by Garreth Bloor

Strategic planning

Analysing grain futures will need some careful thought

While the wheat market fundamentals appear mostly bullish, wheat futures have fallen 20% on average since 8 November 2012
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Despite shifts in the grain market coupled with the standard warnings of investment analysts, noting hedging on grain futures are only for the very experienced investor; this has not stalled the interest and profit making in the sector.

According to the government’s data the grain industry is one of the largest in South Africa, producing between 25% and 33% of the country’s total gross agricultural production.

At present the largest area of farmland is planted with maize, followed by wheat and, to a lesser extent, sugar cane and sunflowers according to southafrica.info. What many are coming around to acknowledging, in the mainstream, confirms what contrarian investors like Doug Casey predicted for some time: the potential for wealth lies in agricultural commodities.

Casey Chumrau, a market analyst at a United States based entity called Wheat Associates, says this downward trend in wheat came unexpectedly to several buyers and sellers.

“While the wheat market fundamentals appear mostly bullish, wheat futures have fallen 20% on average since 8 November 2012,” she noted in a recent investor newsletter.

“Declining world production estimates and crop damaging weather have not supported the markets and the slide stands as a reminder that complicated dynamics are driving today’s wheat market,” she said.

Some have blamed the US government’s budget debates, indicating they “overwhelmed any bullish wheat news at the time”.

Michael Krueger, founder and president of The Money Farm was one such individual: “Investors and investment funds looking for new opportu- nities pulled money out of commodities into the stock market, for example, which has performed extremely well the last few months.

“That erased the incentive to stay in or return to declining commodity markets.

“The biggest reason for the drop in wheat futures has been an exodus of speculative money from the markets in late November and early December due to concerns about the approaching fiscal cliff in the United States,” he said, in comments captured by US Wheat Associates.

By contrast corn futures fell in early January after prices of the grain declined in the US, the world’s largest grower.

However local South African wheat futures rose to the highest in more than five weeks after US prices climbed following concern that snow and cold weather late in the winter may harm the crop – leading to a five week high just before April as tracked by Bloomberg News.

“South Africa is a net importer of wheat and sub-Saharan Africa’s largest producer of the grain after Ethiopia.

“The nation is the region’s biggest importer after Nigeria and Sudan, according to US Department of Agriculture data,” Bloomberg’s Jaco Visser elaborated. Domestically the contri- bution of agriculture stands at around 10% of formal employment, meaning policy in the area of agriculture is a natural priority for the country and a critical variable for investors.

Policy aside however, sustainability of current farming practices has been highlighted, with journalist, Sue Blaine, revealing that there is insuf- ficient fresh water in South Africa to go around.

She underscores that experts say water availability is the most important factor limiting agricultural production. This variable of water is critical in determining the economic contribution of agriculture to the economy. Declining world production estimates and crop damaging weather have not supported the markets and the slide stands as a reminder that complicated dynamics are driving today’s wheat market

from their homeland governments in order to acquire full commercial status.”

They add that the CDE report notes, however, that most are still awaiting transfer of title to the land, leaving them unable to use that title as security for production and farm infrastructure loans.

“Anger has already mounted among farmers – both black and white – in the Eastern Cape, at the provincial government’s failure to release state-owned farms for redistribution as well as at the failure to enforce property-rights protections against land invasions.”

The regulatory ability to provide title on state-owned land is argued as a crucial measure to deliver on the macro-economic stability that can make for a lasting solution leading to improved market conditions and long-term output for investors. Overall the government reports in its own analysis that the grain industry is one of the largest and is “a very strategic one”.

Policy matters are also important determinants in the environment.

The latest Index of Economic Freedom, an annual guide published by the Wall Street Journal and the Heritage Foundation in Washington, report on South Africa explains that the economy continues to be “moderately free”, but the level of economic freedom this year is the second lowest in the country’s 19-years of being surveyed for the Index.

 

Lead economist on the report, Jim Roberts, alongside Ray Walser, note in a report by the Centre for Development and Enterprise: “Land Reform in South Africa, after South Africa’s first democratic elections in 1994, small-scale farmers expected the opportunity to buy the land they had formerly leased

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