Trends in commodity markets are a little confusing at the moment. Both corn and soybean markets are indicating strength at a time when supplies are bulging. Weather has been ideal for corn planting and paddock preparation in the US and it seems planting pace may be on track to eclipse all-time fastest ever records. The record planting pace was recorded in 2004 - ominously also the year of record US corn yields.
It is thought that the poor quality of the 2009 corn crop could be at the centre of strength in the US corn market. Poor corn quality has been associated with lower average kill weights in the US for cattle and pigs. Feeders are now recognizing this and are willing to pay up for better quality corn which is helping to strengthen corn cash prices.
News that the Chinese Government continues to aggressively sell corn out of state reserves in order to cool domestic prices is another promising sign for the demand side of the corn story. This is a tangible indication that either production has faltered or demand is running higher than planned. Normally such action normally precedes a lift in imports for said commodity.
In soybeans, issues with getting Sth American beans to markets seem to be providing nearby market strength. Aiding this has been ongoing strong demand for ever shrinking US soybean supplies. But posturing by China in an ongoing trade dispute with Argentina may also be lending support from left-field.
In another display of the power that China yields in commodity markets, its banning of Argentine soyoil imports could lend ongoing support to US soybean futures.
The Chinese government has urged soyoil importers to not buy from Argentina as it has started an anti-dumping investigation against some Chinese products, including shoes, steel pipes and ignitors. It’s thought Chinese importers have booked soyoil imports from Argentina amounting to 200-250,000mmt per month for May, June and July. Those purchases will likely be canceled, sending demand to the US, Brazil and palm oil suppliers.
To date, none of this has translated to better returns for Aussie producers and it remains to be seen if these trends will be sustainable. Local markets are paralysed by poor liquidity at the moment as local producers are unwilling to sell at current prices which are already above what importers are willing to pay.
Thursday, April 22, 2010
Monday, April 12, 2010
Livestock led recovery
While you wouldn’t know by looking at local cattle prices, the global agricultural sector could be on the cusp of a livestock led recovery. Although, local cattle prices are now on the rise, the local cattle industry is suffering from the effects of a higher $A and tight supplies which is negating export demand. For the minute, this is constraining feedlot numbers, beef production and feed grain demand.
Already, though we have noted that some local producers are preparing to swing marginal paddocks back to sheepmeat production in 2010. Excellent returns for sheepmeat will see some restocking occurring this year and, most likely, more intensive feeding in years to come, as the grain/meat price ratio swings back in favour of meat production.
What is currently happening overseas though, could have far reaching longer-term impacts for the global agricultural sector. This week US cash cattle prices hit US$100/cwt, which was the first time the cash market hit the century mark since July 2008. While tight market-ready supplies are largely behind the strong surge in cash cattle prices, demand is also improving. With retailers continuing to buy beef even at higher prices, processors have incentive to actively compete for tight supplies. If demand can stay strong even at higher prices, it would give the cash cattle market a chance to make a run at the all-time high posted in the fall of 2003.
A lot of attention has been placed on the most recent quarterly stocks figures for corn that showed a decline in demand from the livestock feeding sector – still the major consumer of grain globally (demand from the ethanol sector through the quarter was maintained at all-time record highs). With the US livestock sector showing strong signs of recovery during the March-June quarter, it is likely that demand for feed grain from this sector is again on the rise.
The easiest way to increase meat production in the short-term is to increase grain feeding. In short, it looks like a recovery in demand for feed grain from the global livestock sector could be well under way. Changes in demand usually have a gradual impact on prices. With grain stocks at elevated levels, signs of a recovery in demand from this very important sector are currently taking a backward seat to incessant talk about huge levels of grain production.
We will need to see a few nicks in supply before demand becomes a major talking point again, but rest assured we will be talking about it as one of the catalysts of a recovery in grain prices – in 2011, if not sometime later in 2010.
Already, though we have noted that some local producers are preparing to swing marginal paddocks back to sheepmeat production in 2010. Excellent returns for sheepmeat will see some restocking occurring this year and, most likely, more intensive feeding in years to come, as the grain/meat price ratio swings back in favour of meat production.
What is currently happening overseas though, could have far reaching longer-term impacts for the global agricultural sector. This week US cash cattle prices hit US$100/cwt, which was the first time the cash market hit the century mark since July 2008. While tight market-ready supplies are largely behind the strong surge in cash cattle prices, demand is also improving. With retailers continuing to buy beef even at higher prices, processors have incentive to actively compete for tight supplies. If demand can stay strong even at higher prices, it would give the cash cattle market a chance to make a run at the all-time high posted in the fall of 2003.
A lot of attention has been placed on the most recent quarterly stocks figures for corn that showed a decline in demand from the livestock feeding sector – still the major consumer of grain globally (demand from the ethanol sector through the quarter was maintained at all-time record highs). With the US livestock sector showing strong signs of recovery during the March-June quarter, it is likely that demand for feed grain from this sector is again on the rise.
The easiest way to increase meat production in the short-term is to increase grain feeding. In short, it looks like a recovery in demand for feed grain from the global livestock sector could be well under way. Changes in demand usually have a gradual impact on prices. With grain stocks at elevated levels, signs of a recovery in demand from this very important sector are currently taking a backward seat to incessant talk about huge levels of grain production.
We will need to see a few nicks in supply before demand becomes a major talking point again, but rest assured we will be talking about it as one of the catalysts of a recovery in grain prices – in 2011, if not sometime later in 2010.
Thursday, April 1, 2010
Market signals starting to work again
Last week I was asked to present at an FC Stone seminar about changes in the wheat market since export wheat market deregulation.
The naysayers who are blaming the current tough market conditions on the demise of the single desk have it wrong...just as they were wrong about the benefits of the single desk. But in saying that, there have been significant changes to the market structure.
WA/Eyre Peninsula prices have improved relative to the eastern states as prices now reflect cheaper freight and S&H charges and the fact that these growers are now not burdened with full National pool management costs when east coast growers abandon the export pool in favour of their more lucrative domestic market.
Generally prices are now better reflecting market signals. Through 2008/09 lower quality wheat in WA was trading at a premium to high protein wheat in QLD. This had a lot to do with the increased Iranian demand for wheat and their wheat import specifications and the large production of high protein wheat in the east coast that overwhelmed the relatively small Japanese high protein wheat market.
The pool system ‘managed’ these perceived ‘anomalies’, to the extent it encouraged production of high protein wheat in favour of other wheat until production eventually grew to a level where it outweighed demand from a relatively small premium market.
Noodle wheat premiums seemed to have suffered from the same symptoms…..but are now returning to normal.
Those opposed to deregulation lament the loss of the WA Noodle wheat premium. In the last 4yrs of the Single Desk the pool paid an average $21/t premium above APW for Noodle Wheat.
In the years following the demise of the Single Desk, Noodle Wheat pool returns fell to a discount of -$7/t (currently AWB are estimating a discount of $5/t in the 2009/10 pool).
But cash market premiums for Noodle wheat are now on the rise, peaking at $19/t above APW wheat shortly after the latest Japanese tender results were announced.
It is our view that the return of the Noodle wheat premium coincides with a fall in Noodle Wheat production. The premium Asian noodle wheat market uses around 1.2-1.6mmt annually. In 2008/09 Noodle Wheat production rose to an estimated 2mmt but has since contracted back to around 1.5mmt. Once the 2008/09 carryover has been exhausted, look for the Noodle wheat premium to revert back to normal. No conspiracies here, just the laws of S&D working.
The naysayers who are blaming the current tough market conditions on the demise of the single desk have it wrong...just as they were wrong about the benefits of the single desk. But in saying that, there have been significant changes to the market structure.
WA/Eyre Peninsula prices have improved relative to the eastern states as prices now reflect cheaper freight and S&H charges and the fact that these growers are now not burdened with full National pool management costs when east coast growers abandon the export pool in favour of their more lucrative domestic market.
Generally prices are now better reflecting market signals. Through 2008/09 lower quality wheat in WA was trading at a premium to high protein wheat in QLD. This had a lot to do with the increased Iranian demand for wheat and their wheat import specifications and the large production of high protein wheat in the east coast that overwhelmed the relatively small Japanese high protein wheat market.
The pool system ‘managed’ these perceived ‘anomalies’, to the extent it encouraged production of high protein wheat in favour of other wheat until production eventually grew to a level where it outweighed demand from a relatively small premium market.
Noodle wheat premiums seemed to have suffered from the same symptoms…..but are now returning to normal.
Those opposed to deregulation lament the loss of the WA Noodle wheat premium. In the last 4yrs of the Single Desk the pool paid an average $21/t premium above APW for Noodle Wheat.
In the years following the demise of the Single Desk, Noodle Wheat pool returns fell to a discount of -$7/t (currently AWB are estimating a discount of $5/t in the 2009/10 pool).
But cash market premiums for Noodle wheat are now on the rise, peaking at $19/t above APW wheat shortly after the latest Japanese tender results were announced.
It is our view that the return of the Noodle wheat premium coincides with a fall in Noodle Wheat production. The premium Asian noodle wheat market uses around 1.2-1.6mmt annually. In 2008/09 Noodle Wheat production rose to an estimated 2mmt but has since contracted back to around 1.5mmt. Once the 2008/09 carryover has been exhausted, look for the Noodle wheat premium to revert back to normal. No conspiracies here, just the laws of S&D working.
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