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Commodities Markets: Watch Pilgrim's Pride
added: 2008-09-29

Suddenly, the gyrations of commodity markets and the price of oil no longer seem so dramatic, or headline grabbing. But there's one commodity-related event last week that sums up the conjunction of the still spreading impact of those record prices for oil, grains and other products earlier in the year, the credit crunch and now the lending freeze.

It's all summed up in the situation that confronts Pilgrim's Pride, America's biggest chicken meat company: it's close to going under. The bailout won't help at this stage because there are too many needy banks and financial groups ahead: but it may give Pilgrim's Pride some breathing space.

Believe it or not, the company may become the latest victim of excessive leverage. Its shares tanked by nearly 90% last week and closed at $US3.55. Shades of Washington Mutual.

Rumours spread Wednesday that the food giant was having problems, but on Thursday it revealed it might breach its debt covenants when its quarter finished on Saturday. It has obtained a month-long waiver from its lenders as it tries to fix its business and negotiate a new agreement with its banks.

Some conditions on the company's borrowings had already been relaxed earlier this year. It has long-term borrowings of over $US1.5 billion and on Friday was valued at just $263 million, a clearly unsustainable position.

US reports said it was trying to sell assets but the bank lending freeze and financial turmoil is making that and other attempts to find new cash reserves, almost impossible. It may have to sell assets in Mexico quickly to raise more cash. It built its debt by expanding through acquisitions when credit was free and easy.

Any problems for it would have a knock-on effect on grain markets as it is a major consumer of corn and soybean products in feed for its chicken raising. A default or bankruptcy at this time would spark a series of tremors that would shake confidence.

Corn and soybean prices fell in Chicago last week after the $US700 billion financial rescue plan stalled and there was more evidence of the US economy slowing. December corn futures fell 15.25c, or 2.7%, to $US5.43 a bushel in Chicago on Friday. November soybean futures shed 19c, or 1.6%, to $US11.64 a bushel.

Corn was still up 0.1% over the week and soybeans were up 1.8%. Oil fell after the $US700 billion bailout plan stalled, but also driving it lower was further confirmation of falling demand in the US, the world's biggest energy market.

Oil prices fell by around 3.5% at one stage in trading on Friday after the stalling of the bailout on Friday night. US fuel demand fell 5.3% in the past four weeks, compared to the same period of 2007. November oil fell $US1.13, or 1.1%, to $US106.89 a barrel in New York Friday night.

Prices were up 4% over the week but down 27% from the record $US147.27 a barrel reached on July 11. In London November Brent crude dropped $US1.06, or 1%, to settle at $US103.54 a barrel in London.

Gold rose, extending its gains to a second straight week, as those bailout talks fractured. December gold futures rose $US6.50 to $US888.50 an ounce on Comex in New York. The metal finished up 2.8% last week, after jumping 13% the week before. December silver futures climbed 22.8 USc, or 1.7%, to $US13.503 an ounce.

And reports last week said a key indicator of the world commodity trade, the Baltic Dry Index, fell sharply as demand for oil and iron ore dropped. A dispute between Chinese steel mills and Brazil over a demand for a higher iron ore price (to match those granted to BHP and Rio) has impacted demand for bulk carriers.

The index plunged 25% last week as owners of bulk carriers cut rates to try and win business anywhere in the world. There are dozens of huge carriers off Brazil waiting to loan iron ore, but none is being sent by the huge Vale mining group.

The fall last week means the index, which measures the cost of chartering ships used to carry dry bulk cargoes such as iron ore, coal and wheat, has now lost nearly 70% of its value from the record levels set in May. In fact chartering costs are running at just over $US46,000 a day, compared to almost a quarter of a million dollars. The fall will be welcomed by Chinese, South Korean and Japanese steel mills because it means a huge drop in shipping costs at a time when profit margins are being pressured by sliding demand for steel products.

Source: ABN Newswire

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