Wednesday, August 10, 2011

Decline in the dollar, cushions grain prices against outside fluctuations

After the US debt package was finalised last week, many wondered if this would quell global markets. However ongoing negative sentiment resurfaced in jaw dropping scale with the US Dow Jones having its biggest decline since the early dark days of the ‘Global Financial Crisis’ three years ago. Local markets were not immune with investors wiping $100 billion off shares last week. Negative sentiment flowed through this week when credit rating agency Standard & Poor downgraded US rating from AAA to AA+, severely impacting equity markets for a second week and heightening fears of a looming double dip recession.

So what about grain futures..? Commodity prices have come under pressure on these fears that global economic slowdown will limit demand for proteins and grains. Weaker oil prices will also impact on the profitability of ethanol production and the demand for corn. Although appetite for risk from investors will be greatly diminished in the short term, agricultural prices may show some resilience in the face of strong equities sell off.

This purely reflects the lingering bullish element about future crop losses particularly in the United States. The USDA will release eagerly anticipated crop estimates this Thursday night, however despite many analysts cutting their corn yield estimates sharply in recent times, the USDA is expected to take a far more conservative measure as they take a “wait and see approach” to not raffel more feathers in an already volatile environment.

Domestic cash prices have been largely immune from this outside market pressure, largely on the back of a strong sell off on the Australian dollar. The high dollar of late is apparent, reaching a post 1983 float high of 110.79 against the greenback last week. Amazingly, the dollar has been above parity since 21 March, enjoying a 5c trading range since mid April.

Since that time with economic upheaval, it has dropped around 10c (A$21/t) in a week and has now reached its lowest level against the greenback since 4 April 2011. This has helped cushion domestic prices from wild US futures price fluctuations. There is no technical reason for such a sell off, just fear and panic, with the Australian dollar historically dumped in such conditions. It's like Brian Lara on a flat Trinidad pitch when he passes a 100 runs- you knew there’d be plenty to come; there is still plenty to come here too.

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