mmt of wheat will be downgraded across the northern feed zone and with another big sorghum crop in prospect and pressure on feed barley export values, this has widened the discount to feed wheat to over $100/t.
The key for milling wheat and malt barley price prospects on the east coast will be the Central West of NSW. If harvest progresses and downgrading is not too significant, there should be enough quality grain produced to satisfy domestic markets.
Exporters suggest that current prices are above what export markets are willing to pay for deferred delivery and that current premiums are associated with exporters trying to source grain to meet nearby shipments.
A large exporter recently suggested to ProFarmer that it is unlikely that China will import any Australian malt barley at current price spreads against European and Canadian barley. Given the better availability of quality grain from these destinations, it is also unlikely that they will be interested in off spec malt barley. As such, further price premiums will need to be driven domestically rather than by export markets. The fate of malt barley values lies in whether there is enough malt barley produced to satisfy local demand.
We heard an estimate that the malt percentage could be as low as 20-30% nationwide, which represents a crop of 1.2-1.8mmt on our Nov barley production estimate. Domestic demand is estimated at about 1mmt (700,000t east and 300,000t west), and Japan need about 200,000t. Even our low estimate should have inelastic demand covered. Plus, the incentive to clean and blend is there, and already we have seen standards relax to try and fit the crop to malt specs. It may take a while but domestic demand should get covered.
The key will be WA. We heard that the malt deliveries were running as high as 55% in the Kwinana north zone prior to the latest rain. If downgrading across WA is not too bad, it is hard to see tremendous upside, but at this stage it is too early to assess the true extent of downgrading.
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