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Agri-commodities update: Dairy leapfrog

WMP futures surge to follow and exceed the prices set in Tuesday’s GDT auction.

Currencies

The US Dollar was mostly weaker on Wednesday.  The moves haven’t broadly pushed the greenback into new territory but particular currency pairs are making new ground.  The Euro and NZD in particular have reached levels they have not traded for around a month.  The Brazilian Real is retreating despite all the recent bullishness about that currency.  Brazilian officialdom is leaning hard against the rise which, for now, is working.  The Australian Dollar zigged and zagged over the past day.  The Aussie starts today a shade higher at just over 76½¢.

Grains & Oilseeds

  • Global wheat futures prices were mixed on Wednesday.  Chicago and Kansas gained modestly.  Minneapolis futures continue to falter.  The prompt December contract fell again as doubts about export competitiveness grow at these prices levels.  The market will scrutinise tonight’s US export sales data to see how much Hard Red Spring wheat is being sold.  Weather forecasters have had a change of mind on the dry parts of US hard red winter wheat country.  Forecasters have been eyeing model projections of rain in the region warily until now.  Now they expect some of those projections to come to fruition with rainfall that will relieve (but perhaps not permanently solve) the dryness issue.
  • ASX East January wheat futures were down a dollar at 234$ on Wednesday.  CBH, the predominant grain handler in Western Australia, published their estimates of frost damage to crops in the region.  The frosts were quite some time ago now so the market has been aware of the issue for some time.  We suspect the market had not imagined the grain losses to be this large.  The consensus forecast for WA’s crop was just short of 10mmt.  CBH’s numbers suggest there have been losses of around 1½-2mmt.
  • Corn futures weakened again on Wednesday.  Harvest pressure continues to pull the market lower.  Next week’s WASDE report also looms, prompting investors to engage in some position squaring.  The size of the investor long positon is only modest though, so the scale of potential fund liquidation is not especially large.  On the weather front, forecasters say some storms will pop up in the Midwest today, but beyond that the forecast is looking dry enough to see the US harvest wrapped up by mid-month.  A favourable two week outlook for most of Brazil should allow corn planting to progress swiftly.
  • Soybean futures were lower on Wednesday, despite reports that China had bought 132k of US soybeans overnight.  Investors will be squaring up some of their large long position ahead of next week’s WASDE report, with most analysts expecting the USDA to bump their US yield forecast up.  Yesterday INTL FCStone raise their estimate to 52.8bpa.  A weaker Brazilian Real also weighed on the market.  The Real has now given up all of the big step up it made in October, which will shave some of the competitive edge off US origin ‘beans.  Prospects for Brazil’s crop remain good: aside from some drier areas in the northeast, most of Brazil is slated to receive sufficient near-term rainfall.  Argentina though has seen a deluge of rain over the past fortnight.  Weather models, which had been pointing to drier conditions, are now suggesting that wetter bias will persist.  As a result forecasters say that less planting is likely to be accomplished during the next two weeks. It’s still too early in the season for this to qualify as a “problem” but, should the rain continue long enough, then there is potential for it to have an impact on production.  So on to the watchlist Argentina goes. Canola futures fared better on Wednesday to close the session a shade higher.  Outside support came from a rebound in Malaysian palm oil futures.  Meteorologists say cold and wet conditions in Canada’s Prairies will improve later this week, but the trade will remain nervous about production until those forecasts are realised.

Cotton

US cotton futures had a day of zigging and zagging that took prices to a slightly higher close.  Adding support to prices, forecasters now expect soaking rain in West Texas.  Forecasters say fieldwork will be disrupted over the course of the week and some concerns may emerge over fibre quality.

Sugar

Sugar futures snapped their losing streak on Wednesday with hefty bounce. Traded market prices rarely move in the same direction continuously, especially at the scale witnessed in the previous five days. Last night saw the kind of powerful bounce that is not all that surprising given the force of the fall.  We still favour the market going lower but expect the market to zig and zag as it eventually falls.

Cattle

US live cattle futures spent most of Wednesday trading in a sideways pattern.  Processors have been paying higher cash prices for cattle on the Fed Cattle Exchange this week and US wholesale beef prices have also inched higher.  However gains in futures were capped as prices at month-plus highs have encouraged some profit taking.  Australian cattle indicators have weakened a shade further.  The EYCI, while still historically very high, closed at its lowest level in more than three months on Wednesday as improved supplies take some heat out of the market.  A quiet news day all up.

Dairy

The futures prices rocketed higher on Wednesday following Tuesday night’s stellar GDT auction.  Traded contacts – spanning December 2016 to April 2017 – rallied around 8½% - a very large gain.  Much of the gain is calibration – but not all.  The futures have added premiums – of around two hundred dollars - to the where the GDT auction set prices.  That suggests the market remains bullish about prices even after the recent rises.  We have some sympathy with that view because the downgrades to production in NZ and Australia have been hefty.  The other element here is that consumers are quite likely to running behind in their buying schedules – that tends to happen after sustained periods of ample supply.  Tuesday’s jump is partly a result of that catch-up but it is unlikely to be complete.

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.commbank.com.au/corporate/research. This report was originally published, approved and distributed by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945.

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