Monday, April 6, 2009

$A wipes away gains in global grain markets

Well all of my football teams lost on the weekend and the racetrack certainty that I was tipped finished well down the track (next start apparently). Thankfully, international grain markets, assisted by better outside market sentiment and some positive fundamentals news had a winning week. But for Aussie producers the nasty late week rally in the $A wiped out the prospect of any gains in local prices which were either flat or slightly weaker. The appreciation in the $A is masking what feels like a positive change in global grain market sentiment over the past few weeks.

International financial markets ignored worsening US unemployment figures and dire international trade statistics to post strong gains last week. US equity markets have in fact posted the best March results since 2000, despite US unemployment reaching an all-time high during the same month (+13m out of work).

On cue, nth hemisphere spring weather is throwing some curve balls (floods, freezes and drought), which, when supported by a turn for the better in outside market sentiment, enabled markets to post solid gains.

Soybeans led the charge (up 10% for the week). Prices gained on lower than expected initial USDA planting estimates, another sizeable fall in Sth American production estimates, ongoing political issues in Argentina (which may affect export availability), and continued solid US exports (which ran counter to talks that Chinese purchases may slow).

The Paraguay bean crop is down 40% to around 4mmt and US Profarmer cut its Brazilian estimate by another 1mmt to 55mt vs. 59mmt last year. The Argentine crop which has endured the worst of it, was ‘officially’ revised downwards again from 41mmt to 39mmt. Some unofficial estimates have the crop as low as 35mmt.
The strong gains in beans did not fully translate to canola markets (up only 4%), with canola futures gaining CA$16/t (A$18/t) in Canada and rising €9/t ($A/17/t) in Europe.

Higher soybean prices supported the values of all other grains as they are still locked in a battle for what may not be sufficient plantings. According to the USDA, US growers will plant some 7m acres less across all crops this year and US ProFarmer reckons there could be between 3-7m acres in US plantings still up for grabs.

Although international grain markets look to be turning the corner, the rising $A is pushing our hedging targets further and further away. What we need is a week where nth hemisphere spring weather concerns push grains higher and at the same time financial market instability pushes the $A lower. This would break the current strong link between commodities and the $A and trigger our hedging targets. We think patience is required and reckon we will get this chance sometime over the next few months…but be warned, these opportunities could be fleeting.

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