Views on commodities and energy
Interesting take on the rise in commodity prices from Julian Jessop, chief international economist at Capital Economics. The rise has little to do with the weaker dollar and everything to do with expectations of global economic recovery, he says.
The broad-based revival in commodity prices since March clearly reflects a combination of factors. One of these is the pure accounting effect of the depreciation of the dollar. Other things being equal, a fall in the U.S. currency will of course put upward pressure on commodity prices when measured in dollar terms - commodity producers with bills to pay in other currencies such as euros and pounds will require a higher price in dollars, while consumers outside the dollar bloc will be more able to pay that higher price. However, the movements in currencies have generally been small compared to the underlying movements in commodity prices.
Looking closely at the relative performance of different commodities, Jessop reckons the rally has primarily been led by oil and industrial metals, which are the most sensitive to the economic cycle. Inflation-driven commodities such as precious metals, including gold, have underperformed in the rally, he says.
Jessop takes all this to mean that higher commodity prices are just another manifestation of the growth in confidence about the global economic outlook. However, echoing investors who increasingly want to see concrete evidence, he warns that the anticipated pick-up in growth-based demand has yet to actually materialise.
Another food price spike could be on the horizon, analysts told Reuters.
Consider these factors:
* Grain prices, led by soybeans, have been up since March.
* South America’s crop is expected to be a disappointment. Crops in both Brazil and Argentina have a poor outlook. In fact, the U.S. Agriculture Department steadily lowered its forecast for Argentina’s soybean crop throughout the year.
* Many will be looking to the United States to come through with a big crop. But U.S. soybean stocks began the 2009/10 marketing year at a five year low. That means there’s not a lot of surplus to keep prices level if there’s any type of disruption in supply or weather calamity.
Oil prices have been trading in an unusually strong positive correlation with equities markets over the past few months on hopes that signs of an economic recovery could mean a boost for energy demand.
But with oil and product inventories swelling and little sign of demand improving in the United States and other big developed economies, analysts warn that the linkage may be hard to maintain, especially if U.S. motorists cut back on vacations this summer.
from Felix Salmon:
We knew there was a lot of nuclear waste on Lehman's balance sheet. But we didn't know that was literally true:
Lehman Brothers Holdings Inc. is sitting on enough uranium cake to make a nuclear bomb as it waits for prices of the commodity to rebound, according to traders and nuclear experts.
from Shop Talk:
If you want an answer to this question, you aren't the only one.
Food companies like Kellogg Co, which makes the products mentioned above, say the higher prices are justified because while commodity price inflation has eased amid a global economic downturn, commodity prices remain well above historical averages.
In a sign of the concern of a global slowdown, the DJ Iron & Steel Index has shed 15.6 percent in the past week. It is the worst-performing of the stock sector indexes tracked by DJ. (See the DJ sector indexes here). The coal stocks index is the second, followed by Industrial Metals & Mining. In fact, of the ten worst performing, only two are directly financial sector indexes and the rest are directly related to commodities, basic materials and transportation.
In the futures market, U.S. November crude settled down $10.52 to $96.37 a barrel, after touching a session low of $95.04 after lawmakers rejected the bailout package.
Top officials from the world’s largest fertilizer maker were in London this week trying to convince investors their stock has been unjustly thumped.
Potash Corp of Saskatchewan shares at the Toronto Stock Exchange have lost 30 percent of their value since a mid-June peak, even though prices for potash fertilizer continued their meteoric rise.
“Not that I’m whining about it, but we do have the lowest multiples we’ve ever had. Ever. And I’m not sure it reflects the true value of the company,” said Wayne Brownlee, the chief financial officer of Potash Corp, which plans to boost its potash capacity by 80 percent to capture higher prices.
Hedge funds fled commodities and unwound Potash Corp positions since June, Chief Executive Bill Doyle said.
Doyle continued to hold fast to his rosy outlook, noting producers are short on potash and prices should continue to rise this year, although not at the same rate as last year, when they tripled.
Grain prices should remain historically high, Doyle said, leaving farmers flush and able to pay more for fertilizer.
“Farmers will grouse that their costs are up. They are up, about $39 billion, but their receipts are up $50 billion. So the math works,” Doyle said.
And despite recent events rocking the world’s financial capitals, demand for grain will continue to grow, keeping pressure on supplies, Doyle said, unless the world economy slips into a depression.
“A lot of the people (in developing economies) who have this aspiration to eat better, I guarantee you, wouldn’t know what had happened to the investment banking community in New York,” he said. “It’s not high on their priority list, where food is.”
Photo: REUTERS/David Stobbe Potash is piled into a large storage facility which is then loaded into a train car and transported in Saskatoon, Saskatchewan in this December 2006 file photo.
More than 70 crop scouts began making their way home from Austin, Minnesota, on Friday after a week of 10-hour-long workdays counting and measuring corn and soybean yield potential through seven top production states around the U.S. Midwest.
Based on the week’s findings in 2,100 fields and other data, tour leaders Pro Farmer newsletter released their 2008 corn and soybean production forecast early on Friday.
They projected U.S. corn production at 12.152 billion bushels with the average yield at 153.3 bushels per acre. Soybean production was pegged at 2.930 billion bushels with an average yield of 39.95 bushels per acre.
The corn estimate was below the U.S. Agriculture Department’s latest projection for 12.288 billion bushels and the soy production was under USDA’s 2.973 billion bushels forecast. USDA estimated the average corn yield at 155 bushels per acre and the soy yield at 40.5 bushels per acre as of August 1.
But much has changed in the Midwest over the past three weeks. What some referred to as near-ideal crop weather earlier in the growing season was no longer the case.
As the Pro Farmer Midwest Crop Tour’s two legs departed on Monday from Columbus, Ohio, and and Sioux Falls, South Dakota, crop scouts were already aware that variability and crop immaturity would be a big part of the story of this year’s corn and soybean crops. Scouts on the eastern leg quickly realized that dryness would be another major theme after finding gaping cracks in concrete-hard soils in most Ohio fields. The word was passed on to western scouts who were touring a surprisingly robust South Dakota corn crop and some of them remained sceptical until they saw for themselves as their routes moved east.
Crop scouts will always welcome cool, dry weather during the crop tour, but it was difficult not to feel compassion for farmers that had not received any rain at all since July. Meanwhile, crop development in some fields was as much three weeks behind the normal pace, setting the stage for some nail-biting in the weeks ahead of the average first frost dates, which range from late September to mid-October depending on location.
Tour organisers, farmers, and agronomists repeatedly stressed at evening meetings that most fields need rain immediately or else the yield estimates pulled from fields this week would begin eroding.
Signs of a soggy start to the growing season were all there too, from washed out plots and replanted acres to swathes of pale green leaves on corn plants, a sign shallow root systems and nitrogen loss. Tops of fields that would normally look flat and uniform were discoloured and filled with potholes. Soybeans were planted in washed out patches of corn fields in wavy rows.
All eyes now turn to the weather map. Soybeans need moisture to finish setting and filling pods. Corn needs just enough rain in the near term to add weight to undersized kernels, but not too much rain as that could slow down the crop’s already delayed development. And both crops will be racing for a photo finish in some areas, trying to get to the grain bin ahead of the first frost.
Farmers around the U.S. Midwest hope that this year’s growing season will stretch out a few days longer than usual into the fall to make up for the slow start to the growing season. Corn and soybean crops around the U.S. Midwest are depending on a warm and rainy finish to the growing season to reach the full potential predicted by crop scouts on the Pro Farmer Midwest Tour.
To try and forecast the date of the critical first frost, which could devastate thousands of acres of crops that were planted late due to cold and wet conditions in the spring, farmers are looking to the sky. Or to be more specific, they are looking at the moon.
Windmills are becoming increasingly common around the Corn Belt due to environmental concerns about traditional sources of power generation.