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Agri Commodities Update: Sugar and cotton throw off a cent

Sugar and cotton prices plunged overnight while other markets had quietish night.

Currencies

The US Dollar weakened again the other agri-exporter currencies on Wednesday.  The Brazilian Real again made new year-plus highs against the greenback.  Others are now making or nearing similar highs.  The New Zealand Dollar touched the highest level in more than a year this morning after NZ interest rates were cut to their lowest level ever.  The Kiwi’s response seems counter intuitive.  As does the Aussie’s rally after interest rates reached record lows in Australia.  Investors though view both Australia and New Zealand’s Reserve Banks as being reluctant to cut rates much further.  And, in any case, market pricing has already “factored in” much of any subsequent cuts.  While interest rates are low either side of the Tasman, they are still a lot higher than many other places in the world.  And some of those currencies – the US Dollar, Euro and Yen – are where investors manage mind-boggling amounts of savings.  Getting paid just 1½% or 2% (with little perceived currency risk) sounds like a good deal to these investors.  They are paid almost zero in their home currencies.  (Or worse – for some time now you have had to pay the German government if you want to lend them money for terms up to ten years.)  The Australian Dollar traded as high as 77½¢ overnight.  The Aussie’s most recent highs, set last April, are about 78¼¢.  Beyond that the Aussie will the join the Kiwi and the Real in the year-plus high club.  The Aussie starts trading today a little above 77¢.

Grains & Oilseeds

  • Global wheat futures rallied on Wednesday.  Chicago and Paris in particular made sharp gains.  An encouraging day - mostly.  The Kansas September-December spread was the spoilsport as it retreated to rest just above recent lows.  The actions suggests the US carry task is remains a task.  Egypt, the world’s biggest wheat importer, is reported to have rejected a cargo of Russian wheat on quarantine grounds.  Egypt’s quarantine agency has become more finicky about the ergot fungus in wheat shipments of late.  The agency earlier rejected some EU wheat for similar reasons.  The rejection of a Russian cargo at least suggests the playing field is level.
  • ASX East January wheat futures were marked a half dollar lower on Wednesday to a new season low of 242$.  The market will take little clear direction from global futures and the Aussie Dollar pulling in different directions.
  • The corn market remained in limbo on Wednesday as traders and investors wait for the USDA’s August yield estimates of US crops.  The market is still a little uncertain as to how above-average Midwestern rainfall will stack up against above-average summer temperatures.  China continues to offer large volumes of corn from its reserve stockpile to the market.  Although the take-up rates have been less than impressive, the sheer volume on offer is enough to keep domestic prices under pressure – this week alone the government is set to offer 7.9mmt.  Cheaper local grain will continue to curb Chinese imports of alternative feed supplies, such as sorghum and barley.
  • Oilseed prices were mixed on Wednesday.  Soybean futures fell on forecasts for regular showers to fall across the US’s eastern soybean belt for the remainder of the week.  We expect there was also some pressure from the usual pre-WASDE reshuffling as investors unwind positions in the lead up to the report.  Canola futures finished modestly higher, despite a stronger Canadian Loonie.  Canola garnered some support from another rally in palm oil futures.  The vegetable oil complex has been tight for several years now, with palm oil output curbed by dry weather.  Indo-Malay palm oil production is now recovering, but a recent resurgence in export demand is keeping inventories low.  The November canola-soybean spread has risen from -40 at the start of July to now sit at -10.  If the USDA’s global oilseeds balance sheet continues to point to greater tightness in oils relative to meals on Friday, we think canola might return to a small premium over ‘beans.

Cotton

US cotton futures gapped lower upon opening on Wednesday, but spent the remainder of the day trading in a sideways pattern.  Forecasters say West Texas will receive widespread rain through to Sunday.  The welcome moisture should relieve current crop stress and arrest any further decline in US cotton quality – at least in the near-term.  China sold 69% of reserve cotton offered on Wednesday – an improvement on recent August sales, but still well-short of the near total clearance rates seen in May through July.

Sugar

Sugar futures prices plunged on Wednesday.  And the New York October-March spread continued its steady grind lower.  The spread, as is often the case, has been a better guide to market direction.  The market ground lower over the day and then finished with a quarter cent dive that accounted for much of the day’s trading volume.  A very soft day even while the Brazilian Real made new highs!  The abrupt falls take us back to our earlier concerns about the huge long position held by investors.  Momentum investors will now again have the rationale for their long position severely challenged.  The market is again perched precariously.

Dairy

NZX WMP futures were mostly firm to modestly higher on Wednesday.  The nearby August contract has lifted 12% from its lows last month, while NZX December has rallied nearly 17%.  The New Zealand Dollar has surged 1.8% to one-year highs this morning, despite the RBNZ cutting interest rates.  A higher Kiwi sharpens the impact of a low milk price environment on the NZ dairy industry.  The market will likely view a stronger Kiwi as an additional incentive for producers to reduce output more quickly.

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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