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Agri Commodities Update: here comes the story of the hurricane

Cotton prices touched down for just a day, only to be swept back up again as Hurricane Hermine threatens crops in the US south-east.

Currencies

The US Dollar finished Thursday weakening against the other agri-exporter currencies.  The moves on the day were not large enough to upset pricing broadly.  Nonetheless, the swing is still worth noting because the greenback’s recent gains have weighed on most commodity prices.  The Australian Dollar followed the broader patter and starts today a shade above 75½¢.     

Grains & Oilseeds

  • Wheat futures made sharp gains on Thursday to take a decisive step away from recent lows.  The market seems to have found some stability for now.  The mood swing was abetted by the US Dollar’s weak finish to the day.  Kansas and Chicago’s September-December contract discounts continued to decline to also suggest the market has found a floor for now.
  • ASX East January wheat futures set new season lows on Thursday to close at 225½$.  Yesterday’s price restored a good deal of competitiveness to Australian prices.  Overnight trading in wheat and currencies has marginally improved on that.  Weather forecasters continue to expect heavy rainfall until Monday in eastern parts of Australia’s winter grain region – a mixed blessing.
  • Corn futures were stronger Thursday, pulled higher by the sharp gains seen in the wheat market.  We expect there was probably some investor short covering behind the rally too given that prices had been sitting at seven-year lows.  US corn export sales for last week, while not exceptional, were fairly solid.  Another large sale to Mexico was announced Thursday though to lend the market some additional support.
  • Oilseed futures had a mixed Thursday, but drew broad support from strength in row crops prices.  Nearby soybean contracts closed just a shade higher, with US soybean export sales solid, albeit lower than the previous week.  Canola futures posted stronger gains on the day, still buoyed by the delay to China’s new import measures.  Canada though has boosted its forecast for 2016/17 canola production to 17mmt (previously forecast at 15.9mmt) and the Canadian Dollar has moved higher overnight.  Those factors may weigh on the market today.

Cotton

Cotton futures rebounded sharply on Thursday.  The leg up was no one-off order either.  The day’s trading was characterised by plenty of investor buying activity that only built momentum as the day progressed.  The rally had a couple of drivers.  Firstly, the US again reported strong cotton export sales, with over 350,000 running bales sold last week.  A sign that perhaps the demand tide is, slowly, starting to come back in.  Secondly, market chatter was centred on news that Tropical Storm Hermine had strengthened into a hurricane.  The weather system is expected to make landfall in northern Florida and then track up through south-east Georgia and the Carolinas, bringing heavy rainfall.  While the situation warrants close watching, we are wary of overstating the potential impact on crops at this stage.  Georgia and the Carolinas are forecast to produce around 23% of total US upland cotton this season.  As of last week about a quarter of crops in those states were in the open boll stage.  So perhaps 4% or so of the US crop will be vulnerable to damage.  The result might prove to be even less if the system passes through quickly as meteorologists expect.  Nevertheless, some investor’s sentiment is easily swayed by headlines.  And auto-pilot buyers will care not what has prompted the rally.  The big moves overnight may have extinguished any weakness for now.      

Sugar

Sugar futures prices and spreads dived on Thursday.  New York October is now at the lowest level since early August.  The New York October-March spread (at -59) is at the lowest since February.  And the market is now configured to carry sugar into next year.  We are not really surprised by the fall.  The October contract's end game was always going to test the market’s resolve at these prices levels.  To be sure we, we do think the sugar market will tighten progressively so prices for later in 2017 and 2018 can go higher.  We are sceptical though the market is all that tight now so we have difficulty seeing who is going to buy investors out of their long position in the October contract.  Buyers will need to have strong enough incentive to do so.  The October-March spread is providing that to some degree.  Whether that is enough we shall see - 59 points is modest discount by historical standards.     

Dairy

NZX WMP dairy futures closed weaker Thursday, but did not entirely give up Wednesday’s gains - most 2016 contracts only fell US$5-20.  A GDT auction next week will be the next test for the market.  In our view though, the global dairy market has now reached the turning point and we are optimistic that prices will continue to build momentum as the season progresses.

Learn More

For a more detailed snapshot of market conditions, or to get the daily market update direct to your inbox daily, visit Commonwealth Bank. Important Disclosures and analyst certifications regarding subject companies are at www.research.commbank.com.au.

This report was originally published, approved and distributed by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945.

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