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Agri-commodities update: Futures future fine

Last night’s GlobalDairyTrade auction validated the futures market’s optimism about dairy prices and makes us more confident that dairy farmers will get paid more this season.

Currencies

The agri-exporter currencies mostly retreated a little against the US Dollar on Tuesday.  None of them fell to novel levels though so currency action was largely benign for commodity prices on the day.  The Australian Dollar followed the broader pattern.  The Aussie has retreated a quarter-cent to start trading today at just over 74½¢. 

Grains & Oilseeds

  • Wheat futures were mostly weaker Tuesday.  Chicago prices maintained some polite personal space above season lows.  Kansas remains uncomfortably close to them.  Weather forecasters continue to expect snow to precede sub-zero temperatures in vulnerable US hard red winter wheat regions.  With enough snow we will be able to scratch this region off the watchlist.
  • ASX East January wheat futures gained a dollar on Tuesday to close at 215$.  The rise came despite the ABARES’ huge crop forecast upgrade.  Is the market perhaps sceptical of the numbers?  We suspect not.  ABARES’ numbers are not contradicting the anecdotes coming in from around the industry.  Still, there was reasonably hefty volume traded yesterday so the market does not seem to be caught in some unfortunate “fight’ response to headlights bearing down upon it.  Perhaps the resilience is simply better than we think but the lack of reaction seems odd.
  • Corn futures finished only a whisker higher, as early gains (which took prices to one month intraday highs) gave way to selling pressure.  Dryness in Argentina is a concern, but excellent conditions in Brazil may dampen the impetus to push prices higher.  Brazil’s first crop corn planting is around 93% complete and local forecasters have suggested early harvesting could begin as soon as late January.  Ann unusually large part of Brazil’s soybean crop is expected to be harvested quite early in the New Year too.  Brazilian farmers, with that, will have the confidence to plant big Safrinha crops.  The earlier the Safrinha corn is planted the better.  The plant must receive sufficient rainfall in the grain filling period to carry it through to maturity.  Farmers are often reluctant to risk planting corn beyond the first week or two of March because Brazil will then be moving into its dry season.
  • Oilseed prices made modest gains on Tuesday.  Investors buying up Malaysian palm oil futures (which hit four month highs overnight) continued to push the broader veg oil complex higher.  A couple more big sales of US soybeans were also supportive.  Drier conditions in Argentina will continue to weigh on traders’ minds this week.  Weather models are projecting little rain in important crop areas from southern Cordoba to Buenos Aires and La Pampa.  By contrast, Brazil continues to sail, colours flying, through its summer season.  Celeres, a local crop forecaster, reckon that soybean planting is around 88% complete.  And reports suggest part of Mato Grosso’s crop is already at the filling stage – adding to ideas that a larger than normal proportion of production will hit the market in January.  Canola futures finished Tuesday a little higher overall, though pared most of their early gains after Statistics Canada released its latest set of 2016 crop estimates.  The forecast for the canola crop was raised to 18.4mmt (up from an August estimate of 17mmt), which means Canadian production will be little changed on 2015 levels.  The report probably wasn’t viewed as particularly bearish though, because it was short of analyst’s guesses of 18.8mmt. 

Cotton

US cotton futures were either unchanged or a shade weaker in quiet Monday trade.  Australian forecaster ABARES released its December crop estimates this morning.  The bureau has upped their expectations for Australian production by 150k tonnes, to 1.03mmt.  That would be the second largest cotton crop on record and well above the USDA’s current forecast of 871k tonnes.  The increase was largely on the back of higher dryland sowings as soil conditions were very favourable during the planting period.  Conditions are now trending a little too dry, but forecasters say Australia’s cotton areas should see rainfall in fits and starts over the next couple of weeks.  In the US, late season harvest delays are expected to diminish as the week progresses.

Sugar

Sugar futures prices made hefty gains in the nearer dates.  The rises were smaller, but still significant, in the more distant dates.  There are several candidates to explain the rise.  One is that Petrobras, Brazil’s oil company, raised wholesale gasoline prices by a hefty 8% yesterday.  The immediate thought is that ethanol prices rise too and result in mills producing more ethanol and less sugar.  While the headline probably had some shock value we are sceptical that will have any impact on sugar production in the near-term.  The southern Brazil crush has nearly finished for this season so, practically speaking, any switch to ethanol now will amount to little more than a rounding error.  And even if the full 8% rise feeds through to mills ethanol prices (they won’t) the New York March and May contracts would still pay 1½-2¢ sugar equivalent premium.  We think the explanation lies with two other factors.  One is that with prices at new lows the market has found renewed buying.  The other is technical.  Sugar futures prices (observed as the continuous prompt contract) yesterday traded down to the technical Big Kahuna, its 200-day moving average yesterday.  The market failed to sustain a break below these levels and that will have been a buy signal for some, and that would become a catalyst for others to do so.  We may have found a floor for now.

Cattle

US live cattle futures rallied on Tuesday.  The market had been cooling off over the past few days – largely on profit taking activity.  But there are also worries that packer demand in the cash markets would start to soften given that their margins have deteriorated considerably in the last month.  Demand for middle meats though (ribs and loins) typically sees a seasonal lift in the post-Thanksgiving period.  Market chatter suggests that holiday demand has been stronger than expected, allowing wholesale beef (and so cash cattle) prices to continue moving higher.  Australian cattle markets had a mixed Tuesday: the benchmark Eastern Young Cattle Indicator was a touch lower, however prices for young cattle suitable to the trade lifted sharply.  Yesterday ABARES upped its winter crop forecasts to new records.  So Australia will have even more feed grain available than previously thought.  The obvious implication of that is that feed prices are now likely to fall some more.  Lower feed costs would benefit restocker and feedlot margins and potentially allow beef producers to price more competitively into some export markets.

Dairy

The GDT auction overnight went to script with a near 5% rise in the WMP index and a 3½% rise in the overall dairy price index.  WMP futures provided a bullish signal that proved to be correct.  Indeed, the auction set levels that were an average of 12½US$ above where the WMP futures closed Tuesday – confirmation at least.  Our NZ team are becoming more confident local processors will be able to up the prices paid to NZ dairies again before too long.  We continue to expect a rise in Australia too.

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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