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Agri Commodities Update: Return to Casablanca

The US managed to win most of a Moroccan wheat tender to send US soft red wheat there for the first time in nearly a decade. 

Currencies

The US Dollar had a quiet day against the other agri-exporter currencies after the previous day’s surge.  Again the NZ Dollar is the only one trading anywhere novel as it continues to weaken.  The others are all within recent ranges.  The Euro in particular is trading in an increasingly claustrophobic channel.  The Australian Dollar has spent much of post-Asia trade bobbing up and down in a narrow 76¢ to 76¼¢ range.  The Aussie starts today roughly in the middle of that range.

Grains & Oilseeds

  • Wheat futures again had mixed day.  Minneapolis resumed its seat in the back as Chicago and Kansas, with prices surging, took control of the wheel again.  The catalyst seems to have been US wheat winning the lion’s share of Morocco’s wheat tender (260kt of 340kt).  US wheat has struggled to compete in North Africa against EU and Black Sea wheat so any US sale at all to the region is worth noting.  And all the more so when it dominates the sale.  In our view the sale though will not account for all of the 10-15¢ price rise.  Investors have very large short positions in wheat futures.  Prices are losing downward momentum which can be a catalyst for those investors to buy back their short positions.  On 2017 crops, watch-listed US and Black Sea regions are having diverging fortunes.  Forecasters expect the Black Sea regions to get some rain over the next week or so.  The amounts though might not be enough to do anything more than forestall problems.  Forecasters continue to expect little rain in the dry western parts of the US hard red winter wheat region.  Conditions there are likely to worsen over the next week.
  • ASX East January wheat futures gained a 2½$ on Wednesday to close at 235½$.  Overnight action was helpful as Kansas and Chicago prices surged and the Aussie Dollar fell a shade.  That has fattened Australia’s basis somewhat.  To repeat though, the trade’s worries about wheat quality mean the market is not going to be basis-dominated game.  Weather forecasters continue to expect warmer and drier, but not dry, turn in south-eastern grain regions that should aid drying near-term.  The worry is that the outlook beyond that still has a wet bias and so grain quality, already an issue, might become even more of an issue.  The overnight fattening in Australian basis is likely to remove any handbrake on the next few dollars of price gains.
  • Corn futures had a quieter day on Wednesday amid relatively low volume trading.  Prices finished steady after a feeble attempt at a rally was quickly snuffed out.  The western part of the US Corn Belt will experience some rain disruptions over the next few days, but after this weekend the forecasts look supportive for harvest activity.  The Buenos Aires Grain Exchange has forecast Argentina’s 2016/17 corn crop at a record 36mmt – up 20% on the previous year.  Earlier this week Argentina’s government announced that it would be maintaining the 30% tax on soybean exports during the coming season.  Argentine growers are expected to switch to more corn acres as a result.
  • Soybean futures continued to bow to US harvest pressure on Wednesday.  November ‘beans plunged after being hit by a large sell order in early trade.  Support was found around the 9½$ level, but the market’s attempts to rally back to the day’s earlier highs ultimately failed.  Argentina’s crop forecaster has said it expects the country’s soybean production to fall 5% in 2016/17, to 53mmt.  Argentina is a large soybean exporter, so news of less acres is certainly supportive.  Argentina’s output though will need to fall much more sharply though to be “transformational” for the global balance sheet.  Canola futures tracked movements in soybean market almost to a T.  Late season Canadian canola is at risk of quality declines after rain and snow across the Prairies this week.  Growers in Australia’s southeast also have concerns about wet weather disease, so canola may establish a larger premium (currently only 3$) to ‘beans over the next few weeks.

Cotton

US cotton futures plunged Wednesday.  The path of the storm approaching the US east coast shifted again overnight.  Forecasters say Hurricane Matthew’s current path reduces the risks of flooding in northern North Carolina and Virginia.  Areas further south (Georgia and South Carolina) are still at risk of heavy rains, but the overall threat to key cotton areas is lower morning.  Prices could remain quite volatile over the next couple of days if the storm’s course continues to alter.  Slightly further to the east means less potential damage, while a more westward track would increase potential crop damage.

Sugar

Sugar futures prices continued to rally on Wednesday, as did the New York March-May spread. Neither made new highs but those highs are not far away. Volumes remain flimsy in generating the rally.  The heaviest trading came towards the end of the day when some, by the standards of the day anyway, heavy selling emerged in the March-May spread.  In our view, there is something a little flaky about recent gains.  2017 season prices are following the current season prices to a degree.  In Aussie terms, 2017 is in the 580-590$/t range.  Some are watching and waiting for the magic 600$ level.  To our way of thinking, we can understand that for people who have already sold some 2017 sugar.  For those who haven’t it’d be shame to miss good prices for marginally better prices just because the latter is a bit of a trophy.  2018 prices are only following grudgingly, with the K9 (May 2019) in particular a dog.

Cattle

Australian finished cattle indicators broadly weakened on Wednesday.  The EYCI though remains just a few cents shy of previous highs.  Overnight action in US markets was, net, not helpful for Australian beef exports.  Wholesale domestic 90CL beef prices have fallen sharply.  The weaker turn in the Australian Dollar is supportive, but not enough to be offsetting. Imported beef will look more expensive this morning and Australian beef prices will require some downward calibration.

Dairy

NZX WMP futures prices fell sharply Wednesday.  The market is calibrating to the Tuesday night’s GDT auction.  There remains gap of a two-to-three hundred dollars between the auction and the futures.  How much of the gap remains will be a marker of the market’s confidence that production is set to decline in the 2016 season.  EU farmers seem to be planning to do so.  52,000 of them applied to be part of a government-funded production reduction scheme.

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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