Monday, May 3, 2010

Facing the harsh reality

With wheat stocks bulging and another large crop on the way, it looks like it is going to take something from outside the wheat complex to turn the weaker price trend around. The usual suspects would appear to be (in no particular order): corn, oilseeds, the $A or renewed fund buying. So what is the prospect of any of the usual suspects coming to the rescue of wheat this year?

Corn is often watched for its impact on wheat. Once wheat falls to within about 60USc/bu of corn, it is economic to substitute wheat for corn in feeding rations. The amount of corn fed to livestock globally is enormous and a moderate amount of substitution can dramatically alter the wheat demand landscape. However, currently the wheat/corn spread is +130USc/bu so something would have to alter dramatically with either wheat or corn prices to bring this into play.

Talk of China buying US corn has raised the possibility of an upside breakout in corn values. However, working against this is the rapid pace of US corn plantings and the mounting prospects of larger than anticipated plantings (normally US growers will keep planting corn until the optimal planting window closes) and record yields – put bluntly we are facing another monster corn crop squarely in the face.

There are also question marks about whether China will actually go through with US corn imports. US ProFarmer believes they are using the threat of US corn imports to ratchet down local corn prices and make Government held corn stocks look more attractive. Also with lower numbers of livestock on feed, the prospect of a medium term surge in demand from the livestock feeding sector appears unlikely.

The oilseed complex could be another source of market support for wheat. Strong demand from China and rising demand for oilseeds to crush for bio-diesel have helped the oilseed complex cope with rising supplies. Higher oilseed prices relative to cereals in 2010 is sending the market a signal to maintain supply growth to meet rising demand. This should prevent any large scale planting losses to corn. Any losses may be offset by increased oilseed plantings in Canada, Australia and Sth America. The early plant in the US is also boosting yield prospects.

Ironically, another downturn in the global economy could be a left field supporting factor. This would place downward pressure on the $A and may see investment funds again find relative value in soft commodities (as they seek a safe haven refuge from equity markets). But most bets are that the global economy will gradually overcome obstacles such as debt problems in Euro-zone economies and continue to improve on the back of a solid recovery in growth outside of Europe.

So, what does this all mean? In our view any sort of significant rally in wheat prices ($20/t from here) should be viewed as a selling opportunity. Even in a flat price environment, it would be very unusual for the market not to throw up this sort of opportunity in the period prior to our harvest. But be warned, opportunities may be fleeting as global producers view these spikes as an opportunity to offload their long stocks position.

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