Tag Archives: Agriculture

article 3 months old

Why Grain Prices Can Move Higher

By Chris Shaw

For many years investors have steered clear of agricultural commodities as investment alternatives as the combination of the high cost of carrying the investment and relatively short production cycles that didn’t create the same supply/demand imbalances as other commodities meant there was a reduced level of attraction.

But in the view of Barclays Capital the past few years has seen a structural change in world grain markets, as increasing Chinese demand is coming at the same time as a boost to demand from the growth in biofuels, which has added a level of inelastic demand to grain markets that previously was not present.

As an example the group notes 24% of the US corn crop and 30% of US corn use is now being diverted to biofuels, compared to 6% and 8% respectively in 2000. The result is low inventory levels, with Barclays noting corn, wheat and soybean stocks are now at 24-year lows despite production at record levels.

As with the other commodities supply disruptions have also contributed as unusual weather patterns have in recent years limited the supply of grains available in the global marketplace. Australia is an obvious example as the wheat cropped has halved in the past two years given the impact of the drought.

This growing supply and demand imbalance means that the grains have been the best-performer of the commodities in recent times, a trend Barclays expects will continue.

One reason for the optimistic outlook is the sector is relatively immune from the uncertainties being created by the current economic conditions around the world, as grains are a staple and so not as subject to any sudden or unexpected fall-off in demand.

This is not to say there is no demand volatility, as Barclays points out there is generally a higher level of speculation in grain markets than in other commodities. The point of note in the group’s view is this level of speculative positions has not increased proportionally as prices have risen, implying the prices for gains are in line with the market’s fundamentals given the widening gap between global supply and demand.

Given this, Barclays' view is grain prices have further to run in the coming year.

article 3 months old

Issues For Australia In 2008

By Greg Peel

The obvious rear-view conclusion on 2007 is that no one saw it coming. It has been a year dominated by the subprime crisis and the global credit crunch. But aside from the obvious, there have been other factors of influence in the year gone by.

CommSec's chief economist Craig James has been brave enough to recount what he predicted as the big issues of 2007 at this time in 2006. There's no point in CommSec offering up predictions for 2008 without some sort of score card. So this is what James said in 2006:

Australian interest rates had peaked. It was a reasonable assumption to make given the economies of NSW and Tasmania were close to recession, drought had gripped the country, and just about everyone was expecting the Chinese economy to ease off from its soaring highs. As it was, rates remained on hold from November 2006 to August 2007 but by then the booming Australian economy (spurred on by no let up in China) had forced the RBA's hand.

The oil price would come down. We entered 2007 with an oil price of less than US$60/bbl, would you believe. But apart from ongoing Chinese strength, and strength in other emerging market economies, 2007 saw continuous supply disruption problems as old and tired infrastructure was pushed to the limit, ongoing geopolitical tension particularly surrounding Iran and its mythical nuclear weapons program, and no impact of any note from alternative fuel sources despite the great ethanol boom.

The Australian rental market would remain tight as would the jobs market. Two ticks here. The jobs market has remained tight as the Australian economy has continued to surge, and has done so despite record skilled migration and initiatives such as Welfare-to-Work. Migration helped to keep rentals very tight, along with the cyclical downturn in residential property development.

Climate change/water security would be the big issues. They were at the beginning of the year, and were revived late in the year thanks to the Bali conference, but in between, subprime overshadowed all.

Consolidation would continue in the media sector and private equity would continue to be dominant. Another two ticks, but the media sector has just about sorted itself out now and private equity came to a screaming halt once credit dried up.

So what will be the issues of 2008? James has another go at the crystal ball:

The US subprime crisis obviously, which is then tied into whether the US economy will go into recession. "Clearly much work lies ahead", James says of the subprime situation, noting at least government initiatives have offered some breathing space. As for the US economy, James believes Americans will continue to spend sufficiently and exports will continue to respond to a weaker US dollar and emerging market demand.

Climate change/water security, which never actually went away.

Unemployment versus inflation. Across the globe, economies have been in the enviable position - one which hasn't occurred since the 1970s - of achieving very low unemployment without any great leap in inflation. Can this continue? From Australia's point of view, James suggests it will be up to the federal government to streamline the skilled migrant approval process if we are to stay ahead of the rest of the world in attracting this increasingly scarce resource. As far as inflation is concerned, one of the big issues for 2008 will be "agflation".

Inflation driven by the cost of food has become a real problem in 2007 as China and other emerging markets have shifted from grain-based diets to more meat-based diets given the expansion of wealth. While clearly this pushes up the price of meat, animals are still fed grain so there is not a lot of let up there, and given US farmers are now more interested in growing grains for ethanol instead of food there's a bit of a double-whammy.

James notes the last time the world experienced major agflation was during the industrialisation of Japan in the 1970s. From 1971 to 1974 the foodstuffs index soared 170%, and despite recent strong price movements we haven't yet reached that sort of level this time around. It is unlikely the boom in food prices will rival that which we have experienced in metal and mineral prices, given farming is a much less infrastructure-intense industry. However, there is always a lag as land is converted over to farming and there is still no let up in ethanol production.

Industry consolidation will be important in Australia and across the globe in 2008, given there is little point in continuing to fight over labour, equipment and land that just isn't available. James expects mining industry consolidation to continue, and other industries will also join in on the act. But look for construction, engineering and mining services to be key candidates. The longer shot is the Australian banking industry. The credit crunch has rattled the four pillars and the government will be under pressure to review this policy.

The oil price should ease into 2008 but only modestly. With prices safely now at such high levels, there is nothing to hold back alternative fuel source investment which picked up in 2007 and will continue to be a focus in 2008. The nuclear debate will come back to the fore as well. By the end of 2008 there will be a new US president. The current tip is for a female Democrat but any Democrat would make a big difference in the energy debate - although that's really a 2009 story.

The drought is something which will always be an issue. It is apparent we are currently reversing from an El Nino period to a La Nina period which is bringing rain to Australia. If such weather patterns remain, Australia will be well placed in the agricultural boom.

The big question is as to whether Australia might enter a recession. This seems an unlikely prospect, says James, but 16 straight years of record expansion must come to an end one day. Apart from the US, which James is not too worried about, it will come down to the Chinese authorities and whether (given inflation in particular) they are forced to really tighten the screws on their economy much more aggressively.

Despite all the shenanigans going on in the world in 2007, the Australian share market still posted above average returns. CommSec doesn't see quite as spectacular a result for 2008, although forecast 15% growth would still be slightly above average.

article 3 months old

Oz Commodity Earnings Forecast Slashed

By Greg Peel & Rudi Filapek-Vandyck

The Australian Bureau of Agriculture and Resource Economics (ABARE) has indicated today that commodity earnings for the financial year 2007-08 will be much less than previously assumed.

In the September quarter report ABARE had forecast 3% growth in commodity earnings (agricultural and non-agricultural) but that figure has now been reduced by 66% to 1% growth. The reduction is a reflection of the deepening drought and the reduction in earnings affected by a stronger Aussie dollar.

Farm export earnings are expected to fall by 3% in FY08 to $26.8bn, which mostly reflects a 14% reduction in the grain crop.

The value of mineral exports in particular is expected to rise by 2% to $110bn but this figure has been adjusted from September largely due to the currency appreciation in that time but also due to some softening of metals prices.

Despite the haircut, ABARE highlights the benefits in recent high levels of business investment in the mining industry which is being reflected in stronger volumes.

Earnings from energy are expected to rise by 7% (apart from oil and LNG this includes thermal coal and uranium).

The value of metals and other minerals exports is forecast to contribute $68bn in FY08, a fall of 1%. It is not clear exactly what assumption ABARE has made about the iron ore price, which some analysts have forecast to rise by as much as 50% from April next year. However, a table on page 732 of the report "Australian Commodities - December Quarter 2007" suggests ABARE has (overly cautiously?) so far only penciled in a price rise of less than 10% for iron ore contract prices starting the new Japanese fiscal year.

Amongst the standout conclusions are the fact that aluminium prices are expected to decline in 2008 (with 2007 expected to be the peak in terms of pricing), while prices for alumina are expected to decline by another 10% next year, world nickel prices are anticipated to hold up relatively well even though they are expected to be lower nevertheless than this year, while for copper the difference should be rather minimal with the forecast average price for 2008 at US$6950 per tonne versus an estimated average of circa US$7200 this year.

Zinc prices should continue their trend lower into 2008.

article 3 months old

Cash In On Nufarm, Watch Incitec

By Greg Peel

It's been a big year in the agricultural sector, driven by soaring global grain prices and the inherent volatility that only the weather can bring. There has been a mad rush to plant crops for ethanol production, particularly in the US, while the changing appetite of emerging economies has provided an added impetus to grain demand, both for direct consumption and for the feeding of livestock.

Star performer has been fertiliser company Incitec Pivot ((IPL)) which has proven that even the most unpleasant of concepts can be a big money spinner. Incitec's share price has close to quadrupled for the year. While less spectacular, another beneficiary has been crop chemical company Nufarm ((NUF)) which surprised no one yesterday when it announced a much anticipated takeover offer. So where to from here?

In the case of Nufarm, a consortium of China National Chemical, Blackstone and Fox Paine Management has made a conditional offer for the company at $17.25 with a 30c dividend thrown in for existing shareholders. This is roughly a 35% premium from starting price and just goes to show that private equity is alive and well as long as China's involved. In other markets proposed deals are been withdrawn with increasing speed.

The deal represents an FY08 price/earnings of about 22.3x which means analysts consider it to be a good one for Nufarm shareholders. Of the five FNArena brokers airing their views this morning, four suggested shareholders take the money and run. Only Credit Suisse saw scope for another bidder to emerge, while the others all thought this unlikely given the already substantial premium. Nufarm's board has suggested shareholders accept the offer, but only in lieu of another bid emerging.

Macquarie analysts have been caught out by the bid, having up to now largely scoffed at the constant rumours that preceded the trading halt. But yet they are still offering a warning, suggesting that recent history shows those who hold out for more, or speculators who jump in on the basis of a battle, have been burnt. Rinker ((RIN)) and Orica ((ORI)) are two examples.

Ratings and targets now become largely meaningless, although it is notable both Macquarie and UBS are sticking to Sell to emphasise their advice. The average target also moves up to match the bid. The market in general looks like it's settled on Nufarm being sold to the consortium, with the stock at $17.36 in late morning trade. That splits the $17.25-$17.55 spread on the share bid plus dividend, given new buyers won't qualify for the dividend.

While the same sort of takeover speculation hasn't really greeted the runaway Incitec, there's no doubt a little bit of premium in there. But according to the analysts at Credit Suisse the question is not one of takeovers but of fertiliser prices. The prices of both diammonium phosphate (DAP) and urea are continuing to firm in global markets.

The price of urea is currently averaging US$310-345/t while DAP is fetching $459-480/t. CS reveals industry insiders are looking at a DAP price of US$500/t by year end. Every US$10/t in DAP price means A$12m in earnings to Incitec, while every US$10/t in urea adds A$4m, says CS. On the flipside, every US1c in the Aussie knocks off A$6m.

Credit Suisse analysts are at the top of consensus forecasts by about 20%, but still they believe there is more upside to their forecasts given they are not even assuming spot prices for fertiliser. This would add A$25m or just under 10% to their profit forecast. They suggest that like other commodities, such as metals and oil, fertiliser has made a secular shift upwards in value and prices are likely to stay robust for at least the next five years. This is where everyone got metals wrong, constantly assuming a reversion to mean prices.

CS is currently restricted on its rating given another part of the bank is dealing with Incitec on something or other. But it would likely be Outperform on the strength of its view - a view that has changed in recent times given CS's rating was Neutral for a while there. An Outperform would give Incitec a B/H/S rating of 3/4/1 with the Holds a bit concerned about the strong share price and Deutsche Bank (Sell) suggesting the stock is 47% over fair value. That's Deutsche's fair value however, and at $60 Deutsche's target is both way behind the curve and a good deal below Citi's high mark of $103.30.

The average target is $84.14, and the stock is trading around $88.25 at present. Will fertiliser confound everyone just like copper did?

article 3 months old

The Future Is Higher Food Prices

By Chris Shaw

The drought has been blamed for many things in Australia, not the least is the likelihood of higher food prices in coming years. But as ANZ Bank senior economist Katie Dean points out rising food prices are a global phenomenon as over the past year food prices have grown faster than average inflation in the US, China and Europe as well as in Australia.

While there is no doubt in the Australian case the drought has played a role and some of the increases will be wound back once conditions improve, Dean notes the shift towards biofuels and other curbs on agricultural output could possibly see food prices permanently move to a new and higher level.

This would mark a significant shift from what has historically been the case, as the bank’s research shows food prices have risen by less than 1.0% on average since 1980, a rate well below the 2.9% average increase in metal prices over the same period.

This has changed over the past 12 months though, as the bank notes wheat prices are up 60% and barley has risen by more than twice this amount since September last year. The dairy sector has experienced similar increases, with powdered milk prices up almost 80% over the past year as well.

Gains are not universal as the bank points out prices for commodities such as pork, sugar and beef have actually fallen modestly since this time last year, but overall the trend has been to higher prices.

Weather conditions have been the primary contributor, as among the grains poor conditions in Australia, Europe, Canada, Russia and the Ukraine have limited production and brought down forecasts of global wheat production from an increase of more than 5.4% to just 1.7%.

At the same time stock levels for wheat in particular have fallen and are now at their lowest levels since the 1970s, meaning prices are now much more subject to volatility and therefore responsive to any bad news. It is a similar story for other grains and the dairy sector.

Short-term no improvement is expected, the bank noting weather forecasts for Australia and Canada suggest no return to more normal seasonal conditions is likely for at least another three months.

Longer-term as conditions return to normal weather-wise it will be price signals that change the composition of global food production according to Dean, something that has already occurred as there has been some rotation of crops towards grains and dairy to take advantage of higher prices.

Where there is a difference between agricultural commodities and metals is producers can switch to other commodities quickly and cheaply as it takes only a season to move from growing one crop to another crop.

This leads Dean to suggest global food prices in the medium-term are unlikely to experience the same sharp shift as occurred in resource prices a couple of years ago. Longer-term though it's a different story, as here structural changes such as the impact of global warming are set to change the global agricultural outlook.

The bank suggests while the impact will take some time to filter through as minor changes in temperature will have only a small impact initially, a study by William Cline of the Peterson Institute for International Economics suggests by 2080 climate change could cut as much as 18% from potential world agricultural output.

But climate change is not the only story as the world’s population continues to grow and industrialisation continues, meaning over time the amount of arable land available for agriculture will be reduced.

With more intensive farming to be needed to offset the reduction in land available farmers will need to increase the use of fertilisers, so lifting costs and therefore prices. As a result the rate of food production growth will come down, The United Nations Food and Agriculture Organisation forecasting a fall in the global growth rate from 2.0% in 1998/99 to 1.6% in the period from 1999 to 2015 and to just 1.3% from 2015 to 2030.

At the same time the growth in global food demand is also tipped to slow slightly in coming decades, the result of a slowing in world population growth, the fact a large proportion of the world’s population is already on relatively high calorie intake levels and because poverty will prevent much of the potential growth in demand from being realised.

Where there will be an increase according to Dean is as incomes rise around the world there will be a shift towards higher protein goods such as meat at the expense of traditional staples such as rice, something that is already occurring in the meat sector.

Biofuel is the other factor impacting on agricultural markets as government support for various fuels has changed market dynamics, Dean pointing to the US corn market as an example as US policy here has created a scarcity factor in the market that previously was not apparent.

As a result farmers are attempting to expand the acreage given over to corn production, this coming at the expense of other grains such as wheat and so bringing down output in these crops. This in turn forces up the price of these other crops, particularly for those needing them for their own industry such as meat and dairy farmers needing grains to feed their herds.

Dean’s conclusion is the current sharp pick up in prices in the agricultural sector won’t continue, as at some point weather conditions will return to normal and production will then pick up, allowing prices to ease.

Longer-term though prices are likely to reach and maintain a higher level, meaning households will at some point simply need to put more aside each week to meet the grocery bill.

In an Australian context rising agricultural prices add to the upward pressure on inflation, particularly as it relates to core inflation. Dean estimates food prices in Australia will increase by 5% in FY08, which would add around 0.8% to annual inflation.

This leads her to suggest the Reserve Bank of Australia (RBA) will be forced to act again on rates, with at least one more rate hike coming in the months ahead.

article 3 months old

Food Prices To Keep Pressure On Inflation

By Chris Shaw

While yesterday’s retail trade data will require the Reserve Bank of Australia (RBA) to keep a close watch on the broader economy there is little doubt from RBA statements the major point of its policy focus remains inflation.

Commonwealth Bank chief economist Michael Blythe is one of the more optimistic on the inflation outlook as he expects faster growth in both capital stock and labour supply to lift the economy’s potential growth rate, means an expansion on the supply side will take the sting out of the inflationary pressures currently being experienced in Australia.

Blythe notes there are two exceptions though, these being the housing sector and food costs. Housing prices are likely to be forced higher thanks to a current mismatch between demand and supply that is increasingly tightening the market, but the issues in terms of food prices appear more structural in his view.

First, as the world’s population continues to expand demand has increased accordingly, particularly in the Asian region as the wealth effects of the stronger Chinese and Indian economies flow through to their immense populations.

As Blythe notes it is at lower income levels where there is the largest increase in food consumption, so it is no surprise demand is increasing significantly. Bad weather has also played a role as crop yields are at times struggling given poor conditions, with this year’s wheat crop in Australia a prime example.

The other element contributing to food prices being pushed higher is the emergence of biofuels as an energy source as this is causing some crops such as corn and sugar to be diverted to uses other than food, leaving less left over for people to eat.

This has changed the dynamics of the global food market, as Blythe points out since 2002 food prices have risen on average by 6.3% a year, compared to average annual falls of 2.0% from 1980-2001.

It is inevitable this has some CPI impact in Australia, Blythe noting over the past two years the bank’s measure of grain prices is up 112% relative to this time two years ago.

Factoring this into the outlook for the next two years sees Blythe estimate the grain-affected components of CPI will increase by around 18%, which translates into a 0.7% CPI increase in the CPI.

UBS agrees food inflation is trending higher, particularly given pressures in the wheat, meat and milk markets. The impact on companies operating in the sector is different depending on their position, the broker pointing out food retailers should do well while food suppliers are likely to struggle.

The reason is food retailers such as Woolworths (WOW) and Coles (CGJ) can, if they adopt rational pricing, better recover their cost increases, particularly in the case of the two companies mentioned given their strong market positions.

The food suppliers however will have a fight on their hands to maintain margins as higher prices can force customers to trade down in terms of brand as they attempt to offset the increases.

The most at risk here in the broker’s view appears to be Goodman Fielder (GFF), as on its numbers the company needs a 5% increase in bread prices and a 10% increase in milk prices simply to maintain its EBITDA in FY08. Also at some sort of risk in its view is Coca-Cola Amatil (CCL), as via its ownership of SPC there is scope for some cost pressures to impact.

The broker rates both stocks as Neutral, while the FNArena database shows Goodman Fielder scoring three Buys, two Holds and two Sells overall and Coca-Cola Buy five times, Hold three times and Sell once.

UBS rates Woolworths as a Buy, the FNArena database scoring it Buy four times, Hold four times and Sell once.

article 3 months old

NAB Lifts Forecasts For Bulks And Rural Commodities

By Chris Shaw

In its September Commodity Price Outlook report National Australia Bank has raised its price forecasts in the sector but it has been selective in doing so, seeing the strength coming in the iron ore, coal, wheat and dairy sectors at the expense of base metal prices, which it sees as falling in 2008.

Looking at the upgrades first, bulk minerals and energy economist Gerald Burg expects contract prices among the bulk commodities will be driven higher by constraints on both production and infrastructure, which have caused the iron ore and coal markets to tighten significantly in recent months.

Helping in the case of iron ore has been the imposition of an export tax in India, which leaves prices there as much as 70% higher than equivalent contract prices in the Australian market. With such a positive setting Burg expects iron ore prices to settle around 15% higher in the 2008 Japanese financial year, with any price risk firmly to the upside in his view.

China’s return to a net importer position in coal has tightened that market globally and increased the focus on Indonesia and Australia as potential sources of additional supply. With infrastructure already straining in these markets the supply response has been muted, so the bank expects thermal and semi-soft coking coal prices to increase by 20% and hard coking coal by 17.5%.

In the bank’s view prices among the rural commodities have limited downside as demand continues to grow but supply cannot keep pace, particularly in the wheat market where stocks are approaching 30 year lows.

Base metal prices in contrast have peaked in the bank’s view and declines are expected through 2008 as markets return to surpluses or see a greater supply side response than has been the case until now.

This doesn’t mean a collapse though, as Burg expects prices will remain at what are historically high levels thanks to the potential for any supply disruption to impact on markets given limited stockpiles of most metals.

In terms of the bank’s commodities price index the flat outcome for the September quarter is expected to be replicated in 2008, as the gains in the bulks and rural commodities are balanced by the expected weakness in base metal prices. This has pushed down the bank’s expectations for the Australian dollar, though it sees the currency as being supported at around US80c through 2008.

article 3 months old

Consolidation To Drive Agricultural Sector

By Chris Shaw

If asked to think of commodities most investors would likely think of gold, copper, nickel and oil off the top of their heads while forgetting agricultural commodities are just as significant in global terms, especially given strong demand from China and India and applications in the creation of energy.

Just as in the metal markets where producers are now struggling to invest in increasing output after years of neglect the same has occurred in the agricultural sector, with Austock Securities estimating there has been underinvestment in supply chains for as long as 30 years and market participants are now struggling to close this gap.

With the amount of available land for farming likely to remain relatively steady the broker suggests one almost certain outcome in the sector is further rationalisation and the Australian agricultural sector appears ripe for further consolidation.

This is on the back of the consolidation that has already occurred over the past 20 years, the broker noting in the agricultural supply sector the Australian marketplace has been reduced to just four players while over the same period Australian farmer numbers have halved and the top 10% in the sector now account for about 40% of profits.

Part of this change in farmer numbers reflects difficult conditions, as while the winter crop was something of a respite the lack of rainfall is again forcing down expectations for the upcoming wheat crop in particular.

As conditions remain difficult the rationale for mergers and acquisitions increases in the broker’s view as there is the potential for companies to gain supply chain improvements and other shortcuts, which it expects will mean opportunities for investors.

One sector where Austock expects continued strong performance is among the farm input companies, as the broker suggests the main players, Incitec Pivot (IPL) and Nufarm (NUF), already have solid platforms in place but will be looking for ways to lift productivity and here they are almost spoiled for choice.

For the former the broker has lifted its short-term profit forecasts by 17% and it is positive on the move to take a stake in Dyno Nobel (DXL) as this would be an example of the available consolidation gains the sector provides.

It also sees scope for the company to expand its operations either through additional acquisitions or via joint ventures in other markets, particularly in the Asian and Middle Eastern markets.

As a result Austock has recently upgraded its rating to Buy from Hold, in the process lifting its target price to $87.00. By way of comparison the FNArena database shows the stock as rated Buy and Hold three times each along with one Sell recommendation and an average target price of $75.81.

The broker has also upgraded Nufarm to a Buy given what it sees as a strong growth outlook, this despite making small cuts to its profit forecasts for FY08 and FY09. The diversified nature of the group’s operations stands it in good stead in the broker’s view, while it expects the recent merger with Agripec of Brazil will be a forerunner of other similar deals.

The FNArena database shows a more mixed opinion on the company’s outlook as it is rated as Buy twice, Accumulate once and Hold five times with an average price target of $14.90, which compares to the Austock valuation of $16.00 per share.

Grain companies are more exposed to the current tough conditions and so have had earnings estimates for FY08 revised lower, for Graincorp (GNC) by as much as 47% and for ABB Gain (ABB) by 31%.

Despite this ABB remains a Buy in the broker’s view given management is implementing some internal initiatives that will increase value over time, particularly given the global diversity of the group’s operations.

The greater clarity in the ownership structure following the conversion of shares into a single class type is also a positive, so the broker is happy to maintain its rating given its target price of $10.03 is more than 30% above the current share price.

The FNArena database offers a more mixed view as while the company is only covered by two brokers it scores one Buy and one Sell, with an average price target of $8.18.

In contrast to the simplification of share classes achieved by ABB the broker is less confident of the same being achieved at Graincorp given the board is not united on the issue. Offsetting this is the expectation the company will move towards storing a more diverse range of grains, which would help reduce earnings volatility somewhat.

While the uncertain outlook over the company’s structure remains the broker rates the stock as a Hold, pointing out it is currently trading near its DCF valuation of $11.03. The FNArena database again shows diversity of opinion with the stock garnering one Buy and one Sell rating and an average price target of $10.08.

Similarly to the input companies the broker expects the distribution companies will look for merger opportunities, possibly adding heavy assets in the process. It sees AWB (AWB) as a potential target here, as the company has scrapped its de-merger plans but would become a possible play if the Federal Government decided to take away the Single Desk rights it currently holds.

The recent sharp falls in the stock price (it is down around 40% in the past two months) has resulted in the broker upgrading its rating to Hold, as it points out the stock is now trading near its disaster valuation of $2.50. The FNArena database shows one Buy rating, two Holds and one Avoid, with an average price target of $2.84.

Futuris (FCL) is a far more diversified play but the broker has also trimmed its forecasts by 8% for both FY08 and FY09, while maintaining its Lighten recommendation. This makes the broker one of the more negative in the market, as the FNArena database shows one Buy and four Hold recommendations. The average price target on the stock is $2.52.

Austock has contrasting views on the livestock plays in the Australian market, rating AAco (AAC) as a Buy given its excellent land and cattle assets. In contrast it has downgraded Ridley (RIC) to Lighten from Hold as it sees scope for margins to be squeezed.

FNArena’s database shows AAC as rated Buy once and Hold once with an average target of $3.08.

article 3 months old

Momentum Rolls On, Metals Surge

By Greg Peel

Tuesday's 2.9% rally in the S&P 500 included a big surge in the Materials sector. Materials had been weighed down by concerns of a US recession but the Fed rate cut and subsequent US dollar fall was enough for the sector to assume higher base metals prices ahead. In Australia the Materials sector similarly posted a 4.4% gain yesterday.

The London Metals Exchange had closed for trading on Tuesday ahead of the afternoon Fed announcement. Only nickel posted a serious gain, independently driven by lower inventories. But for the LME it was time to respond the the Fed cut last night, and respond it did. Despite its previous 4% rally, nickel surged close to 10%. Zinc was up 6%, and aluminium, copper and lead all posted gains between 3 and 4%. Tin was the only laggard, with less than a 1% rise.

These catch-up moves were little tempered by a small recovery for the US dollar last night, which rose slightly against all major currencies. But as long as the dollar/yen is rallying, so too will the Aussie dollar - to US$0.8565 overnight. Gold slipped off its highs, down US$2.10 to US$721.30/oz. The smart money is suggesting the rapid rally straight through the US$700 mark will probably result in a profit-taking pullback to the resistance line, and some consolidation, before it's US$850/oz here we come.

Oil kept doing its own thing however, up another US42c to $81.93/bbl - every post a record.

The Dow was up 128 points mid-session before settling back to close up 76 points, or 0.5%, for the day. The S&P put on 0.6% and the Nasdaq 0.5%. At 13,815, the Dow is now only 185 points or 1.3% shy of its July 19 all time high close. It is quite possible that in another session or two, Wall Street will have discounted the mortgage crisis, the repricing of risk, financial sector losses, the frozen asset-backed commercial paper market, and a slowing US economy, down to zero.

The close of 6356 on the ASX 200 yesterday is only 66 points, or 1.0%, below the July 24 high close of 6422.

The first news of the day on Wall Street came from Number Two US investment bank Morgan Stanley, which posted a 17% fall in third quarter earnings compared to 12.5% consensus. This was in contrast to Tuesday's Lehman Bros report of a lesser than expected loss. Whereas once upon a time this news may have sent financials crashing, we are now in a new world of Fed protection. Morgan Stanley's shares finished lower but the financial sector was mixed overall. Bear Sterns shares fell while shares in Goldman Sachs rose. Both investment banks report tonight.

The Fed reaffirmed on Tuesday it would be closely monitoring inflation, so last night's August CPI release would have been of interest. Headline inflation actually fell 0.1% - the first fall since October 2006. Core inflation (ex food & energy) rose by 0.2%.

The surprising fall in the headline came about as result of an even more seemingly curious 3.2% drop in energy prices, which in turn was driven by a 4.9% drop in gasoline prices. Low gasoline prices and US$82 oil? This only goes to highlight the downstream lag between the pump and crude. The question now is: will crude fall to meet gasoline or will gasoline rise to meet crude? Apart from the fact summer is now over in the US and the next step is to turn the heaters on, crude is as much of a supply story as a demand story. Last night President Bush told CNBC's Larry Kudlow that "all options are on the table" with regard to Iran, which thus includes military action and/or oil export blocks. Bush declared that the markets will just have to fit in with US foreign policy.

Which would have to suggest the gasoline price will begin to shoot up in September/November to meet the crude price. Food prices rose a less surprising 0.4% in August however, and are now running at 5.6% annualised compared to 2.1% for 2006. Overall headline inflation is running at 3.7% annualised, compared to 2.5% in 2006.

The Fed, however, supposedly concentrates only on core inflation, which following the August result is running at 2.3% annualised, down from 2.6% in 2006. Core inflation is used because food and energy prices tend to be volatile. Well they're not very volatile at the moment. They're only going up.

In other economic news, new home construction fell 2.6% in August, which is hardly knock me down with a feather stuff. It was the slowest pace of construction since June 1995 and construction is now 19.1% below a year ago.

The SPI Overnight was up 21 points.

article 3 months old

Record Highs For Oil, Wheat; Record Low For the US Dollar

By Greg Peel

Inflation. Remember that? Wall Street has been so fixated on the R-word in the past month that that it seemed pointless to talk about the I-word. A slowing economy does not tend to be inflationary, and the primary focus of the Fed should be to solve the potential recession problem first before worrying about inflation.

And when one talks about core inflation - the favoured measure of central bankers - it is undeniable that (a) core inflation in the US is currently running at a comfortable 2% and (b) a consumer slowdown is more likely to affect an easing in prices at the outset. However, many a commentator has noted (including FNArena) these past months that removing food and energy prices from inflation measures due to their month-on-month volatility may have merit, but to ignore these prices is dangerous when it is clear that the only way is up.

The Fed was still in inflation mode on August 7 when it left the target rate unchanged - a move that in hindsight has all the hallmarks of a wood duck* reaction. A month later we're looking at a possible 50bps cut. When the oil price fell back through US$70/bbl on fears of the US slowdown it appeared that headline inflation was no longer an issue. But the correction didn't last long.

Oil for October delivery passed the US$80/bbl mark for the first time in history last night. It settled back to close at US$79.91/bbl - up US$1.68 in the session.

Oil has been trading recently on the basis of tight supply challenged by unrelenting demand. On Tuesday OPEC's production quota increase was dismissed for the fantasy that it is. Concern lay with last night's US inventory figures, which were expected to show a decline of 500,000bbl. The number came in at a 700,000bbl decline.

Adding to the equation were news from the weather bureau that the tropical depression in the Atlantic may yet turn into a Gulf-threatening hurricane, and that the US government has drawn up contingency plans to either bomb Iran or block its oil exports or both (which isn't really new news, just an unfortunate reminder).

This is a record for oil in nominal terms. In real terms, oil traded at around the US$90-100/bbl mark back in the seventies depending on which inflation measure one discounts by. But a simultaneous record was also set in wheat last light, which hit US$9/bushel before settling back to US$8.60/bushel.

Wheat has been rising rather relentlessly this past year, driven by drought in Australia and other parts of the globe, rising food demand from emerging economies, and the ill-conceived explosion in ethanol production. The reduction in land given over to the production of wheat for food has forced flow on price hikes in other grains, soybeans (farmers are now growing corn for ethanol instead) and meat and dairy products (livestock eat grains).

Around the globe - Australia included - shoppers have all but fainted at the sight of price tags for everyday staples. In Italy, where the price of pasta has risen 27% these past months, frustrated consumer groups have called for a one-day "pasta strike" as a protest against rising prices.

The price of gasoline in the US stands at around US$2.81/gal at present - off from the May record high of US$3.23/gal. But there is a lag of months between movements in the crude price and movements in the price at the pump. Gasoline prices will only rise steadily from here, and this will come at a time when US consumers are already looking to tighten their belts.

US Treasury Secretary Henry Paulson, who has to date attempted to pour cold water on the subprime inferno in the best political fashion, admitted last night that the mortgage crisis will take a lot longer to be resolved than initially thought.

Meanwhile on equity markets, it was a case of range trading as the push and pull of the oil price effect and other news provided no obvious direction. The Dow closed down 14 points on light NYSE volume. Unless anything particularly untoward happens between now and next Tuesday, stocks should be on hold before the world learns of the Fed's decision. Can it provide the cut the market wants in a headline inflationary environment? Should it provide what the market wants? A cut of only 25bps will not be well received.

But the US dollar is already priming itself for further weakness. Last night it hit a record low against the euro at US$1.3904. It also fell back again against the yen. But the Aussie continues to exert its economic fundamentals (don't mention the carry trade) in trading to US$84.17. Can the Fed justify a rate cut which will only pressure the greenback further? And when the US dollar falls, the price of imported oil only rises.

Having had a solid run through the US$700/oz mark, gold remained relatively steady at US$711.60/oz last night. Movements in base metals were also minimal.

The SPI Overnight rose 18 points.

* A wood duck is someone who fails to absorb new information when everyone around has. Duck hunters float a wooden replica duck onto a pond to fool real ducks into thinking the pond is safe. When the real ducks take to the air when the shooting starts, the wood duck just sits there going: what?