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Agri-commodities update: Aussie bulks up

The Australian dollar bumping up against recent highs will force the trade to at least re-think A$ pricing.

Currencies

The agri-exporter currencies were mostly stronger on Monday.  The Euro was an exception because the EU’s broader and deeper economy lacks the hard commodity leverage among most of the others.  The Australian Dollar was probably “best in class” for that broader pattern.  Australia enjoys the biggest exposure to the best performing hard commodities, iron ore and coal.  The Aussie stars today near 77¼¢.  The lower seventy-sevens have been the top of the Aussie’s range for about six months where, on six occasions, the Aussie has tested those highs but the faltered.  The Aussie at these levels will prompt a broader alert because, should it make a new habitat above 77¢, some re-pricing will be required for Australian agri-commodities.

Grains & Oilseeds

  • Wheat futures were mostly a little weaker on Monday.  Neither of the USDA’s export inspections or crop conditions reports had much impact on the market.  The US HRW wheat region saw some rain, but only a little, and even then only in small parts of the region.  The rainfall was neither heavy nor widespread enough to even kick the dryness issue can further down the road.  The wrinkle with this issue for the market is that just a single rain storm can resolve the problem.  Consequently, the market is wary of putting too much of a premium into prices.  The problem is that weather forecasters cannot see patterns that will conjure that storm.
  • ASX East January wheat futures gained a dollar on Monday to end the evening session at 237$.  A higher Aussie and weaker global prices is going to lean on Australian prices today.  The Aussie potentially busting through to new highs would certainly see the trade pause for thought.  Winter crop areas are likely to see largely dry conditions for another week and so present no issues for maturing crops or harvesting.
  • Corn futures eased on Monday, but remained within their narrow pre-WASDE trading range.  There was some strong US export inspections data published but that failed to lend any support.  The Kansas wheat-CBOT corn spread though is already sitting on the low side of recent ranges.  Any further gains in corn will only strengthen the appeal of using wheat in feed rations.  The USDA also released its weekly crop report after the market’s close.  The US harvest is now around 86% complete – a shade ahead of the five year average.   Forecasts for the US Midwest remain fine and dry so the harvest should remain on track to be wrapped up within the next week.
  • Oilseeds prices had a mixed day.  Soybeans futures rallied in early trade, bolstered by strong US weekly export inspection numbers.  By contrast, the canola market dipped as the weather in Canada turns warmer and drier.  Canola’s premium to the ‘beans has halved (to $10) over the past week.  The oilseeds market is likely to be particularly sensitive to the outcome of the looming US election.  Wednesday night’s WASDE report will provide a frank reminder that the health of the US soybean balance sheet hinges on Chinese demand.  An election result that poses a threat to US-China trade relations could prove bearish for prices.  On the weather front, Argentina will see more rain this week.  Forecasters say flooding is likely worsen through northern Buenos Aires and its surrounds – key soybean production regions.  Planting delays could extend out to the end of November given that the affected areas do not drain particularly well.  Forecasters though say there is some flexibility in terms of timing – some Argentine farmers may opt to double crop soybeans, planting them behind the winter wheat crop in late December.  By contrast, planting progress continues to race ahead in many parts of Brazil. 

Cotton

US cotton futures finished little changed on Monday.  The market attempted to push prices higher on thin volumes but met resistance at 69½¢.  The USDA released its weekly crop progress report after the close.  The US cotton harvest is currently around 56% complete – four points behind the five year average – so we may see some modest support develop from that today.  However the forecast has now turned drier for West Texas so that could mitigate the upside. 

Sugar

Sugar futures prices made hefty gains on Monday, as did the March-May spread.  South Brazil’s weather remains a focus.  Sao Paulo got some rain over the weekend.  Weather forecasters now expect a drier patter to emerge in that state and surrounds over the next week or so.  That outlook, if realised, would probably allow mills to keep crushing into the second half of November.  If crushing can be sustained into early December then south Brazil sugar production is likely to get nearer 35mmt.  Copersucar, a big Brazilian sugar and ethanol merchant, said yesterday they reckon the mills are on track to do that.  Australia’s cane regions are look set for another few days of dry conditions so there is unlikely to be any lingering moisture issues for crushing near-term.  Weather models suggest wetter conditions later in the week but the forecasters have not yet picked these up.  Analysts will grow more and more confident that trade flows in the first quarter of 2017 have been balanced as the “dry enough” conditions persist and that is likely to weigh on prices.

Cattle

Australian spot saleyard indicators had a mixed Monday, though the EYCI closed just over a cent weaker at 657½¢/kg cwt.  Direct-to-works quotes have come back 5-10¢ across the board as weekly slaughter looks set to remains near levels that will keep the pressure on prices.  A number of physical markets have also reported a step up in the level of processor attendance.  In the US, CME live cattle futures weakened for the fourth consecutive day.  Technical selling appears to be undermining the market’s late-October gains.  US wholesale beef prices have also lost some ground, on suggestions that US beef demand will remain idle until after the Thanksgiving holiday.

Dairy

NZX WMP futures prices fell modestly on Monday and have continued to weaken in early trade today.  The market has been though a thicket of price-friendly information.  Now it has hit a hiatus in the information flow.  The situation has not changed just because of a lack of reinforcement but the happy hour is certainly over.  We suspect the NZ Dollar’s strength is also sapping some of the bullishness from the market.  Looking longer-term, the Australian Dairy Farms Group yesterday announced a joint venture with its biggest customer in China, Australian Lian He.  The venture will build a milk processing facility specifically designed for export in South-West Victoria.  Here we have another example of Australian agribusiness investing to plug into the Dining Boom.

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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