A volatile outlook

by World Grain Staff
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2010 of is going the world to be an extremely volatile year, reckons one of the world's leading grain sector commentators. Investment managers with cheap money pumped into the economy by governments are going to play a big role, Dan Basse, president of AgResource, told those attending the recent Global Grain Conference in Geneva.

He called the new found supply of money "cash and carry."

"Cash and carry happened in Japan for the last 10 years," he said. "It’s now happening in the U.S. That’s why Chicago (the Chicago Board of Trade) is the way it is."

As well as pushing prices higher, the struggle between large crops and plenty of money made for volatility.

"We are thinking in AgResource that a top should occur in these markets right after the beginning of the year," Basse said. "When the market looks the best like it is now, you probably want to be buying it. Agriculture survived the meltdown of the world economy relativity well. We’ve gone through the good times. We’ve gone through despondency. We’re now back in the times of cheap money."


Basse identified the lessons the world’s grain market learned from 2009.

"The Black Sea market discovered calendar premiums," he said. "Egypt discovered milling wheat quality and higher offers. The ocean freight market discovered that it can rally. Western Australians discovered how to nominate and load vessels on a timely basis."

The Argentineans discovered that genetically modified corn and soybean seeds do not yield any better in a drought, he said. "And the Americans found that cool and wet weather may not always produce a record high/quality crop. Most of all, we all learned that U.S. dollar isn’t what it used to be and that the flow of money will continue to have a sizeable impact," he said.

Despite the credit crunch, demand stayed healthy. "Last year global grain demand was still up some 30 million tonnes," Basse said. "We’re looking for another good year. "

Part of the reason is increased affluence. "As we see someone go from a dollar a day to two dollars a day, the first thing they do is eat more vegetable oil," he said. "As someone moves from two dollars a day to eight dollars a day they consume more meat. We’re still not there yet."


The world economic landscape is improving, he said. In the U.S., initial jobless claims have come down and plummeted. But with U.S. unemployment at 10.2%, or something like 16 million people, people in the U.S. did not feel better off. "The man in the street in the U.S. has not yet seen his economic health improving," Basse said.

But firms have done better. "Their productivity from the remaining workers has soared," he said.

That meant that the U.S. would not lead the way. "Do not look for America to spend itself out of this recession," he said.

Part of the problem was that ordinary people could not get credit. "The banks are not lending to the people that build jobs: small business and consumers," Basse said.

There was, however, more money in the economy, thanks to the U.S. government. "Interest rates cannot go down anymore," he said. "Look at the big increase in the money supply. Free money from the government." For the financial institutions with access to that money, it’s obvious what to do with it. "You can buy commodities," he said. "You can buy gold borrowing from the U.S. government at zero and deploying that capital."

They had also purchased stocks. "The U.S. stock market is up 57%," Basse said. "If you’re in the banking business, it makes sense."

He noted that in the last year close to $250 billion has been invested in the commodity market. "You have to follow the money."

The new money coming in made it hard to be bearish, but Basse suspected that at some stage the Commodity Futures Trading Commission would try to hold down spending by imposing position limits.


"We also have another problem: the U.S. dollar," he said. "Anybody that has been bullish on the U.S. dollar has been wrong."

He used gold as an example to take the effect of currency out of trends in grains. "Never before have currency prices had such a big impact on what we all do every day. If you want to look at wheat in terms of gold prices, it is cheap."

Basse blamed China’s enormous accumulation of U.S. dollars, which has built up over decades. "The Chinese are buying mission," he said. "This allows the Chinese to get out of U.S. dollars."

Without spending by U.S. consumers, China can not export its way out of recession, he explained. "The only way China is going to expand is with Chinese consumers spending more money."

Thus, Basse is concerned that the Chinese economy may start to slow.

China, which is buying more cars than the U.S. for the first time, is also increasingly important in the world’s energy market. "Americans are spending less on energy," he said. "Our friends in China are spending more. They are replacing the U.S. and E.U. in terms of all demand."

Energy and grains are now linked because of biofuels, Basse said, and there are big changes occurring in that market. "We may soon have to ship ethanol to Brazil," he said. "Brazilian farmers make more money producing sugar than they do producing ethanol. U.S. corn (maize) ethanol profitability is still there."

He also expected biofuels to drive growth in vegetable oil, noting that beginning Jan. 1, 2010, Brazil and Argentina have mandated 5% of their vegetable oil crop to be used for biodiesel. "The U.S. is going to have to take up a much larger export role in vegetable oil than it has before," he said. "The contribution of oil to the crush rate is going to reach up to about 44% or 45%."


He predicted, without adverse weather, a growth in U.S. wheat stocks in 2010-11 to 190 million tonnes or more. "We still do not have a shortage of wheat," he said.

The stock surplus in the world put pressure on prices into the final stages of the northern hemisphere harvest, but a slowdown in farmer selling of wheat is limiting further losses.

He expected Argentina, with a crop exceeding market expectations at 9 million tonnes, to be a larger exporter in 2010. "Argentina will be much more aggressive," he said.

India’s wheat demand was expected to reach a record of 81 million tonnes, but with stocks he described as adequate and a 78-million-tonne crop, it was not going to be an importer.

There is uncertainty over Russia and, in particular, the fate of its enormous government wheat stocks. "Russian wheat exports, which we think will reach 18 million tonnes, have been the big change," he said. "The big question is what do the Russians do with government stocks?"

Basse said it would ultimately depend on price. "The Russians will not want to make a loss," he said. "There’s a real chance that our friends in Moscow will want to sell some wheat."

China will not import wheat, but he hinted at the chance of exports. "Chinese wheat demand has been in decline or been stable since 1990," he said. "Chinese wheat stocks are rising." "I don’t think you can have a big enough crop problem in China at the moment to get them to import wheat," he said. "I worry about them exporting feed wheat."

As for the U.S., its wheat exports were in retreat. "U.S. wheat is non-competitive," he said. "This morning, U.S. wheat is at a $41 premium to the Black Sea. It’s hard to be a wheat bull."

The problem, Basse said, is the U.S. market’s detachment from physical trade. "It is not the cash market in wheat that is running price," he said. "It is the fund buying and fund activity. I can no longer recommend hedging Black Sea wheat in Chicago."

The rice market could have an effect. India’s monsoon problem meant lower rice production. "If I look at rice stock-to-use ratios, they are extremely low," he said. "The Indians are out now importing rice. If you could force Indian consumers to eat more bread, it could be a bullish outlier for the wheat market."

He did see an end, before very much longer, to rises in wheat prices. "I’m of the opinion that the wheat market is very close to a top," he said.

Instead, Basse expected corn to be the star of 2010. "Corn will be the bull leader," he said.

For soybeans, he predicted an increase of 35 million tonnes in the crop, as long as South America gets normal weather. "There’s going to be no supply shortage in soybeans," he said. "It’s the biggest increase we have ever seen in one year in the world soybean stocks." However, China’s attitude was again crucial. "I don’t have the Chinese increasing their stocks," he said. "They are by far the most important factor in world trade in soy."

Chris Lyddon is World Grain’s European editor. He may be contacted at: chris.lyddon@ntlworld.com.

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