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Agri-commodities update: Jostling by positions

Large futures positions, held by the trade and investors, created some hefty moves in agri-commodity prices on Friday.

Currencies

The US Dollar had a mixed Friday against the other agri-exporters.  The greenback didn’t broadly make any new ground but it remains close to recent lows on many currencies.  The Australian Dollar had a relatively strong day on Friday.  The Aussie starts today about a half-cent higher at just under 76¼¢.

Grains & Oilseeds

  • Wheat futures had another mostly stronger to end last week.  Chicago rallied sharply, Kansas a shade less. Chicago prices are at their highest since late August, just before Egypt’s ergot-free wheat requirement pulled the rug from under the market.  Kansas prices, by contrast, are some way off regaining those levels.  The USDA published export sales data on Friday that was broadly supportive of the wheat market.  Hard Red Spring Wheat sales remain 4-5% ahead of where we’d expect them to be if the market is to meet USDA forecasts.  Hard Red Winter (HRW) Wheat sales were strong too.  HRW exports are better than 5% ahead of the required trajectory for second week running.  Soft Red Winter (SRW) Wheat sales by contrast remain the dog in the group.  SRW sales are 10% behind required schedule.  US export data is really good for Minneapolis, good for Kansas and bad for Chicago.  Prices did the complete opposite on Friday so we are need to look elsewhere for explanation.  We continue to read Chicago’s relative strength as investors exiting record short positions.  Friday’s positions report shows that investors had, as of last Tuesday, bought back a sliver of that position.  We suspect they have continued to do so since then.  Chicago’s outperformance can continue while investors clear their position.  Kansas too has a hefty investor short position but it is not getting the same performance as Chicago.  Investors are likely to be meeting more trade selling in the Kansas market.  Kansas prices have been supporting exports because they are low enough – a surge higher would make US HRW uncompetitive.  Western regions of US hard red winter wheat country remain on the watchlist after a dry weekend.  Weather forecasters continue to think that is unlikely to change in the next week or so.  Temperatures remain warm enough for now that crops will be able to use any rain that does arrive but that is unlikely to persist.  In the Black Sea region, neither southern Russia nor western Kazakhstan seem to have got much rainfall.  And even the rainfall further west in the Ukraine has been modest.  The region, given the largely rain-free outlook for the next week or so, remains on the watchlist.  There is plenty of tension in US wheat pricing right now which probably favours higher prices but we are sceptical that substantially higher prices can be maintained for 2016 season wheat.
  • ASX East January wheat futures jumped almost 5$ on Friday to close at 240$ - the highest level in since mid-August.  Australian basis still looks a lot more competitive this morning despite gains in global prices.  The cloud over high milling grade availability means there is not necessarily going to be a lot of sellers.  Nonetheless, the weekend was dry in Australia – including, unexpectedly, in Victoria.  Weather forecasters expect good conditions for maturing and drying grains in much of eastern Australia.  Forecasters also still expect temperatures to remain a little on the cool side which will slow down drying in the soggier regions.
  • Corn futures finished at three-month highs on Friday, despite some late pressure on prices.  Investors still hold a very large short position.  Their appetite for holding non-performing trades though will be waning by the day.  Friday’s positions reported indicated that, as of last Tuesday, they have already started to unwind some of that position.  Any further price strength today is likely to prompt another wave of short covering.  Forecasters say some harvest disruption will occur in the US this week with periodic showers.  On balance though fieldwork should still progress at a reasonable pace.  Brazil’s watchlisted dry region in Mato Grosso and surrounds have shrunk with some recent rainfall.  Forecasters though don’t see any follow up rain in their near-term forecasts so the situation will remain closely watched.
  • Oilseeds prices were higher on Friday – soybeans modestly, canola more sharply.  The soybean market drew much of its strength from gains in the corn and wheat.  Some stronger than expected US export data was an additional plus on the day.  As was a delegation of large Chinese importers signing commitments to purchase 5.1mmt of US ‘beans at a ceremony in Des Moines.  Brazilian soybean planting is progressing swiftly – currently about 18% compete – but the lack of rain in the ten day forecast will not be supportive for these early planted crops.  The canola market continued to climb Friday, despite a stronger Canadian Dollar, as harvest remains at a standstill in much of the Prairies.  Conditions are expected to slowly improve this week, but the trade will be worried about losses already incurred.  Canola’s premium to ‘beans has rallied to nearly 18$ as a result.

Cotton

US cotton futures finished higher for a third consecutive session.  The market got a boost from some strong US export data.  The amount of damage from Hurricane Matthew in the US southeast remains undefined.  The prospect of crop losses though will be worrying traders who sold aggressively whenever higher price opportunities presented themselves in the last few months.  Friday’s positions report showed that, in the week to last Tuesday, the trade was busy buying back some of that huge short position.  Investors though have only been willing to sell those positions back at even higher prices.  It is worth noting though that prices, now above 70c, are approaching levels that have previously met resistance.  Cotton must compete with cheaper synthetics for its share in the textile mix so we are wary that it has been low-ish prices stoking recent export demand, and not the other way around.

Sugar

Sugar futures prices had a quiet Friday.  Season 2017 and 2018 prices fell a shade.  UNICA’s production report for the second half of September failed to provide much surprise for the market.  Sugar production was very strong.  And sugar recoveries were weak.  Analysts would not have found much to surprise them in the data.  Likewise in the weekly positions report.  Investors have sold some of their long position but, being enormous, there’s still a lot to go.

Cattle

Australian cattle markets were unchanged on Friday.  In the US, futures prices bounced on some technical short covering.  We are not reading too much into that though – continued weakness cash markets are likely to keep futures on a short leash.  Weekly slaughter remains stubbornly above 600k head and production is running at the highest levels since 2013.  The US will be need to push much more beef into the export market to absorb that growing surplus.  In the US grinding beef market, domestic 90CL prices moved lower, “catching down” to earlier losses seen in the cattle complex.  Domestic 90CL prices have further downside risk, with cow turnoff expected to expand over the next few months.  By contrast, prices for imported Australian prices were little changed on Friday.  Consequently US buyer interest in imported product remains very limited. 

Dairy

NZX WMP futures prices continued to rally on Friday.  News continues to suggest the dairy market is in the midst of a substantial production cut.  Dairy Australia reported on Friday that August milk production in Australia was almost ten percent lower than last year – a big fall.  A GDT auction looms on Tuesday night.  Futures are foreshadowing strong gains.  The GDT auction provides “ground-truthing” for the futures.  The last auction did not.  The market has since seen an accumulation of evidence since then that will give much greater confidence that global milk production.  So we think a more positive outcome is more likely this time. 

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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