Monday, October 5, 2009

Markets take a hard hit but there’s still hope

I have heard a lot of pessimism around grain markets of late, but the reality is that the fundamentals have not changed a lot since market peaks about a year ago. Sure there was a lot of hot money involved and stocks were tight and bio-fuels were the flavour of the month.

Now all I am hearing is doom and gloom. Crops are big and getting bigger and traders and analysts everywhere can’t see how prices can rise. But this lethargy is not restricted to grain markets; take crude oil for example which is at a respectable $75/bll.

If Iran were pulling these shenanigans with secret nuclear plants and missile testing a year ago, crude oil futures would likely be headed back to $100-plus levels. Throw in Chinese negotiations to be an exclusive buyer of Nigerian crude oil, and the market might have built the momentum to challenge the all-time highs! Instead, the markets are focusing on fundamentals - crude oil stocks jumped 2.8 million barrels last week as capacity utilization at refineries dropped 1% to just 84.6%.

So what have we gleaned? A lot of heat has come out of these markets and traders are paying more attention to fundamentals. And while the fundamental picture for grains doesn’t look good at the moment, things can change quickly. USDA’s Quarterly Grain Stocks Report put fourth-quarter 2008/09 corn use at a record 2.59 billion bu, up nearly 8% from year-earlier. At current margins ethanol plants capacity utilization of ethanol is screaming higher. And livestock feeding demand will gradually recover as things simmer down.

So while there seems little to crow about at the moment things can change quickly. Take for example the team that was beaten in the rugby league grand final on the weekend. They lost five out of their first eleven and then won ten from their next eleven. They scrapped into the finals, made the grand final, only to be beaten by some dubious referee calls. They didn’t quite make the pinnacle but they didn’t throw the towel in.

Grain prices have taken some heavy hits but I expect them to bounce back. They may not reach the pinnacle but they should grind the season out. But some help from the $A wouldn’t go astray either.

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