Traders Frantic As Commodities Dwindle
Sun Herald
Saturday July 16, 1988
IF THE traders in the Sydney Futures Exchange had the freedom of their counterparts at the Chicago Board of Trade, they would have spent the past two months making a killing on agricultural commodities.
Restricted as they are to contracts tied to financial products such as treasury bills, the All Ordinaries and the Australian dollar, they have missed out on the action in "soft" commodities such as grains and livestock.
In the United States, however, the severe drought in the mid-west has focussed attention on the "ag pit" on La Salle Street where trading of contracts in soybeans, corn, and wheat has been frantic.
Last week's report from the US Agriculture Department - noting that the country's pastures and ranges were, at 46 per cent of ideal, "the worst for this date since records started in 1921" - will certainly keep soft commodity prices up.
The Commodity Research Bureau index of futures prices of 21 basic farm and industrial raw materials, which is considered a major barometer of inflation, closed up 3.90 last week, at 264.46, compared with a 1967 base of 100. And cattle prices rebounded despite the rising liquidation of herds prompted by increased feed costs.
"There is a big speculative bubble being created by the drought in the States," notes Sydney Futures Exchange chief executive Leslie Hosking. "And stockpiles and subsidies of various sorts around the world don't stop potential peaks in commodity prices."
The US Agriculture Department's report confirmed the market's and farmers'own fears of tighter supplies in commodities.
The department's projections, based on extensive field surveys and interviews about July 1, were released as the US House and Senate Agriculture committees began work on a drought-relief aid package for farmers that is expected to cost more than US $5.5 billion.
In major commodities, only rice production is expected to grow; corn is predicted to fall by 26 per cent, oats by 32 per cent and wheat by 13 per cent. Although the United States will release more acreage for wheat production in the future, the lag effect of a decline in this year's wheat crop to 50.1 million tonnes (compared with 57.3 million tonnes in 1987) is a clear signal that the price of wheat will hold up.
The extraordinary growth in "back to basics" trading on the world's commodity stage underpins Australia's own status as a primary producer and should mean a healthy outlook for the rural sector.
In the fiscal year to 30 June, 1987, rural commodities accounted for 31.1 per cent of Australia's total exports. According to a spokesman at the Bureau of Agricultural and Resource Economics in Canberra, the increase in commodity prices are "good in the short term for Australia".
Rodney White, managing director of fertiliser producer Incitec in Brisbane, agrees with the short-term underpinning of commodity prices, but notes that stocks of grains in the United States are healthy.
"And apart from North America there are some surpluses in Europe," Mr White said. "So I don't expect there will be any great bonanza, simply a nice firming of demand for exports from this country."
The rise in soft commodity prices has come after a year of solid gains in metals prices, which have increased nearly 60 per cent. Some economists expect this to taper off, as interest continues in foodstuff commodities as well as non-food agricultural products such as wool and cotton.
While there was a recent slide in the price of live cattle, as producers sent stock prematurely to market with the rise in grain prices, there should be higher prices in the future.
The excitement in the soybean and corn pits in Chicago will obviously have an effect on everyday life and many observers in the United States expect higher food prices.
Although the US Agriculture Department spokesman played this scenario down last week, others feel there must be an eventual flow-through to prices in supermarkets.
According to Reg Eccles, director of brokers Ord Minnett and chairman of Metals Minerals Research in London, "galloping inflation" is not on the cards. He warned, however, of a flow-through inflation which had yet to show up in official statistics.
"You just have to look at the Commodity Price Index in The Economist and see the rises there of about 60 per cent in metals and 40 per cent in food. And if Australia's agricultural production is up that will continue to mean a strong Australian dollar."
Eccles sees a levelling off in metals prices, which have moved up from the doldrums of two years ago. "I think we've seen the best of the metal markets for a while, but I don't think they'll slump too much."
© 1988 Sun Herald
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