Etikett: Australia

El Niño: the impact on agricultural commodities

El Niño: the impact on agricultural commodities WisdomTreeEl Niño refers to a climate cycle in the Pacific Ocean that has a global impact on weather patterns. The name, which loosely translates to ‘Christ child’, traces its origin back to Peruvian fisherman in the 1600s, who observed that fish yields would often decline around Christmas time as sea water temperatures rose. The effects of El Niño include specific wind patterns across the Pacific Ocean, heavy rain in South America, and droughts in Australia and parts of Asia including India and Indonesia.

With the National Oceanic and Atmospheric Administration (NOAA) forecasting a 96% probability of an El Niño weather event during the current Northern Hemisphere winter, there is a strong chance that we could see some weather abnormalities in the coming months.

Figure 1. The probability of El Niño occurring this year

Why El Niño matters for agricultural commodity prices

El Niño can have a significant impact on the fortunes of the agricultural industry, as the growing of agricultural products is highly sensitive to weather patterns. The right amount of sun and rain at the right time is important to produce the optimal yield. For example, droughts can ruin a crop because of insufficient water, while floods can wash away plants, or delay the process of harvesting a good crop from the ground, causing it to spoil.

While El Niño can have a considerable effect on agricultural commodity prices, the specific impact on the price of any individual commodity will depend on the El Niño’s amplitude and timing, as well as locational factors such as where the crop is grown and how prepared the farmers are for extreme conditions.

Figure 2. Weather impact of El Niño

Source: NOAA

Analysing the impact on agricultural commodity prices

When assessing likely El Niño effects, the first step is to consider the time of the year that El Niño is likely to begin. In this case, the NOAA believes that the event is likely to arrive in the Northern Hemisphere winter this year, but there is a good chance that it could linger into the Northern Hemisphere summer with a lower intensity. The next step is to assess which part of the crop cycle it will affect. According to research by Iizumi et al., a weather disturbance during the ‘reproductive’ growth period of the crop cycle tends to have the largest impact on crop yields.

Using insights from Iizumi et al. we have assessed the possible near-term impact from an El Niño on crops that are in the reproductive phase of growth. We summarise our key thoughts below:

Bullish on sugar, cocoa, and wheat

Agricultural commodities that we are bullish on in the event of an El Niño include sugar, cocoa, and wheat.

Sugar production is highly concentrated in India and certain regions of Brazil. If El Niño occurs, it’s likely that both countries could see below-average rainfall and drier conditions, and this could drive prices higher.

Indonesia, which produces 10% of global cocoa supply, could also be directly affected by an El Niño, and dry warm weather in Indonesia could potentially drive cocoa prices higher.

Australia, which produces 4% of global wheat supply, is another country that could face dry weather if El Niño emerges. This could have a positive impact on wheat prices, although much of the wheat harvest is expected to be completed by mid-January, which should limit the impact of an El Niño.

Bearish on soybean, corn and Arabica coffee

In contrast, we are bearish on soybean, corn, and Arabica coffee.

Brazil and Argentina, who together are responsible for almost half of the world’s soybean supply, are likely to experience favourable growing conditions in the event of an El Niño. As such, an El Niño could prove to be price negative for soybean prices.

Figure 3. The effect of El Niño on soybean growing during the December to March reproductive growth phase

Source: Adapted by WisdomTree from “Impacts of Southern Oscillation on the global yields of major crops” by Iizumi et al, May 2014

Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties.

The effects of El Niño on corn are less significant, but could be mildly positive for growing conditions in South America and parts of Australia, and hence slightly price bearish.

Arabica coffee production is highly concentrated in Brazil, Mexico, Colombia and Central America. These countries could experience favourable growing conditions, and given that most of the coffee in these regions will be in a reproductive growth phase in the months ahead, we could see a positive supply shock to the commodity, which would be bearish for prices.

Other factors

We caution that the analysis above is based on the pure effect of an El Niño event and does not consider the many other factors that can impact crop yields. We’ll also point out that agricultural commodity prices can be affected by a number of other developments such as exchange-rate movements and trade policies. However, the analysis is useful as a rough guide as to how commodity prices could potentially be affected if we do experience an El Niño event in the near term.

DISCLAIMER

The content on this document is issued by WisdomTree UK Ltd (“WTUK”), which is authorised and regulated by the Financial Conduct Authority (“FCA”). Our Conflicts of Interest Policy and Inventory are available on request.

Strong Finish to 2017

Strong Finish to 2017

Strong Finish to 2017 by VanEck, For the Month Ending December 31, 2017

Performance Overview

International moats, as represented by the Morningstar® Global ex-US Moat Focus IndexSM ( MGEUMFUN, or ”International Moat Index”), trailed the MSCI All Country World Index ex-USA in December (1.75% vs. 2.24%), but finished with full-year outperformance of greater than 3% (30.36% vs. 27.19%). The U.S.-oriented Morningstar® Wide Moat Focus IndexSM ( MWMFTR, or ”U.S. Moat Index”) followed a strong November with positive relative performance in December, toping the broad U.S. markets as represented by the S&P 500® Index (1.66% vs. 1.11%). The U.S. Moat Index finished the year ahead by roughly 2% (23.79% vs. 21.83%).

International Moats: Japan Weighs, Australia and Brazil Boost

Together with several firms from Japan, utilities and telecommunications firms struggled in the International Moat Index for the month. The bottom three performing companies in the International Moat Index were Japanese companies. Nippon Telegraph & Telephone Corp (9432 JP, -10.43%), which owns mobile telephone operator NTT DoCoMo, struggled in December after posting quarterly results generally in line with expectations in November. SoftBank Group Corp (9984 JP, -6.58%) also struggled in December. The company has a wide range of international and e-commerce investments in its portfolio, some of which compete directly with the aforementioned Nippon Telegraph & Telephone Corp. On the other side of the coin, financials and consumer discretionary companies contributed strongly to International Moat Index returns and the Index also received a strong boost from companies in Australia, Hong Kong, Canada, and Brazil. The International Moat Index standout was Brazilian aviation company Embraer SA (EMBR3 BZ, +26.46%), following speculation that Boeing was in talks to buy the company. Shares of Embraer SA shot up and approached Morningstar’s fair value estimate of $26 per share at year end.

U.S. Domestic Moats: Consumer Discretionary Shines

Consumer discretionary companies were the primary driver of strong performance for the U.S. Moat Index in December. While Express Scripts Holding Co (ESRX US, +14.51%) was the top performing index constituent in December, firms such as Lowe’s Companies, Inc. (LOW US, +11.48%), Twenty-First Century Fox Inc. (FOXA US, +8.11%), and L Brands Inc. (LB US, +7.40%) helped consumer discretionary lead the way. Tech firm Veeva Systems Inc. (VEEV US, -8.19%) was the worst performing stock in the U.S. Moat Index after issuing 2019 fiscal year guidance below expectations. The firm provides client relationship management services to the pharmaceutical industry and Morningstar lowered its fair value estimate four dollars to $65 on December 6th. The consumer staples and information technology sectors were the two sectors to detract from index performance, but only slightly.

Important Disclosures

This commentary is not intended as a recommendation to buy or to sell any of the named securities. Holdings will vary for the MOAT and MOTI ETFs and their corresponding Indices.

The rebalancing of the Australian economy is the cornerstone of its resilience

The rebalancing of the Australian economy is the cornerstone of its resilience

ETF Securities Equity Research: The rebalancing of the Australian economy is the cornerstone of its resilience

Highlights

• Stronger business confidence picks up momentum offsetting some of the weak consumer confidence.

• Chinese growth has stabilised, its demand for exports from Australia is strong, but momentum will gradually decline in line with the slowing rate of urbanisation in China.

• The housing cycle is easing but a robust mortgage system, lower foreign investor reliance coupled with stable debt service payments emphasise that a crash is avoidable.

Australia defies doomsayers

Australia is the only OECD country since 1970 known to have withstood the longest period, 104 quarters in a row, without a recession. Despite numerous forecasts of an impending recession, the resource driven Australian economy withstood the demise of the commodity boom. Since the 1970s, several reforms such as – the floating of the exchange rate, RBA inflation targeting and labour market microeconomic reform, improved the flexibility of the economy. We remain convinced that the rebalancing of economic activity and the improvement in productivity will enable it to withstand the slowdown in the housing cycle.

While second quarter GDP growth rose to 0.8%, the annual pace of expansion at 1.8% remains below its potential (at around 3%). We believe the lingering effects of tropical cyclone Debbie, on construction and coal exports, was a drag on Q2 GDP growth, and its temporary effects are likely to reverse.

Business confidence remains upbeat

Record high household debt levels coupled with sluggish wage growth has weighed on consumer confidence. As housing accounts for more than 50% of household wealth, the decline in house prices has lowered household wealth thereby dampening consumer consumption. Amidst this backdrop consumer spending (at nearly 60% of GDP) is likely to remain subdued in the near term. Meanwhile, business confidence surpassed consumer confidence in 2014 and its positive momentum provides signs that business investment could plug the gap left behind by consumer spending.

Furthermore capital expenditure in the private sector and mining industry are starting to rebound from current low levels. Public infrastructure investment, led by the state is up 9.5% over the prior year. Services exports, led by tourism and education are continuing to strengthen, aided by a weaker currency, and Australia is well positioned to benefit from the growing Asian middle class.

China’s commodity import demand to unwind gradually

Among all OECD nations, Australia remains the most dependent on China as it accounts for more than a third of all exports. Despite widespread fears of a slowdown in China, growth in China has stabilised. While China’s growth momentum slowed marginally on a quarterly basis, an improvement in retail sales and industry output is pointing to robust growth heading into next year. Additionally, a 19.8% growth in infrastructure spending over the prior year strengthens the case for a continuation of commodity demand. Bulk commodities represent a quarter of Australia’s total exports led by iron ore and coal. We are still seeing demand for steel (which uses iron ore and coking coal) and electricity (generated by thermal coal) remain strong.

At the same time, there has been a fall in Chinese production of iron ore and coal, owing to lower profitability and compliance with environmental regulations. This has increased demand for imports from Australia. Looking ahead, the Reserve Bank of Australia (RBA) is forecasting a slowdown in China’s urbanisation rate to gradually impact demand for iron ore and coking coal over the coming decade.

Housing sector looks stretched

House prices in Australia have continued their meteoric rise since the start of the decade, more so in Sydney and Melbourne while less in Brisbane and Adelaide. During 2000’s, the rate of building construction failed to keep pace with the rising population growth, providing an incentive for a surge in house supply.

Rising supply coupled with tighter lending standards and poor affordability has left the housing sector overstretched. Consequently, building approvals and dwelling investments are declining. Australia’s mortgage system has robust underwriting rules in place that operate on a full recourse basis. In addition, interest payments to quarterly disposable income have remained stable. For these reasons, we do not expect to see a repeat of the US subprime mortgage crisis in Australia. We hold the view that the RBA will maintain interest rates at 1.5% until the end of next year thereby helping households continue servicing their loans.

So far, Australian residential real estate prices remained buoyed by the steady stream of Chinese immigrants buying property at record valuations. Recent data from the Foreign Investment Review Board (FIRB) in May highlight a 60% y-o-y decline in volume of real estate investment approvals sought by Chinese residents. We believe these risks are largely contained as the National Australia Bank (NAB) estimates foreign investors account for only 11% and 7% of new and established home sales respectively.

Australian equities lack innovation

Australian equities have posted a mediocre gain of 5.7% since the start of the year lagging global peers by 12% and the technology sector by 34%. Their lagged performance highlights a critical theme lacking in Australian equities – technology and innovation. While current valuations at 5.3x are well below their historical average, we are of the opinion that unless Australia displays entrepreneurship in the technology sector, they will fail to attract foreign investors.

Despite record high household debt, and a slowdown in the housing cycle and mining investment (6.8% of GDP), we are convinced that the resilience of the Australian economy will help it avoid a recession as it has done for the last 26 years.

For more information contact:

Catarina Donat Marques
ETF Securities (UK) Limited
T +44 20 7448 4386
E catarina.donatmarques@etfsecurities.com

Important Information

This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.

 

US natural gas international demand unlikely to absorb domestic glut

US natural gas international demand unlikely to absorb domestic glut

Commodity Research US natural gas international demand unlikely to absorb domestic glut

Highlights

  • Expansion of natural gas production in the US at a time when output of other fuels is also expected to increase will mean that the US will become more reliant on exports.
  • The US is reliant on NAFTA members for export demand. The risk of disappointment at a time of trade frictions seem high. An increase in inventory over the next six months seems a likely outcome.
  • The US’s role in the global liquefied natural trade is likely to rise. The US could prove to be a positive disruptive force, improving global natural gas security and pricing infrastructure. But it is unlikely make a material difference this year and thus exports are unlikely alleviate the US’s production glut.

End of gas as a transition fuel?

In 2014 President Obama labelled natural gas a “bridge fuel” to help the US meet a lower carbon emission target, before further deployment of renewables. The promise of less red tape to allow businesses to utilise this fuel was supposed to have lifted demand. However, a pledge from the new Trump administration to bring back coal jobs (and presumably increase coal supply) threatens to make gas’s competitor cheaper and will likely weaken demand for natural gas.

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Production expansion

US production of natural gas is set to expand strongly this year and next on the back of legacy investment when prices were higher. This reverses the decline in production in 2016. Meanwhile US consumption is expected to decline this year (before potentially recovering next year).

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Net exporter of gas for the first time

With domestic production outstripping consumption, the US’s reliance on imports will fall significantly. In fact, the US is likely to become a net exporter of natural gas for the first time in calendar year 2018 (and as early as Q3 2017 on a quarterly basis).

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Risk to inventory increase…

If foreign demand for US gas remains weak, we could see inventory rise above seasonal trends, possibly by more than a standard deviation above average, as we saw in 2016.

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…especially if foreign demand weakens

The risk of foreign demand being weak is material. Most of US’s exports is via pipeline and truck (90%). In terms of pipeline and truck exports Mexico accounts for approximately 70% of demand, while the remaining 30% goes to Canada. Both of these countries are being antagonised by the US’s stance on trade. The US’s provocation to withdraw from NAFTA is at the centre of the discord. The US’s threats to ban lumber and dairy imports from Canada and build a wall at its border with Mexico could be met with tit-for-tat retaliation. Canada is already threatening reciprocate with a ban on US coal. As Canada is an important transit point for US coal exports to Asia, that risks bloating US’s domestic coal supplies further (and thus presents a further downside risk to gas).

Moreover, it is difficult to believe that either Canada or Mexico will seek to expand their demand for US gas in an era of cheap oil (both countries are net oil exporters).

US as a disruptive force in the global LNG market

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About 10% of US production is exported in liquefied natural gas (LNG) via vessels. The US is a relatively small producer of LNG, accounting for only 1% of global exports, but is growing rapidly. The US’https://www.etfsverige.se/etfbloggen/?s=Australias LNG growth trajectory, based on liquefaction capacity currently being built, will drive the US from being a negligible player to become the third largest after Qatar and Australia by 2022.

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LNG relies on liquefaction infrastructure in exporting countries and regasification infrastructure in importing countries. There is little volume flexibility in global liquefaction infrastructure: apart from a significant portion (15%) that is offline due to operational issues, liquefaction operates at close to full capacity. Traditionally, global liquefaction facilities enter into long-term contracts – 80% of which are signed before the final investment decision to build a plant – and thus offer little flexibility to respond to spot prices. The US is a notable exception, preferring flexible destination and short-term contracts. The US’s rapid growth will offer spare capacity.

In terms of regasification, infrastructure lead times are much shorter. Today, global LNG import capacity is roughly three times the level of global export capacity. In theory, there is plenty of regasification capacity to absorb an expansion in liquefied exports.

The market is not accustomed to be responsive to prices because of supply inflexibly resulting from long-term contacts. However, the rapid growth of US LNG – that is generally not tied to long-term contracts – could disrupt the status quo and allow importers to opportunistically buy gas when prices are cheap. The US could become a swing producer in the natural gas market, buffering supply disruptions elsewhere and allowing importers to flexibly increase/decrease gas in their power generation mix in accordance with price. We view this a positive development from a global gas security perspective as well as its impact on smoothing the supply that could be subject to boom-bust cycles.

However, we don’t think that the long-term growth in foreign demand for US gas supplies will have a material impact on US gas prices this year, not least because demand in Asia and Europe (the largest import markets) is currently very weak.

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value. This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States. This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents. ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction.  No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.  

Watch out ags: La Niña is coming

Watch out ags: La Niña is coming

Watch out ags: La Niña is coming Yesterday the National Oceanic and Atmospheric Administration (NOAA) and the International Research Institute for Climate and Society (IRI) raised their forecast for a La Niña to 75% starting this Northern Hemisphere Autumn. While meteorologists are often wary about putting out forecasts with such confidence before June, the combined cooling of sea surface and underwater temperatures has helped their assertion. In all 6 occasions since 1979 when there has been cold subsurface water temperatures during spring, a winter La Niña has emerged.

La Niña weather events typically bring cooler, wetter weather to South America, Southern Africa, Australia, Indonesia, Canada and parts of the US.

Looking at historical La Niña episodes that started in the Northern Hemisphere Autumn/Winter, our analysis shows that most agricultural prices fell one year after the event hit a moderate intensity. The notable exception is sugar. Many South American crops benefit from reduced drought risk and heat damage. US winter wheat typically benefits from better snow cover. We expect that most of these crop impacts will be seen in 2017.

Earlier this week, the US Department of Agriculture released its initial assessment of US and world crop supply and demand prospects for 2016/17. While market prices rallied on the back of reduced ending stocks, production forecasts for 2016/17 US corn, wheat and soybean beat Bloomberg consensus forecasts. The projections for world corn and soy production in 2016/17 were also higher than production in 2015/16. While these forecasts are highly tentative (planting of the crops in many cases has not even taken place yet), if they materialise, soy and corn prices are likely to fall.

Watch out ags: La Niña is coming

Nitesh Shah, Research Analyst at ETF Securities

Nitesh is a Commodities Strategist at ETF Securities. Nitesh has 13 years of experience as an economist and strategist, covering a wide range of markets and asset classes. Prior to joining ETF Securities, Nitesh was an economist covering the European structured finance markets at Moody’s Investors Service and was a member of Moody’s global macroeconomics team. Before that he was an economist at the Pension Protection Fund and an equity strategist at Decision Economics. He started his career at HSBC Investment Bank. Nitesh holds a Bachelor of Science in Economics from the London School of Economics and a Master of Arts in International Economics and Finance from Brandeis University (USA).