Tuesday, June 16, 2009

Markets Sending Mixed Signals

There were some very mixed signals being sent by markets last week. Firstly the USDA lifted wheat end stocks after they were expected to fall, while oilseed and corn stocks were projected lower. Projections for a fall in corn stocks – a result of lower yields – should provide the fundamental support for grains markets, taking the batten from beans which have carried markets higher over the past quarter.

Markets still seem to be transfixed on oil, the $US and inflationary expectations. Oil prices have quietly skipped above US$70/bll with the International Energy Agency (IEA) revising its 2009 demand upwards, despite signs that US gasoline demand has peaked (a result of more ethanol blending). While we have outside markets pulling our way, the greater the chance that prices could spike higher on further weather scares. Outside money is gently rolling back into commodity markets.

Already, torrid early season conditions in Canada have seen the Canadian Wheat Board reduce Canadian production expectations by around 20% for wheat and canola. US wheat production is expected to fall by the same amount (delayed plantings and lower yields). It is still dry in Argentina, conditions have improved in Europe - although it is dry in south-east Ukraine - and we have seen a good general plant in Australia (with only central and south-eastern WA needing more planting rain). Strong carryover wheat stocks are keeping prices in check, but the margin for error has narrowed and further major production issues will have an impact.

Heavy losses on pork production (swine flu and weak demand) and very narrow cattle feeding margins and poor dairy prices suggest that the impact of the economic slowdown on demand for commodities is very real. Demand for our commodities from the traditional food sector isn’t showing signs of recovery, but with oil prices on the rise, demand for corn for ethanol will help take up the slack and provide the backbone for prices across the commodities sector.

Prices have neared hedging targets the past couple of weeks, but we are only entering the period of seasonal volatility associated with the maturity of the US corn crop. The next market mover could be the USDA 30 June prospective plantings report which is likely to show a further shift from corn to ethanol from earlier reports.

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