January 23, 2008

Surprise US Fed cut seen supportive of grain prices

The US Federal Reserve's surprise 75 basis point cut in the Federal funds target rate is considered a positive move for US commodities, especially to grain prices, analysts said.

Sharp losses in global equity markets early Tuesday caused enough concern that the Fed cut rates ahead of its scheduled meeting January 29-30, hoping to stem a US recession, would have ripple effects around the world.

The Federal funds rate now stands at 3.5 percent, the lowest in two and one-half years. In addition to lowering the Fed funds rate, the Federal Open Market Committee also cut the discount rate by 75 basis points to 4 percent.

Since many commodities are pegged directly to the US dollar, which fell to intraday lows versus the euro after the Fed rate cut was announced, it is expected to benefit commodities as it effectively makes them cheaper for foreign buyers.

Bill Nelson, associate vice president and market analyst at A.G. Edwards in St. Louis, said the move would be supportive of grain prices, both fundamentally in trying to sustain economic strength and that in turn is supportive to a lot of foreign markets which buy a lot of US grain.

Asian countries, led by China, are some of the largest buyers of US grain.

Grain prices have reached multi-decade highs and in some cases all-time highs on dwindling reserves amid greater demand for grains for both human and animal consumption and for biofuel production.

While the rate cut should provide stability to the gains and oilseed markets, traders still anticipate a sharply lower opening Tuesday at the Chicago Board of Trade, said Don Roose, president of the US Commodities in West Des Moines, Iowa.