Local prices have held onto pre-Christmas gains that were largely inspired by the impact of a weakening U.S. dollar on international commodity prices. But larger gains in international prices did not translate directly to Australian prices due to the appreciating Australian dollar.
With equity and energy markets making tentative steps forward, this has given soft commodities a chance to operate under their own fundamentals. But apart from some minor production concerns – which were easily counteracted by ongoing demand worries – the fundamental situation remains largely unchanged.
Sth American weather conditions continue to get some airplay which is providing moderate support to the oilseed complex. And freezing Christmas conditions across the nth hemisphere may have done some damage to winter wheat crops – but neither of these issues seem sufficient enough, at this stage, to fire up the markets.
Apart from a significant worsening in the issues above, the best near term chance of a recovery in prices may come from a favourable rebalancing in fund positions. Given that commodity prices were beaten down hard in the second half of 2008, many traders believe funds will see commodities as a buy. In soft commodities, funds have reduced positions to around 20-25 percent of open position for beans and corn. Although wheat fund involvement is still high at 40 percent.
Sources of fund support could be two-fold; Funds reweighing their portfolios towards non-energy commodities, which are less sensitive to economic conditions, or a general increase in fund inflows as commodities regain attractiveness as economic conditions improve.
Maybe funds are waiting for the raft of USDA reports due out next week before making a move. The USDA will release its annual crop production summary comprising quarterly grain stocks, winter wheat plantings and global grain supply and demand. These reports will provide more insight into the impact of the global financial crisis on the soft commodity sector.
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