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Agri Commodities Update: Milk spilt, but no tears

Dairy prices fell again at last night’s GDT auction as the market decides instead to wait for proof, rather than promises, that milk production is falling.

Currencies

The US Dollar surged higher on Tuesday to decidedly turn away from recent lows against the other agri-exporter currencies.  The NZ Dollar is the exception as, after being feeble for about four weeks, felt the full force of the greenback’s surge and fell to levels not seen since mid-August.  The Australian Dollar, by contrast, merely fell to its lowest level since last week.  The Aussie starts trading today a half-cent lower at about 76¼¢.

Grains & Oilseeds

  • Wheat had mixed day: Kansas winter weakened, Minneapolis spring surged.  The day's action exemplified the state of the different US wheat balance sheets.  Winter wheat supply remains heavy in the US and, with the feed rations one obvious outlet to cut supply, prices will struggle to rally as it competes with corn in some degree.  Spring wheat supply is by contrast far more balanced.  And the US is even, for now, exporting spring wheat ahead of schedule.  On 2016/17 crops, parts of the US and Black Sea regions need rain and so remain on our watchlist.  Forecasters expect only the Black Sea regions have much chance of getting off that list over the next fortnight.
  • ASX East January wheat futures gained a couple of dollars to close Tuesday evening at 233$.  Overnight action was, net, not helpful – at least if exporting is the goal.  Australian basis is not exactly expensive but nor, as it did for much of September, did it make it an attractive origin.  The trade’s worries about wheat quality though mean that exporting, from the east at least, might not be the goal.  Weather forecasters continue to expect a warmer and drier, but not dry, turn in south-eastern grain regions that should aid drying over the next couple of weeks.  Forecasters, looking beyond the near-term though, expect relatively wet conditions in eastern Australia into November so the worries about wet weather may not wane much.  Basis may take a back seat as a pricing guide if that weather pattern is realised.
  • Corn futures finished modestly higher on Tuesday.  The market continues to build off last week’s price lift, which was kick-started by a better than expected US inventory situation.  The USDA also announced a large (100k tonne) sale of US corn on Tuesday to enhance the day’s trading mood.  Corn’s speculative short position is very large, so investors buying back even some those positions creates the potential for a sharp, short-term price rally.  We still believe though that prices will return to lower levels as US harvest pressure builds.  Weather permitting, South America is also looking like it will add to existing supply pressures.  Brazil’s farmers will respond to very high local prices by planting more corn.  And Argentina’s maintenance of its current soybean export tax regime until 2018/19 will likely encourage more corn production.
  • Soybean futures eased on Tuesday.  Harvest pressure is again pulling prices lower.  Weather in the US Midwest has improved this week and anecdotal reports of exceptional yields continue to roll in.  Forecasters say Hurricane Matthew may pose some threat to unharvested crops in the US southeast but that has not inspired much buying – the bulk of the crop is in the Midwest and Delta, so issue is probably more of a localised one.  Canola futures were kept in check by the weaker soybean market, but a lower Canadian Dollar (which has now given up almost all of last week’s oil-charged rally) and unhelpful harvest weather propped the front contracts up.  A significant amount of rain has fallen in the Canadian Prairies this week, with freezing temperatures and potentially some snow to follow.  Outside of Victoria, Australian weather is slowly improving which should help to alleviate some canola quality concerns.

Cotton

US cotton futures moved higher on weather worries.  Forecasters now say the potential for Hurricane Matthew to make landfall in the Carolinas is now higher, and its impact larger.  The accompanying rainfall will raise concerns over cotton areas in the southeast which have only recently dried down from Tropical Storm Hermine.  Consequently the trade spent Tuesday building some premium back into the front contracts.  In Australia, forecasters expect southern Queensland and northern NSW to dry down over the next fortnight.  Farmers should be able to start planting cotton in these drier conditions.

Sugar

Sugar futures prices had a fulsome bounce on Tuesday, as did the prompt March-May spread.  Trading volumes, light overall anyway, were hefty on the rise but slight on the fall in the day’s large zigs and zags.  Brazil’s cane regions along the Sao Paulo-Minas Gerais border finally got some rain over the past day or so.  The rainfall lifted topsoil moisture but subsoil moisture has barely changed.  This area – around a quarter Brazil’s southern cane region – has been very dry during this season.  August has about par rainfall but that was surrounded by June that had a quarter of normal rainfall at best and a September that was half at best.  Cane harvesting is better in dry conditions – but not this dry.  Plant health will have been affected.  The dry weather has hurt productivity this year.  And there might be an echo in the 2017 season as any newly planted cane in the region will have suffered somewhat too.

Cattle

Australian saleyard cattle indicators remained relatively steady on Tuesday, despite widespread reports of lower quality on offer – a testament to the current tightness of supplies.  Drying across the north of the country assisted a modest increase in Queensland turnoff last week.  That was offset though by lower slaughter in NSW and Victoria, where many areas remain waterlogged.  Processors have largely kept their over-the-hooks rates unchanged this week as a result.  The EYCI has lifted another couple of cents, but individual saleyard trends are starting to vary more significantly – the young cattle market’s gains are no longer looking quite so broad-based.  In the US market, live cattle futures have made a technical bounce off multi-year lows, but cash markets are yet to show any signs of a pulse.

Dairy

The GDT auction last night saw prices record some chunky falls overnight.  The powders, whole and skim, were down almost four percent.  In WMP’s case that was around what the futures were signalling ahead of the auction so the futures only need to fall marginally to calibrate to the auction.  We too find the volatility in prices a little worrisome but not enough to shake our view that dairy prices will finish this season higher.  We expect less milk production around the world this year to help prices rise.  The issue now is that the market will not rally a lot more on a promise – it needs proof.  That can only accumulate with time. 

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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