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Agri-commodities update: Trump slump, bump and jump

Donald Trump’s victory initially rattled markets but they moved on quickly.

Currencies

Currencies had a volatile day as the results of the US Presidential election rolled in.  The agri-exporter currencies mostly weakened against the greenback.  Financial markets broadly had sharp initial reactions to Donald Trump's victory.  Few of the reactions persisted, many were more than reversed.  US assets seem to think Donald Trump is good for growth – equity prices (after an initial fall) rallied to, or close to, record highs while bonds fell sharply.  Like Brexit, the heavy and incessant focus on the US Presidential campaign is not really a measure of an issue’s immediate importance.  That doesn’t mean though that nothing has changed.  The issue for markets is that they don't know what to expect from a Trump Presidency whereas they thought they understood the alternative.  Trump may draw from a wider, even novel, policy palette.  The adjacent worry is that Trump, for all his successes in business life, is an inexperienced politician about to be dropped into the big league.  Washington, like quicksand, can be a trap for the energetic simply because they are energetic.  The world would not be better off with an ineffectual US President.  The policy and politics will unfurl slowly over time so, even if there is an overarching market theme to a Trump Presidency, it will take time to emerge.  The Australian Dollar dived as much as 1½¢ as a Trump victory began to look likely.  In the end, the Aussie recovered a little but is down a cent or so to start today at 76½¢ to take some pressure off $A prices.

Grains & Oilseeds

  • Wheat futures prices fell sharply on Wednesday.  The USDA’s WASDE report had a big impact on grain and oilseed markets.  The USDA’s numbers were not a direct impact on wheat but came via corn.  The USDA is now forecasting a much bigger corn crop this season.  That matters for wheat because using wheat for feed is part of the presumed balancing mechanism for a heavily supplied market.  More corn is more competition for that demand.  There is though an offsetting issue in the wheat market.  The world’s wheat stocks are biased towards the feed-end of the quality spectrum.  That means there is balance, or perhaps even a little tightness, developing in milling grades.  Futures markets are predominantly milling grade grain so they probably will not fall as easily as corn prices.  Forecasters continue to expect dry conditions in US HRW wheat regions.
  • ASX East January wheat futures jumped 5$ on Wednesday to end the day at 240$.  The fall in the Aussie yesterday certainly boosted the market.  As did Russia cutting export forecasts.  The gains mean price levels look on the high side given overnight falls in global prices.  The 240$ level is also likely to attract some producer selling too.
  • Corn futures plunged nearly 4% on Wednesday.  The second shock result of the day came when the USDA increased the US corn yield.  Analysts’ consensus had been for a slight cut so the market were somewhat blindsided.  The higher average yield, now estimated at 175.3bpa (previously 173.4), will see US production 12% higher than the previous year.  The US carryout now looks very burdensome.  In the absence of significant crop problems in South America, corn prices will have to remain at low levels for longer in order to restore some balance to the US market.
  • Oilseed prices fell on Wednesday – soybeans sharply, canola just a shade.  The soybean market (heavily reliant on Chinese demand) took a slide early on as investors were rattled by the increasing prospect of a Trump Presidency.  Prices staged a brief recovery, only to then plunge on news that the USDA had raised the US soybean yield to an even higher record high.  The yield forecast, at 52½bpa (previously 51.4bpa), was well above analysts’ expectations.  US soybean export numbers were also raised (no surprises there), but the impact on inventories was largely entirely offset by a drop in domestic crushing.  There were very few changes made to the South American balance sheets – it’s still too early to know much about 2016 season crops – though Argentina’s exports were lowered to 9¼mmt.  That caught our eye because Argentina’s Agro-Industry Ministry has since come out with an export forecast of 10½mmt.  The latter, if realised, would obviously imply tougher competition for US ‘beans.  And that would limit the scope for prices to rise in the season ahead.  Canola futures were dragged lower by weakness in the soy complex, though weakness in the Canadian Dollar helped to limit the downside. 

Cotton

US cotton futures whipsawed on Wednesday, though closed the session only modestly lower.  The USDA’s November update was not especially friendly.  The report said improved production prospects out of Texas would more than offset the losses in hurricane affected areas of the US Southeast.  The USDA’s forecast for Indian output was also boosted slightly on a largely favourable season.  All up, 2016 global ending stocks have come in 1m bales higher than the previous estimate.  Not devastatingly bearish, but not supportive of a heavily long investor rationale either.  Cotton prices may be at risk of some additional fund liquidation today.

Sugar

Sugar futures rallied on Wednesday.  Early trade saw sugar, like many other markets, slump initially but follow that with a recovery to end the day at about 22¢.  The sharpest gains came in the later contracts covering seasons 2017 and 2018, but only after some equally sharp falls – so the levels have not changed all that much.  The feature that caught our eye though is that most of the contracts only found hefty buying down near where ethanol and sugar come into parity for Brazilian mills.  Perhaps coincidental, perhaps not.  Weather forecasters have bumped up their rainfall outlook through the south Brazil region.  The forecasts are only for normal rainfall in the region so the change is not threatening for crushing.

Cattle

On Wednesday the USDA upped its forecasts for both 2016 and 2017 total US red meat and poultry production.  Beef production was increased due to the torrid pace of cattle turnoff and higher carcase weights.  And US beef exports were revised lower for 2016, with 2017 exports were left unchanged – not helpful news for a saturated domestic meat market.  Those forecasts though are exactly that – forecasts.  They are no barrier to higher US exports in the year ahead.  It just means achieving them will require low, and perhaps lower, wholesale beef prices.  That is likely to remain a handbrake on the US cattle market in 2017.  US live cattle futures have largely shrugged all of this off though – perhaps because they were already well aware the supply outlook was grim – and closed a shade higher on Wednesday.  Traders and investors appear to have been more interested in the solid cash sales reported at Wednesday’s Fed Cattle Exchange.

Dairy

NZX WMP futures prices fell modestly on Wednesday.  And early trading today sees prices down a little again.  The NZ Dollar, like the Australian Dollar, has fallen about a cent over the past day.  Whether that slows or hurries dairy sales is an open question.

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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