Richard's Weekly Rant

China plays games on canola

2009-11-13T00:17:00.000-08:00

Some interesting debate is circulating on the China trade front as the country’s Nov 15 deadline looms where all shipments must be accompanied by a certificate stating absolute zero blackleg tolerance. Given the widespread nature of the disease, it is impossible for any supplier to attach such a guarantee.

As it stands today, the Chinese government is maintaining a hard-line position on this issue, which would mean no further canola sales will be made to China from Canada after Nov 15 - a country which last year represented a third of all Canadian exports.

Rumors circulating the export sector suggest all kinds of reasoning behind the sudden ‘hard to get’ nature of Chinese business; from legitimate Chinese concerns on blackleg to the Chinese playing a game to knock down canola prices, and a back door rationale to reduce built up Chinese canola/rapeseed stocks by restricting more attractively priced imports.

Whatever the reasons there is certainly a sense of underhandedness in the Chinese position and one has to question China's willingness to uphold the rule of law and contract in their dealings. Unfortunately, they are such a large global player, they cannot be ignored - and they know it.

The trade thinking is that a resolution could coincide with a scheduled visit to China on December 2-6. In the meantime, even if that emerges as the common view, the grain trade will likely gear up for a month waiting and/or defer shipment. It is highly unlikely in this waiting period that any more fresh business to China gets done until the green light is again lit.

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US interest rate rise in view

2009-11-05T23:11:00.000-08:00

The weaker $US has been a key component of the rise in international grain values in recent months. But talk the US may have to raise interest rates - sooner, rather than later - helped support the dollar for a short time last week. In order to fund its ever growing debt, the US will need to lift rates to ensure US investments are competitive. The talk was spurred by another potential hike in Australian interest rates and speculation some European interest rates are set to ratchet higher.

As the $US attempted a recovery, US grain prices reacted with high volatility - nearly every uptick in the dollar was matched with a downtick in grain prices. And while we continue to talk about fundamentals - with ‘relatively’ comfortable grain stocks - it is movements in the ‘big’ dollar that is driving investment flows, grain and currency values.

In local industry news, CBH has auctioned off 70% of the core shipping space available for January to June 2010. Bidders had competed for the 4.895mmt of shipping capacity offered across Esperance, Albany, Kwinana and Geraldton. The auction took 42 rounds over three days. There were 15 participants who registered for the first auction, which covers the vast majority of the trade.

Viterra has confirmed it will rebrand the assets of ABB. All operations will be rebadged and other divisions will be renamed in line with existing Viterra structure. Signage will begin changing in coming months.
As it currently stands, container and dry bulk rates are at a very comparable level which should allow a good balance for grain exports which will spread the pressure over a greater number of service providers including container packers, bulk handlers, dry bulk operators, liner operators etc. There was interest in the container market for high protein wheat last week, but mainly out of east coast ports.

Owing to the slowest harvest on record, yield forecasts on US corn and soybean crops are being revised lower. Very light test weight might mean higher than expected usage. US ProFarmer reckons a notorious high-yield, low test-weight crop was 1992. The similarities to 2009 are very clear; late-planted, cool growing season, and high-moisture harvest.

In the first quarter of the 1992-93 marketing year, corn use (according to the Quarterly Grain Stocks Report) was steady with the previous year. In the second quarter of 1992-93, corn use surged 13% from year-earlier and use jumped 8% from year-earlier in the third quarter. Why? ‘Volume’ bushels are different to ‘weight’ bushels, which could lead to tighter-than-expected supplies of corn in the 2009-10 Quarterly Grain Stocks Reports.

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Canola carnage on Chinese import regulations

2009-10-27T23:45:00.000-07:00

All hell broke loose in the Canadian canola pit on Friday when news that the Canadian Food Inspection Agency (CFIA) planned a conference call with its local grain trade on Friday to discuss a number of issues; chief among them being potential Chinese revisions to quality regulations on imports of Canadian canola.

The situation goes back to a report earlier this month that China had expressed concerns regarding blackleg risks in Australian origin canola. The CFIA call might involve a Chinese request to provide blackleg free certification on Canadian canola exports. Another issue may involve establishing weed seed tolerance levels.

This really shows how vulnerable we are to changes in requirements in importing countries, particularly those we haven’t had a long track record in dealing with. China imported a lot of Canadian canola last year and any disruption to this trade will have ramifications here.

Notwithstanding issues with canola, it was another better week of trading in grains – assisted by the weaker $US and further speculative interest. It is hard to find any fundamental reasons for the rally – although the US is on track for its slowest ever harvest of corn and beans (with another wet week forecast across harvesting areas). Partly offsetting this though is the Brazilian soybean plant which is off to a flying start.

The Ukraine winter plant is being hindered by dryness is some areas, but conditions are improving and rumors are that the Russian Government plans to start intervention buying soon. This gave international grain markets a better feel than what we have witnessed for the past few months. Growers around the world are very slow sellers and buyer stocks are running down. This should assist prices in grinding gradually higher but any major rallies will be well covered by grower selling. So don’t expect prices to explode higher; plan to sell enough to cover harvest cash flow needs so you can dodge the normal bout of harvest weakness.

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Still at the mercy of the global economy

2009-10-18T21:07:00.000-07:00

Commodity stocks have had a nice little run-up in the past few weeks. By now in the US they have normally harvested most of their summer crops but this harvest looks like it will push into December. That could cause a lot of volatility if the gap widens between demand, low current stockholdings and new crop supplies.

Fundamental support started to creep back into the commodities world; the soybean harvest is almost two weeks late, bio-fuel margins are starting to work and feeding demand is creeping higher. Outside market influences started to lend a hand ($US, crude oil prices) and fund and speculative money started to flow.

But world stocks fell Friday as weak results from General Electric Co and Bank of America Corp dimmed confidence in a profit-driven economic recovery. This saw a bout of risk aversion creep into the market and most currencies retreated against the $US.

GE, the biggest US conglomerate, reported a 42% drop in profit and Bank of America posted another quarterly loss, which pulled markets back a gear after investor appetites were whetted by strong JPMorgan Chase & Co results earlier in the week. European and US shares sank, and safe-haven US Treasury notes gained after earlier in the week US equities had moved through 10,000 points.

ProFarmer is a bit flummoxed by talk that stubbornly high inflation might see the Reserve Bank of Australia lift rates by another 0.5% by early next year, if before. This won’t be good for the $A as international investors are seeing the yields on offer here and the relative robustness of our economy and strength of the $A as a signal to invest.

But while we haven’t the resources to do the research that the RBA has, our observation is that our economy is very mixed. We were buying a car the other day and the Government stimulus money seems to be working - new car places were full of people. But you get in a taxi and they tell you it is very quiet.

We are an export dependent nation and the $A is doing us little good. After a quick spurt, Chinese buying has contracted and imports across the developed world are crawling. The US economy is still losing jobs and in Australia there are a lot of people still heavily indebted and rate rises will definitely impact consumer confidence.

We think this global recession has a sting in its tail and it won’t miss Australia. See a full wrap on our thinking on the prospects of the $A in this week’s newsletter.

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ACCC learning on the job

2009-10-18T21:02:00.000-07:00

This is a little bit heavy for my normal rant, but I think it is important because it demonstrates how serious the Australian Competition and Consumer Commission (ACC) is serious about ensuring an equitable regime for wheat exporters. This year they were caught in a Mexican standoff and it is fair to say neither side was totally satisfied with the outcome or process. I have heard complaints from various staff and directors of bulk handling companies as well as the heads of global grain trading organizations - competitive tension never hurts anyone I say.

Under the Wheat Export Marketing Act 2008, accredited wheat exporters that own or operate bulk grain export facilities were required to have an approved port access undertaking in place before October 1.

So a week or so prior to the deadline, the ACCC finally approved the proposed port access arrangements of grain handlers CBH, GrainCorp and ABB Grain subsidiary AusBulk. Essentially the terms of the new access arrangements include the prohibition of any port operator engaged in anti-competitive discrimination for the benefit of its own business.

The ACCC had previously rejected access arrangements proposed by port operators CBH, ABB and GrainCorp, saying the arrangements needed greater clarity and transparency for wheat exporters.

The port access terms approved by ACCC include:

Clear and transparent port loading protocols that port operators are obliged to follow in managing demand shipping slot allocations.

Obligations on port operators to negotiate in good faith on price and non-price offers of access to port terminal services• If negotiation fails, the ability of wheat exporters to seek mediation or binding arbitration on port terminal services

A set of clear and certain minimum non-price terms and conditions of access to port terminal services for wheat exporters who opt for a standard offer• Obligation on each port operator to publish its standard prices for port terminal services at least one month before commencement of each new wheat exporting season.

Obligations on each port operator to publish certain port terminal information to provide greater transparency over its operations.

While not to everyone’s liking, particularly the bulk handlers, at least now we have clarified what the undertakings cover and there is a standard set of rules in place to provide greater transparency and a formal process to handle disputes. The application of these access undertakings may be tested in a formal arbitration process. This will help the ACCC learn about the actual application of these undertakings and, if so, allow them to alter or tighten them where necessary.

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Markets take a hard hit but there’s still hope

2009-10-05T00:11:00.001-07:00

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.

The low down on the Japanese wheat import system

2009-09-27T19:32:00.000-07:00

While the Japanese have been one of our largest and most valuable wheat customers for many years, it is probably fair to say that few of us really know how the system works. Up until the last week I had no idea really, but this week one of the newest members of our team Richard Smith – our Asian foreign correspondent based in Tokyo - Japan wrote a fascinating story in the ProFarmer newsletter on how the Japanese milling wheat import system works.

Now, I have to explain a few things about Richard Smith. He talks with a very strong Japanese accent and has very Japanese mannerisms, I have deep suspicions Richard Smith is his writing alias. Anyway, I call him ‘Smithy’ and we get along fine.

Anyway, here is a snapshot of how it works. Anyone interested in the market in more depth should contact the office and become a subscriber. Japan’s Ministry of Agriculture, Forestry and Fisheries (MAFF) controls both producer and resale prices of domestic and imported wheat. MAFF buys imported wheat at international prices and sells it to domestic flour millers at a markup.

In the new fiscal year 2007, MAFF started a new SBS system for food quality wheat and barley. The SBS system was set up to allow for greater flexibility of imports and transparency in a portion of food quality wheat.

There are two categories of SBS wheat imports. In Category I, MAFF purchases 240,000 to 250,000t of Australian Prime Hard amongst other wheat qualities from all around the world. The second category includes wheat varieties that are not imported under the state trading regime, to provide a vehicle for importing new varieties.

MAFF sold imported wheat at a higher price to domestic millers, while buying domestic wheat at a high price and selling it to domestic flour millers at a price lower than that of imported wheat. Revenues from transactions for imported wheat are used to help cover the cost difference between the purchase and resale of domestic wheat.

Next week I have asked ‘Smithy’ to explore how the market for noodle wheat works up there.

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Pools still need to prove themselves

2009-09-20T23:05:00.000-07:00

Comparing pool returns with alternative marketing methods is like trying to herd cats. Some pools pay early commitment premiums with fixed washout costs, some pay quality increments and some don’t. In addition, costs are dynamic, payout rates differ and what do you compare them against.

ProFarmer has purposefully stayed away from this area because it is very costly to do a thorough, full and fair analysis and it is an area fraught with danger from a litigation point of view. The cynic in us suggests that pool managers don’t make it easy for us to compare returns, although to be fair many of the innovations have been used to differentiate products. Anyway we haven’t had enough time to properly assess the performance of individual pool managers in a deregulated environment – nothing before 2008/09 pools can be used as a measure because the environment prior to that was different.

Grain Trade Australia (GTA) established a committee to work on improving pool transparency about 4 years ago. I am not sure whether they actually meet but to say the pace of change has been glacial would be a gross overstatement. The only thing they have agreed on is to quote pools on an FOB basis net of management fees…Wow!

At the Pastoral and Graziers Association Conference (PGA) this year I outlined a number of areas where I would like to see Pool managers improve their performance and transparency:
• Better articulate their strategy
• Co-ordinate release of estimates
• Industry standards for the calculation of estimates/costs
• Make it easier to assess performance (statements on pool entry/exit, quarterly updates)
• State pool size
• Adopt an industry auditor (someone who understands how grain pools work and can spread best practice across the industry)

I heard this week that some 1mmt might have already been signed up to early commitment pools – a staggering figure when we don’t even know how 2008/09 pools have performed. Maybe this is too much, I was thinking about 300-400,000t. But if it is as large as 1mmt, I really wonder about the logic of this. The end pool return pays the premium and most of this will be based on the post harvest marketing period. With prices at seasonal lows what tricks will pool managers perform use to lift current returns to reasonable levels?

The past year has shown us that pool managers don’t have any magic formulas to outperform cash markets, nor do they hold long-term strong and significant relationships to extract huge premiums above current cash market returns – there are no free kicks in the grain marketing game. If they did the AWB pool should be outperforming all other pools by a country mile….they did have a big head start.

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A gloomy week for grains

2009-09-14T00:57:00.001-07:00

It was another disappointing week for Australian grain growers with few glimmers of hope to point you toward.

On Friday the USDA increased its estimates for US and global stocks of the major grains courtesy of a prolonged and mild spring that has allowed crops to overcome early set backs. Although the USDA estimates came in below most analysts forecasts the trend of rising yields is definitely apparent and the market is already trading estimates well above the USDA September numbers.

Our friends at Ag Commodity Research out of Canada have also increased their estimates of the Canadian canola crop. They are now estimating a crop of 10.7mmt vs the latest StatCan guess of 9.4mmt. This shows the extent of the improvement in the northern hemisphere season.

On the positive side for canola, the Canadian crush is expected to increase some 1mmt this year and the Ukraine crop may also be some 1mmt lower than last year. A monster US crop would cast a large shadow over the oilseed complex, but with demand rising, current increased end stock projections are very much dependent on Sth America producing a record crop. If the US soybean crop escapes frost, attention will turn to crop prospects in Sth America.

Barley is sagging under the weight of a massive global corn crop, but global livestock industries and meat demand look close to bottoming out which should see demand for feed grains rise into our harvest, in contrast to last year when it was crumbling in the face of the Global Financial Crisis (GFC).

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Is the recovery real?

2009-09-06T21:27:00.000-07:00

Since March, global equity and debt markets have recovered largely on the back of hopes that Chinese and developed economy fiscal stimulus measures would help pull the global economy out of recession. A pick-up in activity in China has also led to some recovery in growth across the entire region, but growth across much of the developed world still remains weak.

Despite enormous fiscal and monetary stimulus, in the US, the recovery there has only been a weak. Fresh data from the US Bureau of Labour Statistics (BLS) shows that the US unemployment rate rose to 9.7% in August – from 9.4% in July – its highest level since June 1983. The level of those under-employed – which includes those who have taken part-time work to make ends meet and those who had been searching for a job but have stopped looking – rose to 16.8%, the highest level since records began in 1994.

But while equity and debt markets are improving, the shipping market is crashing for the second time in a year, prompted by China’s reduction in raw-material imports and record numbers of new vessels setting sail. The rate for leasing capesize ships is expected to drop about 50% from the current price of $37,865 a day to as low as $18,000 before the end of the year. The Organization for Economic Cooperation and Development predicts a 16% drop in world trade for 2009. China’s State Council called for curbs on steel and cement production last week. Also pressuring shipping rates is the record 146 capesizes (equal to 28% of the fleet) that will be added to the fleet this year.

The key issue is that the Chinese economy is still heavily reliant on exports and unless export buying picks up, much of the increased production in China will be adding to inventories. Chinese authorities are endeavouring to implement measures to stimulate domestic demand, but re-transitioning the economy will take some time.

Curiously the $A is ignoring troubled waters ahead and has surged above 85USc, mainly on $US weakness, as it appears that Chinese purchasers of raw materials and commodity prices will be on the slide during the backend of 2009. Our bet is that the $A will be susceptible to another bout of global economic instability before the end of the year.

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Prices weighed down by crop conditions

2009-08-30T23:24:00.000-07:00

Markets are really struggling to find any reason to rally. Nth hemisphere crop conditions keep getting better, early season harvest results are strong and talk of a late season frost remains just that. Markets for quality grain are being supported by concerns over crops in eastern Australia and the threat of a late season frost impacting late nth hemisphere spring crops. Argentine bean crop forecasts should keep the oilseed market on edge over the next few months.

Wheat still holds a sizeable advantage over corn (+165USc/bu CBOT Dec 09 futures), indicating that a fair chunk of carryover wheat stocks are of poor quality. Also, many of the producers of higher quality wheat will have smaller crops and the quality end of the market is not prepared to relax until a large Australian crop is made and until northern hemisphere spring wheat escapes a late frost threat.

Speaking of which, we are hearing reports by the day that crops across parts of western Queensland are being fed off. Unseasonally hot and windy conditions over the past week have crop watchers giving the crop another fortnight before serious production damage is done. A poor QLD and nth NSW crop has the potential to knock at least 2mmt off current crop forecasts.

While prices in most port zones have traded a premium above east coast northern zones this week, Newcastle APW is currently a $10—12/t premium over these southern and western zones with Brisbane APW/H2 another $5—8/t above Newcastle.

Worries about Australian supplies kicked off offshore interest in new crop with trade reports of Asian consumers buying both December and March APW shipments. Customers are also looking at min 11.5% protein wheat ex Western Australia and South Australia.

Outside of Aussie crop concerns, the only real action is in oilseed markets. China continues to buy up beans, old crop stocks remain tight and there is talk that disease may limit US yields. But reports are that, despite ongoing political turbulence and uncertainty regarding export taxes, Argentine will produce a massive crop of over 50mmt as drought prone areas are forecast for a drenching as the impact of the El Nino moderates.

Argentina’s soybean output peaked at 47.5 million tons in the 2006-2007 season before dropping to 46.2 million the following year, the exchange said. The 2008-2009 harvest, which was gathered between February and June, was cut by the drought to 32 million tons.

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Now look who’s calling for more information

2009-08-23T22:37:00.000-07:00

The email I received from CBH late Friday afternoon was a breathtaking exercise in hypocrisy. For those that missed it, CBH released a special ‘Down the Line’ e-newsletter late last week where they URGENTLY called on growers to submit their crop estimates.

It read ‘With a potentially big harvest less than six weeks away, we still have only 50% of crop estimates submitted. This is a serious concern for our operations staff. If we were to plan harvest services from the information we have received to date, we would be opening only 80 of the State’s 197 receival sites.’

They will get no argument from me that this type of information is required to promote efficiency, but it is a curious comment from a company who doesn’t think there is a need to disseminate information to other industry participants to aid their planning.

Prior to completing the survey, growers should be thinking about who will gain access to it? Is it just CBH operations? And if CBH were fair dinkum about promoting competition (which would benefit their grower members), they should publicly release this information to the market so that everyone else can get on with their planning.

Remember Grain Pool (formerly Agracorp and part of the CBH Group) was the biggest cash buyers at harvest time last year, so why would you (the farmer) potentially want to create an information advantage for one of more than 20 organisations looking to buy grain from you this year? Does the muted response to the survey by growers finally recognize that this information could be used against them?

Some perceive that I am launching a crusade to improve industry information for my own benefit. A CBH Director has publicly made this claim. But apart from the claim being totally baseless (it is not like I will be able to inside trade with this info), why would a CBH Director accuse me of this? Think about it - is it he that accuses, trying to veil the vested interest of the company he represents?

What vested interest can ProFarmer possibly derive, from asking for the public release of high-level information to the marketplace? All I want is better information so I can give qualified, independent advice to my grower subscribers - I hate guessing. Unless growers derive benefit from my advice I don’t have a business, no-one is forced to become a ProFarmer member. I am not asking for an advantage over any other market participant competing against me.

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Frost and friction in oilseed market

2009-08-16T21:28:00.000-07:00

Considering that last week’s USDA reports were pretty negative, the markets held up reasonably well. Corn and wheat look to be searching for a bottom but could have some further downside if we escape the next month or so without a significant frost event. Speaking of frosts there is a frost forecast to hit Canadian canola growing areas this week (around the 20th). ProFarmer Canada is a bit dubious but thinks that there is some major frost risk later in the month.

The oilseed markets has been acting strangely, dropping through the floor after failing to break through a key resistance level this week. This is despite further evidence of excellent sales of both old and new crop out of the US. Over 1mmt of new crop sales and another 260,000t of old crop sales have been executed while a further 760,000t of new-crop beans are added to export bookings.

Large sales to China are welcome but need to be treated with some caution as there is a potential trade tiff brewing between the US and China. Some are now wondering if China is aggressively front-loading purchases ahead of potential trade retaliation that could include slowed US bean buys.

In local news a crop tour of the WA northern cropping zone last week revealed that canola crops were faring by far the worst, particularly for those sown on sand plain country. Patchy emergence and some browning off is being attributed to wet planting weather, shallow root establishment and some hot dry days. Time will tell whether recent rain will help these crops recover in time to post average yields, but none of the farmers we were talking to were expecting better than 1t/ha.

There are also worries about crops in the northern cropping zone on the east coast. Without a decent rain before the end of August these crops have the potential to fall-over quickly and this coupled with a northern hemisphere frost may prove the right tonic for a fundamentally driven grain market rally.

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ACCC on the job

2009-08-11T00:17:00.000-07:00

If the bulk handlers thought the Australian Competition & Consumer Commission (ACCC) had its hands full with other matters - which would allow them to set their own ambiguous rules for competitor access to their port terminals - then they were wrong. The rejection by the ACCC of their initial draft access Undertakings has left them in no doubt that the watchdog has their eye on them.

While the ACCC agreed with many of the principles expressed by the bulk handlers they were concerned by the lack of clarity and formality of them. The best example is that less then three months out from harvest and none of the bulk handlers had published indicative prices to access their services. This means that the major competitors are essentially flying blind trying to purchase grain with no idea what it may cost them to export.

Moreover, exporting arrangements and management of capacity issues (which proved a significant problem over the 2008/09 harvest) are far from the clear and the ACCC has asked the bulk handlers to go back to the drawing board to improve transparency in dealing with these issues. ACCC’s response to the CBH draft undertaking is 227 pages long – many times longer than the access Undertakings originally proposed.

On issues such as ‘ring fencing’ information the ACCC have taken a ‘wait and see’ approach, deciding not to threaten the industry with a deluge of regulation while it is in transition. But at the same time they have issued a stern warning that they would act if there was evidence that proposed ‘ring fencing’ measures were not working.

The main beef the ACCC has is with the ambiguity surrounding the publish-negotiate-arbitrate component of the proposed Undertakings. The ACCC has heard exporter concerns of the former ‘take it or leave it’ approach adopted and want a more formal and inclusive approach to setting prices for access arrangements and dealing with disputes.

Unlike Cargill Australia Pty Ltd, Elders Toepfer Grain Pty Ltd, Emerald Group Pty Ltd and Noble Resources Australia Pty Ltd which had their wheat export license accreditations extended to September 2012, the bulk handlers have some serious work to do before their export license accreditation can be considered. Wheat Export Australia (WEA) cannot issue an export license to any bulk handler unless the ACCC accepts its access undertaking. It is also likely that the bulk handlers have to apply for their licenses on an annual basis so that ACCC can monitor their compliance with their access undertakings.

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A bad to time to rethink price expectations

2009-08-03T00:11:00.000-07:00

It has been a busy but successful week at ProFarmer. I finished my last presentation in a stretch of five at the Australian Grain Conference and spent most of the week in Melbourne discussing trade issues with nearly 500 delegates at the conference. While I was away my horse Silver Omen won at Belmont which was a bonus.

I have been telling my inner-self to hold the line that grain prices would rise towards our harvest, but lately, week by week I have been questioning our price expectations; right in the middle of the nth hemisphere harvest is never a good time to be rethinking price forecasts, as supplies often look overwhelming and price forecasters get jittery.

Northern hemisphere summer crops continue to look impressive resulting in the International Grains Council (IGC) raising its all grain 2009/10 end stocks by 18mmt or 1% in its latest report released last week. A big corn crop would take out some upside potential and open up some downside, but although yields appear to be moving, the trade wants the USDA to confirm the unexpectedly large plantings of its 30 June report.

But we might not have to. Despite posturing about making soybean sales, China last week stepped back into the oilseed market big-time. Traders reacted strongly to US weekly and daily export sales data reported last Friday morning where export sales were nearly double the top end of expectations.

The USDA confirmed market rumours of large new crop soybean purchases by announcing sales of 1.8mmt on 30 July - the third largest daily sale on record. Clearly, China continues to have a large appetite for imported beans and used the recent price retracement as an opportunity to extend bookings. Internal Chinese prices are still US$30/t above imported beans. This all gives hope that the Chinese economy has regained its footing quickly.

But while China’s enormous appetite for beans provides overall support, beans and cereal prices could start diverging which is something to keep our eye on. We suspect another rain and prices back towards A$300/t could prompt some local hedge selling.

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Grain’s Industry Conference points the finger at the services sector

2009-07-28T04:02:00.000-07:00

ProFarmer is in Melbourne this week attending the annual Australian Grains Industry conference. There are certainly some hard questions being asked and answered, which is a change from previous conferences where industry issues were often brushed over.

One of the themes of the conference is how much more professional the services sector needs to become to meet the changing needs of our increasingly sophisticated client base (the grower). This is especially true in a marketplace which is undergoing substantial changes both at home and abroad.

Many small businesses are trying to figure out how they can run fast enough just to keep up. We reckon, that just the price risk farmers are faced with has increased 10-fold over the past decade. If you throw in climate variability and dynamic input costs you can get an idea of why our clients need the best service possible.

In that respect ProFarmer is not standing still. This year we have opened an office in Sydney and have recently employed our first foreign correspondent to keep us abreast of agricultural markets and trade issues across Asia. His first piece on the changing structure of the Japanese beef market was in this week’s newsletter and it is a cracker!

Another key theme of the conference is the step-up in competition in the services space. In conjunction with eFarming, ProFarmer is preparing to launch a subscription based nationwide daily price discovery and information service called Best Bids on the eFarming website. We’re on track for a mid-August launch. Another party is launching a similar service at the conference. But we love competition - bring it on - the grower will be the winner!

But the biggest and most exciting development is our employment of an Ana Komorova who started this week in our Perth office as our Strategic Development manager. Ana has experienced in the turf seed and irrigation industry through a family business based in Moscow, Russia.

She has spent the last 2 years in New York setting up supply distribution arrangements for seed and irrigation equipment back to her family’s company in Moscow which has contributed to that company growing its market share significantly. Basically she knows all the places we all guess about at the moment and has the ability through her networks to ‘verify’ information received on the Eastern European grain markets. ProFarmer is very excited to have someone of Ana’s experience and calibre join our business.

Grain Industry Logistics Conference Instils Confidence for Growers

2009-07-22T01:36:00.000-07:00

Apart from having the flu, I had a great weekend. Poor old Tom Watson got the wobbles on the 72nd hole, I fell asleep on the couch when the guy I had backed, Lee Westwood, was leading by 2 strokes – I thought I had the money in the bag.

I thought the industry took a great leap forward last Thursday with a great conference on Grain Industry Logistics organised by the AAAC last week. Sure it was a talk fest, but the difference was discussion revolved, finding the best solution for the longer-term industry benefit. Growers had a chance to hear from both sides of the fence and be involved in the decision making process.

This is quite different from pre-deregulation days when decisions (some right and some wrong) were made behind closed doors. Mistakes were covered up and any successes were overstated.

There is nothing wrong with debate. People have different views based on their industry position, personality, background and training and everyone needs to respect that. But growers are also entitled to hear different perspectives that are not churned out by industry funded propaganda machines. Focussed debate is healthy.

A better informed industry is an industry with better prospects. But what is lacking is a formal decision making process. On CBH matters it is the CBH board, and who does the CBH board take advice from?

But CBH isn’t the only player anymore. Increasingly we will have a diverse industry with a diverse range of issues. So what about matters where CBH is only one stakeholder, then it becomes the state Government or an even higher power. How do we read the temperature of the grower and find out what he thinks after he has been given all the facts and arguments?

For example there is clearly divided opinion on the level of information CBH should release to the market. The natural reaction is to say don’t tell anyone anything or to maintain the status quo. This is the easy option, and certainly many think it is the best way to go. But is this in the best interests of our industry longer term?

With my training I have learnt that markets work better when they are provided with information. Multi-nationals like to work in an environment of certainty, it makes decision making easier. But this is an argument for another day.

The purpose of the rant this week is to congratulate the industry for taking a step forward and at least be prepared to debate tough issues (the last bloke I heard that got his head stuck in the sand suffocated himself). And be prepared for more of the same as our industry goes through momentous, but well overdue, change.

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Crops are off to a better start in 2009

2009-07-13T00:16:00.000-07:00

In order to better assess crop conditions and improve our production and balance sheet efforts in 2009, we have come up with an improved methodology to rank crop conditions nation wide. The ProFarmer Crop Condition Index (PCCI) can be used to assess which crops are likely to perform best at a state and national level.

In the ProFarmer weekly newsletter we will be reporting on crop conditions regularly throughout the season, and each crop month we will update the (PCCI). We now have 4-years historical data by state by major crop.

What do the results show?
At the state level, crop conditions have started better this year than in 2008. The improvement in conditions on the east coast are stronger than on the west coast, due to earlier and more planting rainfall.

WA had later rainfalls, which has lead to later crop planting/establishment, however good rains forecast in July should see the state play catch-up. In WA wheat is rated fewer than 50, placing the season’s conditions just under average.

SA wheat has had the best start, with current crop conditions ranked in the top third of the last 100 years. This is a significant turnaround from last season, where it was in the bottom half. Murray Bridge and Naracoorte in eastern SA are both currently ranked in the highest 10% of crops over the last 100 years. While this is an amazing improvement it needs to be noted that last season SA’s condition rating more than halved between July and November – if this occurred again it would place the crop condition in the bottom third.

VIC is currently ranked the lowest amongst the states, however there are areas of VIC which are currently ranked in the top 10% of crop years.

It is early in the season, and as spring approaches the weighted crop conditions will start to give a better idea of the production capacity of the season ahead.

Nationally, all crops this season have had a better start than in previous seasons. National planted area of canola is estimated to increase by 7% this year, and if crop condition continues to remain ahead of last season, total production could push the record.

Barley area has been estimated lower; however with a weighted condition 22% higher than last year production could also rise. Wheat is in a similar position, with a weighted crop condition ranking 20% higher than last year. With wheat acres thought to increase on last season, strong tonnages could again be seen. All crops have had a great start to the season.

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No car accidents this week and one of my footy teams won

2009-07-06T21:50:00.000-07:00

I know I promised to give you an overview of the information regimes of some of our competitors but our normally reliable source didn’t come through - I will get back to you on it.

In this week’s newsletter we issued results of the Australian Grower Planting Survey. Apart from our survey we don't currently have a comprehensive survey of grower’s plantings. Our survey is but a small snippet required to be confident in the accuracy of the numbers - it is not statistically valid, but we are confident that the trends are usually correct, particularly on the major crops.

There is still a level of skepticism in the grower community about providing open access to information - our view is that good information makes markets work better. For example service providers can better plan for the needs of their customers who can then make better decisions based on good information. As Alan Greenspan used to say 'when the facts change so do my decisions'.

What many don't realise is that ABARE plantings estimates are a combination of expert opinion and the views of their analysts - they are not survey based. In this week's newsletter we plan to review our historical survey results to actual ABARE figures. But if the ABARE figures are not survey based then which benchmark can we use to measure our results against? A prime example is the WA canola crop last year; our survey suggested a massive increase in plantings and we produced a massive crop, but ABARE put much of this down to stellar yields rather than considering if they had under-estimated plantings.

The other gripe I have with the way ABARE approach things is that they assume all plantings are actually harvest, but we know there is often a high level of abandonment. Rather than adjusting harvested acres they just decrease yields to fit the planted number to the production estimate. So in fact they are underestimating yields on the portion that was harvest.

Don't get me wrong, I am not bashing ABARE. I think their work has improved significantly since Phil Glyde has taken over but we have a long way to go to meet the information regimes of our competitors to bring us into the 21st century. These needs will be covered in the coming weeks.

Update to last week’s rant – Information is right for all

In an update to last week’s rant, CBH has still not provided me with results of their online survey where they asked growers whether they would like CBH to release more harvest related information. They have, however, selectively released results to parts of the industry where they say the results have been 'mixed'.

Our survey conducted in conjunction with efarming of over 1000 growers was almost 90% in support of the bulk handlers releasing more 'aggregate' information. CBH are attempting to run a scare campaign suggesting that what we are requesting is the release of individual grower information which is a misleading.

Anyway because CBH disagree with my view - that they should be keeping the market more informed - they are not speaking to me anymore. But apparently I am not the only one. Exporters are highly disgruntled about the new CBH proposal on the management of shipping allocation for the upcoming year. CBH say they have consulted with industry, but apparently the conversations have been my way or the highway type stuff - no different to the experience I have been having. Are they reminding you of anything?

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Information is a right for all

2009-07-05T17:42:00.000-07:00

I have had better weeks; I got into another car bingle and both my footy teams lost again, meaning another quiet September (I might go on holidays or take up another hobby like gardening – except I don’t have a garden). At least it is raining - it’s a pity grain markets are in a coma and stuck in a trance following financials.

Anyway, I want to continue to press an issue that I have been banging on about for a while. It concerns the release of market critical information. It seems the debate has been polarised by the noisy minority who don’t want to tell anyone anything to the exporters who want to know everything. The problem with this is it is easy for CBH to run interference to their betterment.

CBH have gone to ground on the whole affair. They won’t even release results of a survey they took of growers on this issue, on the grounds that ProFarmer will misconstrue the data (I found this quite offensive). The survey we conducted with efarming.com.au suggested that 87% of the 1078 growers who voted, agreed that the bulk handlers should be compelled to release more aggregate information. I have provided CBH with formal, peer reviewed economic studies that suggest that information facilitates trade and overcomes market inefficiencies. CBH conveniently fail to acknowledge these ‘established’ economic theories.

The sad thing is that CBH won’t even enter into a debate about the subject. They are showing clear signs that they intend to abuse their market power by withholding information for as long as they can– but to whose benefit? The Grain Pool and Agracorp have a vested interest in withholding this data because as market leaders they have better information than any of their competitors – this benefit will erode as their market share diminishes. That is if you believe that the Chinese walls between their operations and trading teams are effective.

Growers are kidding themselves if they believe withholding data is to their benefit. All the buyers they are selling grain to have much more sophisticated market intelligence systems, and the grower only sees the information from their own port hole.

In their submission to the ACCC, CBH reckon ABS and ABARE release sufficient data to the market. But there are gaping holes. The ABS and ABARE stocks and usage information is dated (5-8 weeks late), and only covers wheat (what’s the integrity of this data). They fail to release information on other commodities and the ABS excludes barley exports that are only released at a national level (state export data is deferred by six months – a hangover from statutory market days) meaning it is impossible to formulate an east coast feed grain balance sheet.

Plus we only have a quarterly production report (which is survey based after consultation with industry experts i.e., CBH and their counterparts); no planting intentions, actual plantings or abandonment statistics or ongoing weekly crop conditions, receivals and exports.Some groups want CBH to release a plethora of information. We don’t agree this is necessary, but if CBH continue to stonewall on the release of basic data they will further alienate the people they are supposed to serve.

We need a new information regime that reflects the needs of a changing market. Next week we will articulate the types of data our competitors release to benefit market participants.

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Fundamentals not strong enough

2009-06-25T17:56:00.000-07:00

Just as prices started to claw their way into hedging territory, canola prices copped a sudden hammering this week. Grower bids have fallen the best part of A$50/t for both old and new crop after nearing our targets of A$600/t. But these big falls were mainly isolated to canola with bean markets only softer to the tune of A$10-15/t.

These big falls come at a time when the Canadian crop is getting smaller - last week the Canadian Wheat Board cut their crop to 10.2mmt, down 19% from last year’s 12.6mmt monster and the market range continues to contract with estimates in a wide range from 10-11.5mmt. Canadian weather forecasts have improved but plenty of damage appears to be done and unless the rain is extensive and widespread, much more will be required to attain average yields.

Rumours that China has cancelled some forward orders may have played a role, but it seems these cancellations were at the margins and haven’t significantly changed the S&D outlook. With global oilseed production and canola likely to fall this year, we are moving towards a much better fundamental situation.

Canola prices vs. beans are at the lowest levels in 5 years (for spot months), at a US$50/t discount, and back to near contract lows for new crop (at a US$11/t premium), both down US$30/t in a week.
It appears that much of the recent weakness has been inspired by the funds which have been pulling back their exposure in commodities. As one of the more thinly traded markets we feel that the punishment dished out to canola may have been overdone.

That said, we can’t see much on the fundamental horizon, near-term, that is going to be strong enough to push markets back to recent highs. We are a little wary of the Nth American planting intentions reports, due out on the 23rd and 30th of this month, from Stats Can and the USDA respectively. These agencies both produced surprising reports in March, where the trade felt they low-balled canola and bean planting intentions across Canada and the US.

Canada could find another 0.5-1m acres – although recent weather will negate the impact. The wild card could be beans. The USDA could easily find 2-5m acres thanks to switches from corn, wheat and idle land to beans as planting delays and higher prices have encouraged farmers. A plantings shock is all we need in the current environment where outside markets are providing limited support.

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Markets Sending Mixed Signals

2009-06-15T17:28:00.000-07:00

There were some very mixed signals being sent by markets last week. Firstly the USDA lifted wheat end stocks after they were expected to fall, while oilseed and corn stocks were projected lower. Projections for a fall in corn stocks – a result of lower yields – should provide the fundamental support for grains markets, taking the batten from beans which have carried markets higher over the past quarter.

Markets still seem to be transfixed on oil, the $US and inflationary expectations. Oil prices have quietly skipped above US$70/bll with the International Energy Agency (IEA) revising its 2009 demand upwards, despite signs that US gasoline demand has peaked (a result of more ethanol blending). While we have outside markets pulling our way, the greater the chance that prices could spike higher on further weather scares. Outside money is gently rolling back into commodity markets.

Already, torrid early season conditions in Canada have seen the Canadian Wheat Board reduce Canadian production expectations by around 20% for wheat and canola. US wheat production is expected to fall by the same amount (delayed plantings and lower yields). It is still dry in Argentina, conditions have improved in Europe - although it is dry in south-east Ukraine - and we have seen a good general plant in Australia (with only central and south-eastern WA needing more planting rain). Strong carryover wheat stocks are keeping prices in check, but the margin for error has narrowed and further major production issues will have an impact.

Heavy losses on pork production (swine flu and weak demand) and very narrow cattle feeding margins and poor dairy prices suggest that the impact of the economic slowdown on demand for commodities is very real. Demand for our commodities from the traditional food sector isn’t showing signs of recovery, but with oil prices on the rise, demand for corn for ethanol will help take up the slack and provide the backbone for prices across the commodities sector.

Prices have neared hedging targets the past couple of weeks, but we are only entering the period of seasonal volatility associated with the maturity of the US corn crop. The next market mover could be the USDA 30 June prospective plantings report which is likely to show a further shift from corn to ethanol from earlier reports.

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Bio-fuels we can take - but no subsidies and no mandates

2009-06-02T01:49:00.000-07:00

I am speaking at a Sugar Conference in Cairns this week. To be honest I have been roped in as a favour but at least most of the big end of town will be there. Most of the final day constitutes an assessment of the impact of bio-fuels on the agricultural industries.

I think they envisage me as being supportive because we are involved in the grains industry that has been one of the major beneficiaries of bio-fuels. Two of the founding principles of Profarmer are free trade and minimal Government involvement (along with absolute independence). So to support the Australian bio-fuel industry in its current form would be to turn our back on these principles. While it may prove unpopular with some of our subscribers (like our opposition to the Single Desk), we have to remain true to our principles.

Anyway here is my argument. Declining global grain stock trends are undeniable and bio-fuels have played a role in these trends and the extreme price rises witnessed over the past couple of years. A lift in demand, ignited somewhat by the euphoria surrounding bio-fuels, increased demand at a time of inelastic demand as grain stocks fell to historically low levels. Trends in grain consumption from the ethanol sector in the US are undeniable and are linked to rising mandates (not price sensitive).

A leading US Ag Economist Keith Collins reckoned bio-fuels were responsible for lifting prices 25-60%. In the US, rightly or wrongly bio-fuels will stay, mainly because it makes political sense - it is a palatable way of selling farm subsidies and is a vote winner.

But why are we doing it here? They don’t seem to be a major vote winner politically. It won’t create jobs and may destroy jobs in industries built on our sustainable competitive advantages.

• They won’t save the environment (2-5% mandates in oz?)

• We aren’t world competitive in producing bio-fuels so it will result in a tax on consumers/industry• We aren’t world leaders - at least 10yrs behind in producing ethanol from grain

• If we were genuinely concerned about the environment lets import it from the lowest cost supplier

So bio-fuels sure, but no subsidies or no mandates.

To us mandates and subsides stink of populous follow-the-leader - silly politics where all we will do is make ourselves busy for no real gain. Shouldn’t we be concentrating on building infrastructure to support our industries built on our sustainable competitive advantages.

But we recognize market failure does exists and if the Government were to get involved how about we lead the world in research in 2nd generation bio-fuels produced from waste from feedstock that we produce on a scale which is globally competitive?

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Are we being fooled by fundamentals?

2009-05-26T02:41:00.000-07:00

It was another promising week for grains with prices grinding higher amid deepening production issues and demand showing ongoing signs of resilience. But with global economic sentiment rising, we ask ourselves the question; is the rally just a ‘mirage’ and will supportive grain market fundamentals hold if investor sentiment turns?

The production issues include further downward revisions to the Argentine bean crop – at almost 90% harvested you can almost be certain that these won’t be going up. There are also significant planting delays in key US wheat and corn producing states.

In nth Dakota, spring wheat seedings reached just 31% as of May 17, well behind the five-year average of 87% and in Minnesota spring wheat seedings reached only 34%, compared to a five-year average of 90%. The US normally produces 16mmt of spring wheat and the mounting premiums in Minneapolis spring wheat futures – up from 88USc/bu to 127USc/bu – indicates that the market is taking this seriously. But the planting pace should pick-up this week with some dry weather forecast. For local growers, the late plant (including similar issues across Canada too) augurs well for higher protein wheat producers.

In Illinois, one of the largest US corn producing states, it is getting to the stage where they should be planting soybeans (June bean plantings are considered late), but as at the end of last week just 20% of the corn crop has been planted. This is setting the scene for a wild ride this season as the bulk of this crop will be pollinating and yields will be forming in the ‘dog days of summer’. The threat of a big swing in plantings to beans has capped the rally, but plantings issues have lead to renewed fund interest in ownership of both corn and beans.

In Europe winter crops are travelling sweetly, but spring crops were planted into less than ideal moisture and are now starting to stress right across Europe. This is a situation that bears watching, particularly on the malt barley front.

Production wise, the only bright spot is a solid and general improvement in local planting conditions which should see the bulk of intended acres planted, albeit a bit late and with less than optimal subsoil moisture in most places – but you would take it given the run we’ve had in recent years.

We have been maintaining a consistent line that the world will be disappointed with how much grain is produced globally in 2009.

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Australia - a quiet harbour in a global storm

2009-05-18T00:53:00.000-07:00

I had breakfast with the Reserve Bank of Australia (RBA) last Friday. They were relatively upbeat about the prospects of the Australian economy bouncing back from what they reckoned was the ‘worst contraction in global GDP since World War 2’. But get used to relatively weak levels of growth.

What the global economy has gone through has been shocking; however our local economy doesn’t provide any measure of how tough global conditions are. Australia has been a quiet harbour in a global storm. Most of the graphs which the RBA showed looked like someone falling off a cliff. The worst of the slowdown has been in developed countries leading to sharp falls in business and consumer confidence.

Conditions seem to be gradually improving, but very much linked to huge stimulus packages being unleashed by Governments around the world. The Chinese economy has been very responsive with Chinese banks being told to lend money - businesses didn’t even have to ask, it was just dropped into their bank accounts. It will be interesting to see whether the recovery will be sustained.

For me, the key signs will be unemployment and consumer sentiment in developed countries. While Australia has been one of the least affected developed countries, my gut-feel is that it will be very tough through 2009. Lower interest rates have been cushioning us from the impact, but private sector debt levels are high and further rises in unemployment will affect consumer sentiment. It is much worse elsewhere and I don’t think we can claim a recovery until unemployment in developed economies has been stemmed, enabling a recovery in consumer sentiment.

Another key risk to the outlook for a slow, steady recovery is further financial sector issues. It seems our eastern European mates have fallen foul of the old ‘Swiss francs lending’ scenario and defaults across the region are on the rise - the bulk of the fall seems to have been carried by Swiss, Austrian and Nordic banks. We wouldn’t be surprised to see some further financial market problems before the recovery is set in train.

Global Governments have turned bankers to overcome these, by taking over crimpled financial institutions and buying bonds (by printing money) to recapitalize these. With unemployment still rising, Government’s have been writing blank cheque’s to cover future losses - incurring almost unlimited liability.

At what cost you might ask? Well taxpayers will need to pay back these loans and the cost will be future levels of growth.

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