Wheat prices continue to recover from season lows as the progress of time takes the market to a point where there is much less potential for surprises.
The agri-exporter currencies fell against the US Dollar at week’s end. Some the agri-exporter currencies are testing recent lows – Brazil, Canada and the Euro area. But that’s not the case either side of the Tasman. The Australian Dollar was weakening as Friday came to a close but starts today again just a little above 74½¢.
Grains & Oilseeds
- Wheat futures continued to gain on Friday. Kansas and Chicago prices in particular made sharp gains. The USDA’s WASDE report did not have a lot of impact on the wheat market. The USDA changed US supply estimates in a very minor fashion and the changes to global estimates reflected already well known factors. The west of the US hard red winter (HRW) wheat region continued seems to have gotten patchy snow at best on weekend data to date. Later data may tell a different story. Snow cover is likely to be more important in the coming days. Weather forecasters expect very cold temperatures in the HRW region in the first part of this week. The market will have been concerned by those forecasts but the rally in Kansas prices looks on the large side relative to the risk. The other factor is that investors have large positions in Kansas futures, something that can amplify any market move.
- ASX East January wheat futures gained 3$ to close Friday evening at 220$. Friday night’s gains in global prices, along with a steady Australian dollar, will be helpful for the Monday mood if nothing else.
- Corn futures prices staged a solid recovery Friday afternoon following an initial post-WASDE fall. The US balance sheet was left unchanged, however corn production forecasts for Brazil and China were upped. The upgrades weren't all that large but, in the context of already very heavy global supply, any extra grain is unwelcome. And ever growing wheat supplies further add to the global grain glut. So the light at the end of the tunnel is (again) pushed somewhat further into the distance. US growers have remained very patient sellers over the last few months, however the latest round of forecasts might just add a bit more urgency to the task. Especially given that the USDA opted not to increase their US export forecast on expectations for fierce South American competition early in the New Year. The one modest upside risk for prices is that Argentina is still too dry. Forecasters say a weak cool front will bring about some scattered showers to the region today and tomorrow – but not enough to significantly improve soil conditions. A high pressure ridge is then expected to build mid-week which will send temperatures soaring and accelerate drying rates. Stress to Argentine crops will increase, but permanent damage to production potentials can still be avoided if significant rain falls over the balance of December.
- There were no surprises to the global soybean balance sheet on Friday. Production forecasts for the big three soybean producers (US, Brazil and Argentina) were all left unchanged. The USDA expects the trade landscape to become increasingly competitive as the market rolls into 2017. Consequently they chose not to raise their US export forecasts, despite November being another strong month of sales. Southern Argentina is forecast to receive some today and tomorrow – but not enough to scratch dryness fears off the watchlist. And hot conditions developing mid-week will increase evaporation rates. Argentina’s crop will be depending on a forecast rain event that is still a little over a week away. Prices are likely to continue moving higher between now and then as traders price in the risk that the event does not evolve. While ‘beans are benefitting from those weather worries, they proved to be of little benefit to veg oil markets on Friday. Both soy oil and canola futures suffered losses as Malaysian palm oil prices plunged. The downside was limited by improved Canadian canola crush numbers, but a stronger Canadian Loonie will be cutting into the crush margins.
US cotton futures were lower on Friday. Prices dropped sharply after the USDA upped its forecast for the US cotton crop. Higher production out of Texas continues to offset losses reported in the Carolinas. According to the weekly positions report, the managed money long position has grown even larger. That position can become a liability if the market’s confidence is rattled – investors have plenty of selling power at their disposal. We, among others, are optimistic about cotton’s longer term prospects, but Friday’s report is a setback on the bumpy road to higher prices. Trading this week should reveal just how patient investors are.
Sugar futures prices continued to weaken on Friday. Again the pattern is bigger falls in the nearer dated contracts and smaller falls for more distant prices. Trading volumes remain very light. Investors’ positions as of last Tuesday still had a hefty long. The position remains large enough to weigh on prices but there has been scant sign of their selling of late. The market is sitting close to levels that can prompt investors to sell.
US live cattle futures were little changed Friday. Cash activity last week was slow as packers are thought to have secured the bulk of their cattle needs in the lead up to Christmas. The US reported impressive beef exports for the month of October. However further increases will be needed as production there continues to grow – on Friday the USDA once again upped its 2016 US beef production forecast on the current pace of slaughter. Next year looks a touch less bearish though as the trend to lower feeder placements is expected to continue, reducing front-end supplies in early 2017. Consequently the USDA has raised its 2017 fed steer price forecast for an average of 107$ (previously 106$) – though that is still more than 10% below 2016 levels.
NZX WMP futures traded finished the week on a weak note. Friday’s mix of modest-to-sharp falls mean that the futures’ premium to the last GDT auction result is quite modest. The WMP futures market looks like it lacks direction. We are not all that surprised because the news flow has not provided much impetus. The torrent of weaker production several months back has, in news value, slowed to a trickle of confirmation.
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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.