Monday, January 12, 2009

Fundamentals improve, Economics worsen

I reckon last week’s trading provided a snap-shot of what we can expect for at least the first half of 2009 – up when the markets focus on fundamentals, but down as economic concerns weigh on markets.

In a vacuum of economic data, grain markets posted good rises in thin post holiday trading – there were even signs that commodities were starting to attract renewed investment interest.

The absence of negative financial news allowed some focus on new crop fundamentals. Very cold weather across the nth hemisphere has raised the prospect of some wheat winter kill and ongoing dryness across Sth America is seeing crop estimates wound back. When coupled with expectations of falling new crop production, this is raising questions about the need to encourage more 2009 summer crop plantings. But the rally was quickly countered by data showing a significant counter-seasonal rise in US crude oil stocks accelerating US unemployment. Given that economic growth projections are still reaching for a bottom, it is hard to see funds leading a pilgrimage back towards commodities in the near-term, unless they dramatically restructure.

Most commodity funds are heavily weighted towards energy and metals – the prospects for which are reliant on economic growth. As one industry source commented to ProFarmer last week – the investment banker running these funds has probably seen most of his colleagues ‘liquidated’ in the past few months – he is going to be a bit gun-shy with the money he has left to invest.

As the Global Financial Crisis (GFC) continues, there are some signs that the players are starting to navigate their way through it. On the equity front certain sectors are starting to perform significantly better than others; consumers are favouring value based items (in Japan, purchase of grassfed beef at discount stores are increasing); in commodities, the fund position in wheat (an inelastic food item) is double that of corn and soybeans (bio-fuel or energy related crops).

Over time, soft commodities will attract more than their share of investment funds and this should be supportive in 2009. But for commodities to break their nexus with the economy, funds will have to change the way they invest. In an indication that this may be happening, we heard that a new commodity fund was being launched that would invest purely in soft commodities – the stuff that grows and that people eat or need.


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