Tuesday, May 26, 2009

Are we being fooled by fundamentals?

It was another promising week for grains with prices grinding higher amid deepening production issues and demand showing ongoing signs of resilience. But with global economic sentiment rising, we ask ourselves the question; is the rally just a ‘mirage’ and will supportive grain market fundamentals hold if investor sentiment turns?

The production issues include further downward revisions to the Argentine bean crop – at almost 90% harvested you can almost be certain that these won’t be going up. There are also significant planting delays in key US wheat and corn producing states.

In nth Dakota, spring wheat seedings reached just 31% as of May 17, well behind the five-year average of 87% and in Minnesota spring wheat seedings reached only 34%, compared to a five-year average of 90%. The US normally produces 16mmt of spring wheat and the mounting premiums in Minneapolis spring wheat futures – up from 88USc/bu to 127USc/bu – indicates that the market is taking this seriously. But the planting pace should pick-up this week with some dry weather forecast. For local growers, the late plant (including similar issues across Canada too) augurs well for higher protein wheat producers.

In Illinois, one of the largest US corn producing states, it is getting to the stage where they should be planting soybeans (June bean plantings are considered late), but as at the end of last week just 20% of the corn crop has been planted. This is setting the scene for a wild ride this season as the bulk of this crop will be pollinating and yields will be forming in the ‘dog days of summer’. The threat of a big swing in plantings to beans has capped the rally, but plantings issues have lead to renewed fund interest in ownership of both corn and beans.

In Europe winter crops are travelling sweetly, but spring crops were planted into less than ideal moisture and are now starting to stress right across Europe. This is a situation that bears watching, particularly on the malt barley front.

Production wise, the only bright spot is a solid and general improvement in local planting conditions which should see the bulk of intended acres planted, albeit a bit late and with less than optimal subsoil moisture in most places – but you would take it given the run we’ve had in recent years.

We have been maintaining a consistent line that the world will be disappointed with how much grain is produced globally in 2009.

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