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Agri-commodities update: Where the WASDE wasn’t

The USDA’s October ag report was published which, once out of the way, let markets focus on what they were really concerned about.

Currencies

The US Dollar continued on its stronger tack against many of the other agri-exporter currencies on Wednesday.  Most of the agri-exporter currencies are near their lowest levels for at least a few months as a result.  US$ agri-commodity prices will suffer from the strong greenback factor.  Whether or not it is the dominant influence will depend on commodity-specific factors.  The Australian Dollar is something of an exception in the agri-currency group.  The Aussie has certainly fallen from recent highs around 77¢.  However, were it in a similar position to the other agri-exporter currencies, it would be another cent or so lower instead of a little over 75½¢ where it starts today.

Grains & Oilseeds

  • Wheat futures prices were mixed on Wednesday.  The standout feature though was the hefty falls in Chicago and Kansas prices.  The USDA’s October WASDE report made some unfriendly sounding changes to their forecasts for the US wheat market.  The changes though were at the rounding-error end of the scale so they hardly qualify as “news”.  And they certainly weren’t novel enough to cause that degree of selling.  One notable feature of the USDA’s report was them cutting their estimate for wheat’s use in feed.  More wheat needs to find its way into feed rations if US wheat supply is to come back into balance.  The feed connection is part of the explanation for the drop in prices: wheat probably followed corn lower on the day.  And both had been rallying in the face of a stronger US Dollar – not a sustainable combination.
  • ASX East January wheat futures were all but unchanged to close at 237½$.  Sharp falls in global prices overnight have fattened Australia’s basis to levels where large scale export buying is unlikely.  Nonetheless the cloud of high milling grade availability means there is not necessarily going to be a lot of sellers to correct that.  Weather forecasters expect the better turn in the weather to persist in eastern grain regions.  While not free of rain, drier periods and expected temperatures will allow soils to make some progress on drying.
  • Corn futures plunged on Wednesday.  As expected, US corn yields were lower – down 1bpa, to 173.4bpa.  The impact on output though was partially offset by an increase in harvested area.  Consequently US production estimates did not fall quite as far as analysts had been expecting.  The net result though was still, fundamentally at least, price positive.  And the demand side also looks a little better with exports raised and domestic corn feeding steady.  The most surprising thing about the October WASDE then is probably the market’s reaction.  Our thinking is that perhaps there was some delayed response to the US Dollar’s rally in the sell-off.  Corn prices have spent the past week creeping higher as traders and investors positioned themselves ahead of the report.  With WADSE now in the rear-view mirror, the market has turned its attention back to the macro-context.  The US will have had some of its competitiveness eroded by a stronger US Dollar.  The market will have to offset that (in the form of lower prices) if it is to meet the USDA’s now higher export forecast.  Forecasters say weather in the US Midwest will be less than ideal, but some fieldwork will still take place between rounds of forecast rainfall.  Dry regions in central Brazil are still disfavoured for rain over the next week and so remain on the watchlist.
  • Soybean futures finished Wednesday moderately lower.  The modest net result though masks the extent of the day’s volatility.  Prices traded as high as 9.71$ and as low as 9.47$.  The USDA raised soybean yields in last night’s WASDE update – no surprises there.  The average yield is now projected at 51.4bpa, up 0.8bpa.  We suspect that the market remains concerned that, even on those higher numbers, the size of the US crop is still being understated.  The demand side will at least help take some of the sting out of bumper production – US soybean exports were raised by over one million tonnes, to 55mmt.  At the global level, the report was also bearish.  The global 2016 carry-in was revised higher.  And the carryout will be larger too, with Brazilian production now forecast to increase to a record 102mmt on higher planted area.  Canola futures were little changed on Wednesday, despite a small lift in forecasts for Canadian and Australian canola production.  These increases though had been earlier anticipated by local crop forecasters, so much of the impact would have already been priced in.

Cotton

US cotton futures rallied on Wednesday.  Prices touched intra-day highs of 69.8¢ after the USDA made a larger than expected cut to US cotton stocks.  The cut was off the back of marginally lower US production (mostly out of Texas) and modestly higher exports (mostly to Bangladesh and India).  The US balance sheet looks modestly tighter on those numbers.  The reaction also reflects the market’s positioning too.  The trade sold heavily into the September rally and now hold a huge short position.  Consequently they will be unusually sensitive to their ability to source cotton and so event hints of tighter supply will prompt a price reaction.  The extent of the damage to crops in the US southeast will now be of even greater concern.  Globally, end stocks are lower than previously forecast on improving cotton consumption.  The USDA said that the success of China’s 2016 reserve auctions (which saw more than 2mmt of cotton sold) indicated that Chinese mill demand had previously been underestimated.  Chinese import demand though is set to remain weak with small import quotas and prohibitively high out-of-quota tariffs still in place.

Sugar

Sugar futures prices were mostly higher on Wednesday.  The remaining 2016 season prices, March and May, though both weakened on another lightly traded day.  The sugar market looks to have lost some momentum after the spurt in September.  Weak, or even nil, momentum remains toxic for momentum investor’s long positions which are still very large.  South Brazil’s mills are due to report second-half September production shortly which might awake the market from its slumber.  2017 and 2018 prices both made solid gains as the later seasons ratchet up to where near-by prices have come to rest.  Australian dollar prices have gained too with a largely steady currency.

Cattle

Australian spot cattle prices were a touch weaker overall on Wednesday.  Nevertheless, prices remain at high levels and restocker interest is yet to show signs of slowing down.  We suspect the dip in the EYCI is more to do with the small rush of cattle that physical markets have seen this week following the very wet start to spring.  Dalby, for example, saw consignments lift to the highest level in three months yesterday.  In the US, cash cattle markets remained relatively steady.  Futures though faltered once again after the USDA upped its forecasts for US beef production on higher than anticipated cattle slaughter.  A small silver lining though – total US red meat and poultry supply for 2016 was revised a shade lower thanks to weaker broiler production. 

Dairy

NZX WMP futures were stronger on Wednesday.  And they have started Thursday in a similar fashion in the near dates.  The dairy market has plenty of price-friendly vibes from data suggesting capacity is being culled.  Dairy Australia yesterday said, based on its very detailed knowledge of the industry, they expected Australia’s milk production to contract 5% this season.  The EU is reporting lower milk production data now.  The EU’s decline, based on the elevated cull rates they also report, is likely to continue too.  The move higher in prices is being supported by accumulating evidence that the required drop in milk production is indeed happening. 

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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