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Agri Commodities Update: waning and waxing with WASDE

Friday night trading in grains and oilseeds was marked by volatility, while cotton prices had the wane but not the wax.

Currencies

The US Dollar, after considerable volatility, had a mixed day against the other agri-exporter currencies on Friday.  The changes were mostly modest but it did mean a number of them veered away from near-terms highs.  That should, for time being at least, mean less downward pressure on local currency prices.  The Australian Dollar shared the greenback’s volatility but ultimately fell.  The Aussie, about a half cent lower from Friday’s start, starts the week just above 76½¢.

Grains & Oilseeds

  • US wheat futures, after a volatile zag and zig, closed with mostly modest gains on Friday.  The USDA’s WASDE report did forecast higher production and end-season stocks of wheat.  The market’s immediate response to that report was to cut prices sharply.  Not long after though the market recovered all those losses.  Perhaps the surprise, once digested, was less than the initial sticker shock.  We suspect though that the action in the corn market (see below) may have led the wheat market higher.  Feed demand for grain is strong.  The Minneapolis futures did better as the spring wheat future increasingly asserts its independence from the supply-heavy winter contracts.  Another segment of the market seems to be concluding that it is safe to assume US wheat prices have reached a low.
  • ASX East January wheat futures traded 1½$ lower on Friday to a new season low of 240$.  The market might find some support today with friendlier moves in global prices and the Aussie dollar.  Australian wheat looks quite competitive at the moment.
  • Corn futures whipsawed on Friday.  Prices plunged to a seven year low after the USDA raised its forecast for US yields by 7.1 bushels per acre, to a record 175.1 bushels.  The resulting lift in production could see US corn inventories close the 2016/17 season at the highest level in almost three decades.  Despite that very bearish production number the day’s lows were short lived - the market posted an even stronger rebound to end the day higher overall.  The WASDE report contained some positive signs on the demand side worth noting.  The USDA raised its US export forecast by 6% - an acknowledgement of the US’s new found competitiveness which has resulted in strong sales of late.  And higher forecasts for US red meat and poultry production in 2017 are expected to support a 3% lift in domestic use of corn for animal feed.  Global feed demand is growing strongly, so perhaps the market is realising that the scale of supply required for “comfort” will also need to be higher.
  • Soybean futures were volatile on Friday.  Prices plunged and rebounded several times to ultimately finish the day not far from where they stated it.  The market got the bearish WASDE report it had been expecting, but there was plenty of moving parts within it for the market to calibrate.  US yield forecasts were revised higher but, at a record 48.9 bushels per acre, they outdid even the most optimistic of analysts’ expectations.  Some commenters have already expressed their scepticism over the lofty figures.  On the demand side, US exports have been very strong, with another fresh sale of ‘beans to China reported on Friday.  The USDA gave US export forecasts (both old season and new season) a sizable boost as a result.  Still, the pickup in demand did not quite offset the increase in production and so global ending stocks were raised ~4mmt, to 71.24mmt.  That should add a little comfort back into the global market.  We note though that South America still has the potential to throw a spanner in the works later in the year if crop problems arise.

Cotton

US cotton futures fell sharply on Friday.  The USDA lifted US cotton output in its August WASDE report.  While the upgrade was only relatively small, the market had been expecting a downgrade (given that hot weather has left US crops in worse shape than last year).  Yield forecasts were indeed trimmed, but that was offset by an increase in harvested area.  US weather is now much improved too, so expectations for any further deterioration in crop quality have largely evaporated.   At the global level, production was revised a touch lower, while consumption and export forecasts were little changed.  Investors are holding record long positions though, so the lack of demand-side improvement in the report was likely disappointing.

Sugar

Sugar futures had quiet Friday.  Prices were a shade higher, spreads little changed.  UNICA, the millers' association in southern Brazil, are due to publish production data for the second half of July today.  The report should not provide any big surprises.  Nonetheless, a market that has huge long positions needs bad supply news to sustain itself.  The regions northern section remains very dry and that dryness is creeping southwards.  The dry areas were initially just touching Sao Paulo state’s northern border.  Now the dry soil and subsoil regions start well south of that border.  Cane harvesting and sugar recoveries are better in drier conditions.  These conditions are though outside a healthy range.  And newly planted cane will be suffering.

Dairy

NZX WMP futures were mixed on Friday.  Most 2016 contracts were unchanged.  2017 prices were modestly to strongly higher.

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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