Despite Murphy’s Law (what could go wrong did go wrong) and in the absence of any perfect measures, on our assessment deregulation has been a success. Certainly, the worst fears of many have not been realised:
• Finance was still available to participants to purchase the crop
• There has always been a ready buyer of grain (despite significant quality issues)
• Pre and post harvest market liquidity has been sound
• There have been spot premiums available (growers have had some market power)
• There has been plenty of competition for grain.
East/West Coast
A big winner for WA was that the east/west coast spread inverted post deregulation. This suggests some serious inequities existed under the previous system. The first export licenses were issued at the end of August and the spread inverted the following week. You can’t get more unequivocal than that!
This just reflects that the true costs of execution are being reflected in the market. Over time this more direct transmission of market signals will extend – no more subsidisation of areas, sites and grades which are not in demand.
Supply chain – the big challenge
Currently there is a big line-up of grain boats off Cottesloe beach waiting to load. This scenario has been repeated at various ports several times this year. Some commercials have found it more difficult than anticipated to acquire grower tonnage which caused early season delays in ship loading – they will learn from this.
CBH has been surprised at the demand for early season shipping space with demand running at 3mmt per month compared to 1mmt previously. The problem is in getting grain to port and the ‘unanticipated’ costs of meeting the surge in exports. Unless this can be resolved quickly, it has the ability to damage WA’s reputation as a reliable exporter of grain.
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Friday, February 27, 2009
Friday, February 20, 2009
Balancing corn and soybean plantings in 2009
US producers are now planning planting intentions for 2009, with the balance between corn and soybeans a key issue. South American production will be a contributing factor to soybean plantings, while bio-fuel use will be an important factor in corn acres.
Whichever way it goes, the area planted for each crop and subsequently the potential production will have an impact on our local oilseed and coarse grain markets. Let’s nut out a few of the issue’s facing the balance between corn and soybeans in the US at the moment.
Firstly, of major concern in the US is demand for corn and the health of the US ethanol sector. The current low prices of crude oil make ethanol production less attractive. Until recently the financial woes of VeraSun, one of the largest ethanol producers in the US, had cast considerable doubt on the future of ethanol production.
But last week saw an offer from Valero Energy Corp – a big oil company – to purchase the company for a third of its construction costs. The purchase will help improve production of corn based ethanol, and also shows that traditional energy producers see a necessary future in ethanol production.
The USDA secretary has also called for an increase in the maximum allowable ethanol blend rate for gasoline which will help boost the industry. The rate is currently set at 10%, which the ethanol industry claims is limiting growth potential.
The maximum allowable biofuel equivalent is the Renewable Fuels Standards (RFS) which has set levels of biofuel use. They call that 10.5 billion gallons be used in 2009, and this is to be increased to 12 billion in 2010. Assuming that these standards are maintained, there will be large increases in the use of corn. It is estimated that in this marketing year 3.6 billion bu of corn will be used in biofuel production.
ProFarmer US has forecast that if corn plantings in 2009/10 remain at the same level as last year, the carryout level for corn would be under 1 billion bu which is dangerously low. This would be supportive to coarse grain prices across the globe. With soybean prices falling sharply on recent rain in Sth America, forward corn and soybean prices are not currently giving a clear indication to producers in regards to which crop to favour. It will be interesting to see if there is a late play for acres by either corn or soybeans. Watch this space.
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Whichever way it goes, the area planted for each crop and subsequently the potential production will have an impact on our local oilseed and coarse grain markets. Let’s nut out a few of the issue’s facing the balance between corn and soybeans in the US at the moment.
Firstly, of major concern in the US is demand for corn and the health of the US ethanol sector. The current low prices of crude oil make ethanol production less attractive. Until recently the financial woes of VeraSun, one of the largest ethanol producers in the US, had cast considerable doubt on the future of ethanol production.
But last week saw an offer from Valero Energy Corp – a big oil company – to purchase the company for a third of its construction costs. The purchase will help improve production of corn based ethanol, and also shows that traditional energy producers see a necessary future in ethanol production.
The USDA secretary has also called for an increase in the maximum allowable ethanol blend rate for gasoline which will help boost the industry. The rate is currently set at 10%, which the ethanol industry claims is limiting growth potential.
The maximum allowable biofuel equivalent is the Renewable Fuels Standards (RFS) which has set levels of biofuel use. They call that 10.5 billion gallons be used in 2009, and this is to be increased to 12 billion in 2010. Assuming that these standards are maintained, there will be large increases in the use of corn. It is estimated that in this marketing year 3.6 billion bu of corn will be used in biofuel production.
ProFarmer US has forecast that if corn plantings in 2009/10 remain at the same level as last year, the carryout level for corn would be under 1 billion bu which is dangerously low. This would be supportive to coarse grain prices across the globe. With soybean prices falling sharply on recent rain in Sth America, forward corn and soybean prices are not currently giving a clear indication to producers in regards to which crop to favour. It will be interesting to see if there is a late play for acres by either corn or soybeans. Watch this space.
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Monday, February 9, 2009
Grains remain resilient – Feed to grind higher
Grain prices have performed well over the past couple of months. Worries over Sth American production, an easing in Black Sea selling, intervention buying across Europe, increased Chinese grain buying and pockets of nth hemisphere winter crop dryness have all lent a hand. Locally, exporters seeking grain to meet early season commitments have had to compete hard to attract grain amid slow grower selling.
But over the next couple of months support from some of the factors above may ease. Sth American weather has taken a turn for the better and Black Sea selling should recommence entering March. In addition, north America will need to become more aggressive to reduce stocks ahead of the next harvest. This will check any rallies from Chinese buying or ongoing dryness across the US mid-west. Generally large wheat stocks should help allay any near-term supply fears.
The picture looks better later in the year. Growers around the world are likely to have fallowed more country this year after a heavy cropping schedule over the past two. This and lower input applications will see 2009 global wheat production fall significantly which will help offset any ongoing negativity from the Global Financial Crisis (GFC).
We expect feed grains to continue to grind higher. There is much less downgraded wheat around as first thought and given the spread to feed grains, unlike the last few years, most Australian wheat should find a home in milling or export markets. The sorghum crop will be keenly sought by east coast feeders. In the north, feeders will want to secure sorghum as a cheaper alternative to wheat. Meanwhile southern feeders are buying sorghum as growers across this region sit on their white grains until the season turns. Australian sorghum is now pricing itself out of export markets – local sorghum values have been rising as US corn values have fallen in recent weeks.
So, milling wheat prices may trade sideways for the next few months until they start trading northern hemisphere new crop conditions. Local feeding demand should see sorghum and feed grain values continue to grind higher.
If you are interested in receiving this information and more on a regular basis, please call us toll free on 1300 302 143 to organise your subscription. Click HERE to subscribe online or Click HERE for a 4-week FREE Trial
But over the next couple of months support from some of the factors above may ease. Sth American weather has taken a turn for the better and Black Sea selling should recommence entering March. In addition, north America will need to become more aggressive to reduce stocks ahead of the next harvest. This will check any rallies from Chinese buying or ongoing dryness across the US mid-west. Generally large wheat stocks should help allay any near-term supply fears.
The picture looks better later in the year. Growers around the world are likely to have fallowed more country this year after a heavy cropping schedule over the past two. This and lower input applications will see 2009 global wheat production fall significantly which will help offset any ongoing negativity from the Global Financial Crisis (GFC).
We expect feed grains to continue to grind higher. There is much less downgraded wheat around as first thought and given the spread to feed grains, unlike the last few years, most Australian wheat should find a home in milling or export markets. The sorghum crop will be keenly sought by east coast feeders. In the north, feeders will want to secure sorghum as a cheaper alternative to wheat. Meanwhile southern feeders are buying sorghum as growers across this region sit on their white grains until the season turns. Australian sorghum is now pricing itself out of export markets – local sorghum values have been rising as US corn values have fallen in recent weeks.
So, milling wheat prices may trade sideways for the next few months until they start trading northern hemisphere new crop conditions. Local feeding demand should see sorghum and feed grain values continue to grind higher.
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Tuesday, February 3, 2009
Road to reform for pools
Don’t get us wrong. Pools are suited to some (who want a hands off approach to marketing) and can offer low risk exposure to post harvest market upside. But recent events tell us that if someone is managing something on your behalf, you should demand a degree of accountability. If they can’t or won’t you should ask questions.
Neither are we saying pools can’t or won’t outperform... it’s just that at the moment we have little evidence to go on. I joined the market leading super-fund when I started my working life in 1994 and pulled my money out this year – 14yrs later – at a return of 3% per annum. I’m not sure whether this was before or after fees, but either way I would hate to be relying on it for my retirement.
We asked one of the pool managers about what level of hedging one might expect in a pool. He thought each pool would have more than 50% hedged but less than 100% and probably an average of 60-80%. But which one is your pool? Is it closer to 50% or 100% and does it change the way you manage your unpriced wheat?
1. Tell us your strategy
This strikes at the heart of one of our major concerns with pools. While some have made efforts to articulate the pool strategy or management philosophy (Plum Grove have been beating this drum for years), most have not. This might be attributable to the level of industry maturity (and the background of many pool operators – many of which are former monopolists). We are not asking for a blow by blow account, but how about telling us whether you are a defensive manager or if you are aggressive. As an industry, together, we can frame these parameters to improve the customer experience.
2. Release of estimates
How about the industry agrees to some consistency in terms of the release of estimates – maybe weekly/fortnightly on a Friday at 10am EST. This will help ensure the pool managers are fair dinkum about making a real estimate and not just looking over their shoulder at what everyone else is doing. And make it as easy as possible to obtain this info.
3. Calculation of estimates and costs
Unlike some others, we have never been in favour of inviting ASIC to regulate grain pools. ASIC regulation of pools would add another layer of cost (they would most likely force pool managers to issue a prospectus); dissuade participants and provide little effective protection. I reckon the industry would get a much better bang for its buck by self regulation. As an industry we can force this change by supporting pool managers who offer greater transparency about how they calculate returns and estimate costs.
4. Make it easier
Another bugbear we have with pools is that it is very difficult for the average punter to tell how effective a pool investment was. Plus, by the time the pool is done and dusted, no-one can really be bothered to analyse it. Sure, changes in the headline number might give some idea, but a rise in the headline number can be eroded by changes in costs. Our suggested solution; supply a statement of pool return and cost estimates on entry and on winding up of the pool. And maybe a mid-term update to assist the grower in deciding whether to back the pool manager again with wheat from the upcoming harvest. This will allow participants to compare actual returns and costs against the original estimates.
5. Get the auditors in
While the audit industry will be busier than Beirut bricklayers in next few years, making pool audit reports publicly available might be a way to instill more confidence in the pool management industry. The industry should select an audit firm and develop them into industry specialists. The auditors could benchmark managers against industry best practice and help improve industry-wide practices.
6. How big are you?
One of the observed characteristics of the funds management industry is that the bigger the fund, generally the harder it is to outperform. These principles apply to grain pools. The funds management industry discloses funds under management – why don’t we do the same?
If you are interested in receiving this information and more on a regular basis, please call us toll free on 1300 302 143 to organise your subscription. Click HERE to subscribe online or Click HERE for a 4-week FREE Trial
Neither are we saying pools can’t or won’t outperform... it’s just that at the moment we have little evidence to go on. I joined the market leading super-fund when I started my working life in 1994 and pulled my money out this year – 14yrs later – at a return of 3% per annum. I’m not sure whether this was before or after fees, but either way I would hate to be relying on it for my retirement.
We asked one of the pool managers about what level of hedging one might expect in a pool. He thought each pool would have more than 50% hedged but less than 100% and probably an average of 60-80%. But which one is your pool? Is it closer to 50% or 100% and does it change the way you manage your unpriced wheat?
1. Tell us your strategy
This strikes at the heart of one of our major concerns with pools. While some have made efforts to articulate the pool strategy or management philosophy (Plum Grove have been beating this drum for years), most have not. This might be attributable to the level of industry maturity (and the background of many pool operators – many of which are former monopolists). We are not asking for a blow by blow account, but how about telling us whether you are a defensive manager or if you are aggressive. As an industry, together, we can frame these parameters to improve the customer experience.
2. Release of estimates
How about the industry agrees to some consistency in terms of the release of estimates – maybe weekly/fortnightly on a Friday at 10am EST. This will help ensure the pool managers are fair dinkum about making a real estimate and not just looking over their shoulder at what everyone else is doing. And make it as easy as possible to obtain this info.
3. Calculation of estimates and costs
Unlike some others, we have never been in favour of inviting ASIC to regulate grain pools. ASIC regulation of pools would add another layer of cost (they would most likely force pool managers to issue a prospectus); dissuade participants and provide little effective protection. I reckon the industry would get a much better bang for its buck by self regulation. As an industry we can force this change by supporting pool managers who offer greater transparency about how they calculate returns and estimate costs.
4. Make it easier
Another bugbear we have with pools is that it is very difficult for the average punter to tell how effective a pool investment was. Plus, by the time the pool is done and dusted, no-one can really be bothered to analyse it. Sure, changes in the headline number might give some idea, but a rise in the headline number can be eroded by changes in costs. Our suggested solution; supply a statement of pool return and cost estimates on entry and on winding up of the pool. And maybe a mid-term update to assist the grower in deciding whether to back the pool manager again with wheat from the upcoming harvest. This will allow participants to compare actual returns and costs against the original estimates.
5. Get the auditors in
While the audit industry will be busier than Beirut bricklayers in next few years, making pool audit reports publicly available might be a way to instill more confidence in the pool management industry. The industry should select an audit firm and develop them into industry specialists. The auditors could benchmark managers against industry best practice and help improve industry-wide practices.
6. How big are you?
One of the observed characteristics of the funds management industry is that the bigger the fund, generally the harder it is to outperform. These principles apply to grain pools. The funds management industry discloses funds under management – why don’t we do the same?
If you are interested in receiving this information and more on a regular basis, please call us toll free on 1300 302 143 to organise your subscription. Click HERE to subscribe online or Click HERE for a 4-week FREE Trial
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