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Agri Commodities Update: cotton returns to earth

Cotton prices fell again last night to levels where they have given up all the gains from the weather-inspired, investor-amplified rally in July.

Currencies

The US Dollar had no clear direction against the other agri-exporter currencies on Wednesday.  The greenback made, or neared, near-term highs in doing so.  The Australian Dollar saw some limited zigs and zags to start today, as it did yesterday, a little below 75¼¢. 

Grains & Oilseeds

  • Wheat futures prices were modestly lower on Wednesday.  US futures all set new season lows on the day but the breaking wave of selling petered out to a gentle wash on in its final reach up the beach.  The day did though feature a disturbance in the force.  The Kansas September-December spread rallied sharply after opening higher.  The rally is potentially a sign that the market has taken the hit from Egypt and regained its poise.  On that, Egypt cancelled their wheat tender yesterday after only receiving one offer of wheat.  The trade is clearly unwilling to run the risk of tendering to Egypt with its recently re-established zero tolerance for ergot in wheat.  Ergot-free wheat is perhaps only possible conceptually, so Egypt is likely to have to compromise on this at some point.  Tunisia, not a finicky wheat buyer, took advantage of the lower prices and completed a well offered tender – an event much more signal of the state of the wheat market.
  • ASX East January wheat futures set new season lows on Wednesday to close at 228$.  Overnight trading in wheat and currencies are a small negative.  The extra though does not add greatly to the task of getting Australian basis back to competitive levels beyond our nearest customers.  Nonetheless, without a combo of a lower Aussie and higher global prices, that is still going to take a five-to-ten dollar fall in old crop prices.  New crop milling prices might hold up better for now.  Forecasters expect rainfall for several days in eastern parts of Australia’s winter grain region.  The extra moisture might well work against grain quality.
  • Corn futures closed lower on Wednesday.  CBOT December’s attempt at a rally proved short-lived as the trade was more than willing to sell.  The US is still grappling with the legacy of a large grain carry task from the 2015 season.  The 2016 US winter wheat crop is already headed into feed rations and the corn harvest is now fast approaching.
  • Oilseed prices had a mixed Wednesday.  Soybean continued to fall.  Canola futures bounced though after China agreed to delay the implementation of stricter import measures (due to come into force today) on canola dockage.  The euphoria proved fleeting though as the market was on a weaker tack by the day’s end.  We expect current weakness in the soy complex to remain the dominant feature for canola.  Forecasters say that eastern Australia is set to receive more rain over the next few days, leaving canola some canola growing regions abundantly to excessively wet.  Australian crops are looking at large production potentials but, with harvest approaching, crops will need a drier period to ensure a good finish.

Cotton

US cotton futures closed lower on Wednesday.  An attempt to grind higher was thwarted by another large sell order.  West Texas cotton has benefitted from recent rainfall, but forecasters say a drier pattern will be needed after mid-September to promote crop maturation.  By contrast, parts of the Southeast have become too dry of late and crops are experiencing some stress. 

Sugar

Sugar prices fell sharply on Wednesday.  Spreads were weaker too.  The New York October-March spread was just a shade lower but nonetheless edged towards carry.  The contrast between the price and the spread is stark.  Both took wing in late May as heavy rain settled into south Brazil and disrupted harvesting.  The divergence began in July.  The New York October contract has continued to oscillate either side of 20¢ since then.  The October-March spread though had reversed all those gains by mid-August.  Testing times are upon the market now though as the October contract end-game begins and the divergence needs to be reconciled.   

Dairy

NZX WMP futures were generally higher Wednesday, with most 2016 contracts posting solid gains.  NZX milk futures also finished a shade higher, with the 2016/17 season contract closing at NZ $5.15/kg MS.  The milk contract’s open interest has, encouragingly, risen quickly in the three months since its inception.  Continued growth in daily trading volumes will be necessary to promote greater liquidity and allow for effective price risk management.

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