Humphrey Feeds - Weekly feed report 11th December 2011
For the last two weeks, May futures wheat has traded at £145.50 plus or minus £1.00. Similarly maize and soya have mainly traded sideways over the same period. It is almost as if everyone is holding their breath – waiting for Eurozone news and Fridays USDA report. Apparently the funds that hold equities are in the same position, frightened to sell shares in case they miss out on a massive recovery, and just as frightened to buy in case of a Black Swan event. The FAO believes the world will produce 695mt of wheat in 2011 (up 6.5% over last year), some 10mt more than the previous record of 2009. The USDA announced mildly higher ending stocks for maize, and much higher ending stocks for wheat and soya. World ending stocks were higher all round, and UK May wheat futures fell initially by £3, then as a more bullish sentiment emerged on CBOT (contrary to the figures as usual), the UK wheat lifted to unchanged. US wheat futures ended firmer, a sharp contrast to soya futures which fell sharply. Next week will be interesting.
US bioethanol production hit a record 930,000 b/day at the end of November. Partly because crude oil prices are now $100/b (up from $76/b in early October), and partly because Brazil is a net importer (due to a lack of sugar), but mainly because the $0.45 subsidy is scheduled to end on 31st Dec. As a result bioethanol stocks are climbing rapidly. Profitability of the bioethanol industry from Jan 1st has yet to be determined – in theory the loss of the subsidy should push them into negative territory with consequent knock-on effects on maize usage. In practice, some insiders report that bioethanol will still be profitable; but much depends on the price of maize in the New Year. US farmers are reluctant sellers of maize which has forced ethanol and livestock producers to bid higher prices for spot delivery. Farmers believe that because spot buyers are willing to pay a premium over futures prices, that higher prices are in the pipeline. Farmers are also trying to avoid crystallizing profit, in order to avoid paying more tax this year. Maize prices this autumn have averaged around $6.0/b (a record high), compared with $4.3 in 2010, $3.5 in 2009, and $4.5 in 2008.
US banks have become wary of lending to the Eurozone, and so the EU banks being starved of cash ran to the ECB to borrow money. Hence the reason for the strange coalition of the world’s central banks, to which we referred last week, which included the ECB, US Federal Reserve, Bank of Japan, the BoE and the central banks of Switzerland and Canada. The agreement is in place until February 2013. Whilst the equity markets moved higher with news of the cash injection, the agricultural commodity markets were relatively static. The EU banks are the largest suppliers of commodity finance to traders, importers/exporters and hedge funds, but EU banks are busy building up capital for a potential Euroquake, so have little ’spare cash’ to lend to the commodity trade. It is possible that a commodity trade credit crunch may become a new factor in 2012. Judging from the absolute lack of UK wheat futures trade this week, it has already started! Another interpretation of the current crisis is that it is a lack of demand, not a lack of credit. It now seems that the argument about the role of the ECB has been finalised.
Germany was reluctant to bail out Greece and Italy, because the Eurozone is a leaking colander; hence the need to fill the holes by imposing penalties if anyone steps out of line. Article 123 of the Lisbon Treaty allows the ECB to finance banks, but prohibits the financing of governments. So the UK veto ensures Article 123 remains, and the Euro17 will have to find a different solution. Today, Moodys downgraded the banks: BNP Paribas; Credit Agricole SA; and Société Générale.
There is quite a bit of unrest in Syria, Iran, Egypt and Russia, not to mention Europe itself. In the light of all the uncertainty, it is not surprising that Ag commodity prices are in gentle decline. But while the US and EU navel-gaze on their own problems, would China wage war? President Hu has been making sabre-rattling calls to his navy to ’prepare for warfare’. Does China really want to use nuclear war to ’level the playing field?’ http://www.financialsense.com/contributors/jr-nquist/2011/12/05/warning-from-a-chinese-professor . China owns most of the US debt, and allegedly has offered to help bail-out the Eurozone. With the world cash-strapped, if China did make a move, who would or could object?
