Upload
lgfinance
View
213
Download
0
Embed Size (px)
Citation preview
8/9/2019 Commodities 08/2010
1/5
www.danskeresearch.com
Investment ResearchGeneral Market Conditions
Global wheat prices have rallied since early July, as estimates of Russian production have
been revised down on the back of an extended period of drought. We have assessed the
fundamental situation in the grains market after the August WASDE report from the US
Department of Agriculture (USDA) and conclude that the recent rally is overdone and
specifically that a new global food crisis is not imminent. Still, the recent price surge
could put upward pressure on inflation in the near term and highlight structural challenges
facing the agricultural sector.
August WASDE report mildly bullish
The August WASDE report saw a larger-than-expected downward revision to global
wheat stocks: the USDA now projects 2010-11 ending stocks at 174.8 million tonnes
(July report: 187.1, survey: 178.8). The global wheat stocks-to-use ratio was revised
down from 28.0% to 26.3%. For corn and soybeans, 2011 stock estimates were also
taken down and stocks-to-use are now forecast at 16.7% and 25.8%, respectively.
Overall, the report was mildly bullish for the grains sector but still paints a picture of a
well-supplied market. We look for Matif milling wheat prices to retreat to EUR175 per
ton before year-end, as the recent rally looks overdone. We see current levels as attractive
for locking in wheat prices from a producer point of view.
Russian drought leads rally in wheat
European (Matif) milling wheat prices have risen from EUR140 per tonne to above
EUR220 in less than two months - levels not seen since the summer of 2008. However, in
the past few days, wheat prices have peaked and dropped to now trade just around
EUR210, with prices up a little on the WASDE report.
Wheat price rally on Black-Sea production shortfall
Source: EcoWin, Danske Markets.
12 August 2010
CommoditiesWheat scare unwarranted as stocks remain huge
Key points
Global wheat prices have ralliedon weather-related supply
concerns. We view the recent
price surge as overdone,
however, as the global wheat
market remains well-supplied.
The risk of a new global food
crisis is small in our view.
Things to look out for include:further trade restrictions,
contagion to other soft
commodities and speculative
flows.
On the whole, we look for Matifprices to retreat to EUR175 per
ton before year end and see
current levels as attractive for
producers to lock in wheat prices.
Senior Analyst
Christin Tuxen
+45 4513 7867
8/9/2019 Commodities 08/2010
2/5
2 | 12 August 2010www.danskeresearch.com
Commodities
The panic rise was more or less solely caused by a supply shock. Wheat has risen on fears
that Black-Sea production would be severely harmed by a prolonged period of very dry
weather. Russia accounts for 9% of global production and 14% of exports but also output
from other major exporters in the region such as Ukraine and Kazakhstan may be at risk
from an ongoing drought. In an attempt to contain domestic price rises, Russia last week
announced an export ban to take effect from 15 August until year-end. Crucially, ongoing
wildfires may not only destruct this seasons crop but could potentially hinder next
seasons plantings of winter wheat. Ukraine officials this week said that the country is
contemplating export quotas for grains.
Further adding to likely production shortfalls is the fact that Canadian wheat was hit hard
by heavy rains earlier in the year and Pakistani crop is now threatened by flooding.
Combined with the fact that record harvests in recent years have led farmers to plant less
wheat, wheat stocks look set to decline significantly this year. This has spurred fears of a
global food crisis similar to the one that hit the global economy in 2007/08 when rising
food prices led consumer prices to surge and inflation-targeting central banks to hike
interest rates despite a significant slowdown in economic activity.
Current situation is very different from 2007/08 crisis
In our view, the situation in the global grains market is very different from the one in
2007/08 and provided no hoarding or new trade barriers are introduced, we look for
markets to calm down in the near term and for the inflationary impact to be limited.
Longer term, the surge in wheat does however highlight a range of structural problems in
the agricultural sector.
First of all, global stocks of wheat are ample at present. Measured in terms of the stocks-
to-use ratio, the market is well supplied with stocks available to honour almost 30% of
yearly consumption; in the US the corresponding figure is above 80%. This is rather
different from the situation in the summer of 2008 when US stocks-to-use ratio was
running at a mere 10%. At above 26% the wheat market is still at a very comfortable
level.
Second, we should not forget that a supply reaction can happen fast in the grains market:
when farmers observe higher prices they usually increase plantings of the grain in
question for the next season. This is indeed what has been seen in recent years after bumper harvests led to booming inventories. The planting season is about to start in
Australia and Argentina, which makes for a quick reaction to Black-Sea crop damage.
Third, prices of other grains and soft commodities have followed wheat up only to a very
limited extent (barley is the exception though). This highlights that the recent panic is so
Wheat production by region
Source: USDA, Danske Markets.
Wheat market fairly loose... ... but getting a little tighter this year
Source: USDA, Danske Markets. Source: USDA, Danske Markets.
Plantings decline on record harvests
Source: USDA, Danske Markets.
9%
20%
17%
12%
9%
33%
Production
United States EU-27 China India Russia Other
0
50000
100000
150000
200000
250000
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
Wheat, world stocks (1000 ton)
0.21
0.24
0.27
0.3
0.33 World, stocks-to-use (%)
0
20
40
60
80
2008/09 2009/10
Est.
2010/11
Proj.
US area planted (mn acres)
US area harvested
8/9/2019 Commodities 08/2010
3/5
3 | 12 August 2010www.danskeresearch.com
Commodities
far mainly contained to wheat. Notwithstanding, it cannot be ruled out that higher prices
on wheat could crowd out plantings of other crops such as soybeans and corn. Stocks of
these grains are also at decent levels but in particular the soybeans market is somewhat
tight and could thus be vulnerable to production shortfalls arising from planting
substitution.
Fourth, the demand side should provide only limited support to prices. Crucially, we are
currently in a different stage of the business cycle than was the case in 2008 when
capacity utilisation was high and underlying inflationary pressure significant as a result.
Also, with focus shifting to second-generation biofuels, which use biomass etc. rather
than grains as input, demand from the energy sector - and thus spill-over between food
and energy sectors - should be limited.
Finally, whereas the 2007/08 rally was likely to have been partly caused by a rise in
speculative positions, this does not seem to have been the case to the same extent this
time round. Leading up to the price spike speculators were on average net short wheat but
an extensive short-covering rally has reversed the situation such that non-commercials are
now net long. During the recent rally the ratio of non-commercial positions to total open
interest has in fact declined. This suggests that speculative flows into the sector have in
fact been reduced.
Overall, it is important to note that the current shock is rather different from the 2007/08
one which arose from a demand shock: global grains stocks were low, the global
economy was booming, regulatory changes spurred demand for grains for biofuel
production and financial interest in commodities was accelerating.
Agflation scenario unlikely in the near term but longer-termoutlook highly uncertain
The UN Food and Agricultural Organisation has made an attempt to calm the markets,
saying that global inventories are indeed sufficient to compensate for the production. This
week the OECD joined the UN in playing down the impact of the Russian drought. We
largely agree with the view that there is little reason to panic as things are now, but the
short and the longer term implications of the wheat crisis are likely to differ.
Near term: little sign of contagion but both physical and financial risks in
place
We look for wheat prices to continue the downward correction seen in recent days and to
retreat to EUR175 per tonne before year-end as the market wakes up to reality whichremains elevated global wheat stocks. During the course of 2011, wheat prices could rise
a little from this newfound level as global demand ticks higher alongside close-to-trend
economic growth (and sustained population growth). This assumes no further trade
restrictions and a normal planting reaction to this years production shortfall. Notably,
US and European farmers stand to benefit from the price increases as their crops have
developed neatly while Black-Sea producers face a tough time.
Having said that, risks that the recent rally could spur further price rises along the grains
physical supply/demand chain remain. Wheat, corn and rice are fairly close substitutes in
consumption as well as production and thus while the price rises so far are mainly
restricted to wheat, spill-over cannot be ruled out. This could make the price rises more
broad-based and fuel inflation to a larger degree. Notwithstanding, there is little tightness
in neither wheat, coarse grains (incl. corn) or rice.
Short covering in wheat
Source: EcoWin, Danske Markets.
Little tightness across grain types
Source: USDA, Danske Markets. Note:coarse
grains
refer to other grains than wheat and rice(includes corn and barley).
0%
5%
10%
15%
20%
25%
30%
35%
TotalGrains
Wheat CoarseGrains
Rice,milled
Stocks-to-use, %
8/9/2019 Commodities 08/2010
4/5
4 | 12 August 2010www.danskeresearch.com
Commodities
Also, speculation remains a joker and was at least partly blamed for the 2007/08 spike.
However, investor interest in commodities has been muted in this recovery phase despite
loads of liquidity. Part of the reason for the limited flows into commodities as an asset
class is the contango structure that prevails in most futures markets, not least in grains:
when putting their money in commodity futures investors thus incur a negative roll yield
due to the downward-sloping curve which must then be made up for by an even larger
upward move in price levels.
Milling wheat: Danske forecast vs. fwd
Source: EcoWin, Danske Markets.
Longer term: structural challenges looming
Although the near-term impact of the wheat surge may be limited, it does turn into focus
a range of potential problems in the agricultural sector.
First, the experience of the past two months underline that volatility in agricultural
markets has risen. This is partly a consequence of the market becoming more finely
balanced in terms of supply and demand due to underinvestment combined with rising
use of grains from first-generation biofuels and emerging-markets demand. On top of this,
comes the rising impact of financial markets due to the focus of commodities as a
separate asset class, potentially useful in portfolio diversification. Heightened volatility
policymakers may turn their eyes on financial trading in commodities and eventually lead
to more widespread regulation of a market which remains highly politically sensitive.
Second, wheat is potentially facing another supply issue from spreading of wheat rust
aka ug99- which is a fungal infection attacking the stem of the plant, seeEconomist: Rust
in the bread basket. The disease has recently been spreading in southern Africa and but
may however travel far via the wind and could have devastating consequences if it
reaches some of the worlds major producers.
Finally, the recent incidents of drought and flooding also highlight the potential threats to
the agricultural sector arising from extreme weather events likely related to a changing
climate. Indeed, 2010 is on track to become the warmest on record according to the UK
Met Office. This poses both threats and opportunities to farmers but will most likely
require a re-structuring of the sector in coming decades.
8/9/2019 Commodities 08/2010
5/5
5 | 12 August 2010www.danskeresearch.com
Commodities
DisclosureThis research report has been prepared by Danske Research, which is part of Danske Markets, a division of
Danske Bank. Danske Bank is under supervision by the Danish Financial Supervisory Authority. The author of
this report is Christin Tuxen, Senior Analyst.
Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high
quality research based on research objectivity and independence. These procedures are documented in the Danske
Bank Research Policy. Employees within the Danske Bank Research Departments have been instructed that any
request that might impair the objectivity and independence of research shall be referred to Research Management
and to the Compliance Officer. Danske Bank Research departments are organised independently from and do not
report to other Danske Bank business areas. Research analysts are remunerated in part based on the over-all
profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other
remuneration linked to specific corporate finance or debt capital transactions.
Danske Bank research reports are prepared in accordance with the Danish Society of Investment Professionals
Ethical rules and the Recommendations of the Danish Securities Dealers Association.
Financial models and/or methodology used in this research report
Calculations and presentations in this research report are based on standard econometric tools and methodology
as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be
obtained from the authors upon request.
Risk warning
Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis
of relevant assumptions, are stated throughout the text.
Expected updates
This publication is updated monthly.
First date of publication
Please see the front page of this research report for the first date of publication. Price-related data is calculated
using the closing price from the day before publication.
DisclaimerThis publication has been prepared by Danske Markets for information purposes only. It has been prepared
independently, solely from publicly available information and does not take into account the views of Danske
Banks internal credit department. It is not an offer or solicitation of any offer to purchase or sell any financial
instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no
representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from
reliance on it. Danske Bank, its affiliates or staff may perform services for, solicit business from, hold long or
short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned
herein. The Equity and Corporate Bonds analysts are not permitted to invest in securities under coverage in their
research sector. This publication is not intended for retail customers in the UK or any person in the US. Danske
Markets is a division of Danske Bank A/S. Danske Bank A/S is authorized by the Danish Financial Supervisory
Authority and is subject to provisions of relevant regulators in all other jurisdictions where Danske Bank A/S
conducts operations. Moreover Danske Bank A/S is subject to limited regulation by the Financial Services
Authority (UK). Details on the extent of our regulation by the Financial Services Authority are available from us
on request. Copyright (C) Danske Bank A/S. All rights reserved. This publication is protected by copyright and
may not be reproduced in whole or in part without permission.
This publication has been prepared by the correspondent of Auerbach Grayson & Company Incorporated
(AGC) named above on the date listed above.
We are distributing this publication in the U.S. and any U.S. person receiving this report and wishing to effect
transactions in any security discussed herein, should do so only with a representative of Auerbach Grayson &
Company Incorporated. Additional information on recommended securities is available on request.