Grain Prices

Risk-on or risk-off?

Peter McMeekin, Nidera Australia origination manager, November 8, 2016

 

LAST week we saw the running of the Melbourne Cup, the race that stops a nation. On Tuesday we have the conclusion to the race that stops the world, the United States Presidential Election. That race started before Protectionist won the Melbourne Cup back in 2014, and that name is quite ironic when you consider the stated trade policies of one of the Presidential candidates.

So how will the election result impact the Australia grain grower? What scenario is likely to have the greatest influence on domestic grain prices?

Risk-on, risk-off (RoRo) investing describes a process where investors move to riskier potentially higher yielding investments and then back again to supposedly lower yielding investments, which are perceived to have lower risk. Quite often risk-on, risk-off behaviour follows global markets, where periods of perceived low financial risk encourage investors to take risk, therefore creating a risk-on situation, and periods of perceived high financial risk cause investors to take less risk, creating a risk-off situation.

Whilst a win by either candidate would most likely lead to differing RoRo reactions by global markets in the short term, it is the resulting market volatility that will most likely have the greatest impact on grain prices here in Australia. A risk-on market bias would most likely see money moving into global equity and commodity markets and out of the USD. The upshot of this would be a strengthening of the AUD against the USD leading to lower domestic grain prices (assuming futures and basis are unchanged) as we attempt to compete and market grain into the world market place.

A risk-off scenario would see investors favouring the perceived security of the USD versus equities and commodities manifesting itself in a weaker AUD and higher domestic grain values (with the same assumptions). This has already been seen to a degree with corn and soybean futures down week-on-week and the AUD almost a cent stronger against the USD as polling revealed Trump was closing the gap on Clinton in the race to The White House.

United States Department of Agriculture (USDA)

The other big agricultural news this week will be the World Agricultural Supply and Demand Estimates (WADSE) report, which is due out on Wednesday, a day after the election. Market expectations suggest that the USDA will trim its corn production slightly and raise soybeans a small amount. If the changes are minimal, as suggested this would be neither bullish corn nor bearish soybeans. Wheat has been a follower of corn and beans lately and market feeling is the USDA may tinker at the edges by raising United States ending stocks compared to October and lowering global ending stocks.

The one certainty this week is uncertainty – if that makes sense. Markets across the globe are being extremely cautious leading into the US Presidential Election and the agricultural markets have a double whammy with the USDA report due out the following day. I hate to say it, but it has been the year of the underdog. Wins by Cronulla, Western Bulldogs, Leicester, the Chicago Cubs and the Cleveland Cavaliers wiped out a combined losing streak of four hundred and eight years. And then there was Brexit.

What surprises are we in for this week?

 

Source: Nidera Australia Weekly Market report: Peter McMeekin is Nidera Australia’s Origination Manager.

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