Author: Michael Ferrari, PhD
VP, Applied Technology & Research
Short term moves in the commodity complex notwithstanding, the longer range view is fairly constructive when we start to anticipate where much of the demand will originate for 2010. It is easy to get caught up in managing the short term volatility in the ags/energies/metals without sometimes taking a step back and looking at the y/y trends, and as a result, at the end of each year, we note the missed opportunities. I am not advocating a return to the levels we saw in 2008 ($145 crude/$7 corn/$15 beans), but I am looking at a supplier-friendly scenario, particularly in agriculture, over the 6-9 month time horizon.
The Economist recently published a table which highlights the y/y (2008/09) % change in the stock markets for several emerging market economies – notable at the top of their list ($ terms) are Brazil (-55 to +142), China (-68 to +125) and India (-62 to +88). Carrying over into 2010, when looking at the general outlook for growth in these countries, the economic, social and political indicators are generally optimistic for a strong year. When we put the anticipated stronger demand from these origins in the context of global supply, we do see additional pressure in the food staples sector. Supplies in corn/beans will remain tight in 2010 (not as tight as we thought entering 4Q09, but still tight), coupled with a generally high stocks-to-use ratio. A surge of investment in the agri sector will also lend some longer term support to the market. So with anticipated stronger global demand and lower buffer stocks, how does the long range weather forecast fit in to the assessment? Readers of WTI’s discussions are also well aware of status of the current El Nino, which will mean different things for different growing origins. While there is no blanket El Nino statement that can be applied to all growing regions, most of the indicators will point towards a good start to the growing season for grains/oilseeds, particularly for the northern hemisphere origins. As we have discussed, we are looking at this second El Nino ‘pulse’ as part of a longer cycle which started with an El Nino, and was then followed by a transition to La Nina. Instead of gravitating towards a neutral state, the cycle moved once again into El Nino phase – this current phase of El Nino is anticipated to drive much of the pattern for the start of the growing season in 2010, which typically will result in a favorable start (early planting/good germination conditions) for the US, China and central Europe. However, to offset a favorable start in 2010, we do see some risk in India, Australia and Argentina, so the overall weather outlook, at this stage is pretty neutral.
As we enter the new year, clients are encouraged to follow WTI’s discussions closely as we assess growing conditions key origins in the context of the broader macro themes that will affect S-D balances over the next several months. And while I am looking at a longer range outlook that is supportive in ags, I am not anticipating a recovery that mirrors the rapid rise like the one seen in 2007; rather, the expectations are more like a pattern that more closely resembles the early to mid 2000’s.
