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Agri Commodities Update: Wheat remembers the need, the need to feed

US winter wheat prices fall sharply as a softish export report reminds the market it needs to compete with corn at home.


The US Dollar has weakened a little over the past day.  The greenback really lacks any systematic direction against the other agri-exporter currencies.  The individual pairs are of more interest.  The Brazilian Real had a sharp rally that has taken it closer to the upper end of recent ranges.  The Australian Dollar is in a similar place.  Both will be a headwind for local prices, and that will intensify if either pushes higher still.  The Aussie starts trading today at about 76¾¢.

Grains & Oilseeds

  • US winter wheat futures prices were sharply lower on Monday.  The market didn’t seem too worried by high wheat inventories on Friday.  Monday’s modest export inspections number was sharply lower.  Indeed they were back in the “slow exports” range seen in 2014 and 2015.  That will re-emphasise the role feeding wheat will play in resolving heavy US supply.  The US and Black Sea winter wheat regions still require some rain to boost moisture for 2017 crop planting.  Weather forecasters expect dry parts of the Black Sea countries to get some rain towards the end of the week.  In the US the dry western sections of the winter wheat regions are unlikely to get much rain over the next week.
  • ASX East January wheat futures fell 4$ on Monday to close at 231$.  Overnight action in currencies and US futures was not helpful either so Australian basis will be under pressure in early trading today.  Weather forecasters continue to expect a drier, but not dry, turn in south-eastern grain regions.  Higher temperatures will help that that drying too.
  • Corn futures had an eventful couple of days.  Last Friday, the USDA reported on the state of US grain inventories.  Corn inventories were not as large as the market had feared. US stocks are large, but the fact that they were not as large the trade’s expectations prompted a sharp rally which continued through into Monday trading.  Investors are holding a very large short position, so their buying potential is also large.  The lower-than-expected corn inventory and higher-than-expected wheat inventory numbers are also interesting as they imply that the extra protein in wheat is not worth the 80¢-100¢ premium that winter wheat has been sporting since July.  At those levels livestock producers do not appear to have been incentivised to switch to much additional wheat feeding.  Kansas wheat’s premium to corn has now tightened to ~60¢.  The lows though were set back in June (22¢), so wheat-corn spreads probably have further corrections to make.  On the harvest front, around 24% of the US crop has been harvested – still a few points behind the average pace.
  • Oilseed prices were higher on Monday – soybeans sharply, canola more modestly.  Soybean futures have drawn some support from the lower than expected US inventory number reported by the USDA on Friday.  Strong US export inspections are also encouraging, but fresh sales will be limited this week with Chinese traders celebrating a national holiday.  A sharp rally in the Real was broadly helpful too – though the currency impact is probably muted by the fact that, at this point in the crop calendar, the US is effectively the only origin with any material number of ‘beans to sell.  An already strong signal simply gets a little bit stronger.  US soybean conditions remain excellent and around a quarter of the crop has been harvested so far – significantly slower than last year, but not too far behind the five-year average pace.  Progress should speed up this week with some drier weather in the eastern Midwest.  Argentina and Brazil will receive some rain this week, but eliminating existing moisture deficiencies will require several follow up events, so both remain on the watchlist for the time being.  Argentina’s government announced this morning that it will retain its current 30% tax on 2017 soybean exports (having previously promised to cut it to 25%) due to current fiscal challenges.  Instead the tax will be gradually reduced by 0.5% per month over 2018 and 2019.  That could be a potential price positive for the soybean complex if it encourages Argentinian farmers to switch to crops which do not face export tariffs.


US cotton futures drifted lower early on Monday, only to later rally their way to a modestly higher close.  The finish though was a wobbly one: prices at the day’s highs (~68.7c) encouraged drew out some late selling pressure.  The US cotton harvest is currently around 16% complete – slightly ahead of the five-year average, so no concerns there at the moment.  Drying conditions are expected to prevail across Texas for the next week or so, which should allow fieldwork to advance favourably in the west.  In the US southeast though, weather forecasters’ models have Hurricane Matthew on a slightly more westward track – which means there is a chance that it may make landfall near the North and South Carolina border over the weekend.  Future model runs could see that changed, but it will be monitored closely by the market all the same.


Sugar futures prices fell for a second day on Monday.  Trading volume was light-on but, coming after Friday’s very sharp fall, we wonder about how robust the recent rally is.  The March-May spread weakened sharply to 0.72.  That level is the lowest in some time but it remains in the higher orbit that it reached from mid-September.  Friday's positions report showed that investors still had huge long positions (as of last Tuesday).  On some measures that is a new record but that seems to happen every other week – testament to how long this huge investor long has been with us.  The other event on Friday was UNICA publishing production data for the first-half of September.  The data, as the market was expecting, showed that this cane crush is a struggle.  There is less cane.  Pre-season forecasts were for a near 620mmt crush.  Forecasters now see it barely making 600mmt.  For example, GVO, a Sao Paulo cane miller, reported Friday that its cane crush in the 2016 season would be 8½mmt – down almost a million tonnes on what they were planning to crush.  And the sugar content of the cane is down too.  The first half of September normally sees sugar recoveries over 15% - this year it is only just 14%.  Mills though are not producing a lot less sugar.  Instead they are allocating as much cane juice to sugar production as their operations allow.  And why wouldn’t they – sugar at 22½¢ is paying about 5-6¢ more than ethanol.  The combination of no surprises and sugar production holding up anyway was not what a bullish market needed to hear.


Australian cattle indicators were not reported Monday due to the Labour Day holiday weekend.  The US cattle market however continued to plumb new lows.  Average cash bids for choice steers were around 100US¢/lb on Monday (288A¢/kg).  And on the futures market, live cattle prices touched six year lows.  The sharp leg down was prompted by some more bearish news on the size of the US meat glut.  Last Friday the USDA reported that the US hog and pig inventory was not only larger than analysts’ expectations, but also the largest on record for the September quarter.  Lean hog futures tumbled to a seven year low as a result in early Monday trading, dragging the cattle beef-complex down with it. 


NZX WMP futures fell modestly on Monday, as they have done for the previous couple of days.  Tonight’s GDT auction will re-anchor the market.  The futures suggest a small drop in prices.  The larger recent falls in WMP futures have largely been about the futures calibrating to the previous auction. 

Learn More

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

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