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Agri-commodities update: Dollar again untrumped

The US Dollar surged on Thursday creating a headwind for commodity prices.

Currencies

US Dollar strengthened sharply against most of the agri-exporter currencies.  The Brazil’s Real was an exception as that nation’s politics and policy evolve.  And evolve enough for investors to think their high interest rates are an opportunity rather than a warning.  The other major agri-currencies all fell sharply against the greenback.  The Australian Dollar led the pack lower.  The Aussie has fallen more than a cent over the past twenty-four hours.  Yesterday’s Australian employment report was on the weak side.  Markets looked upon that report, concluded Australian interest rates are more likely to fall than they thought, and so sold the Aussie.  The Aussie starts today at about 76¼¢.

Grains & Oilseeds

  • Wheat futures prices ended a shade lower on Thursday.  The USDA’s US export sales report was a bit mixed.  Hard Red Spring exports were on weak side after a period of strength. We are a little surprised Minneapolis futures did not react more.  Hard Red Winter wheat exports continue at a pace that, if maintained, will see people bump up their forecasts.  The US Dollar’s strength threw some sand in the markets’ wheels.  Wheat prices have climbed sharply of late as evidence has mounted that US wheat was competitively priced.  We think that rally is limited by a couple of factors.  Firstly, exports have been strong because prices are low enough but will stop if prices rise too much.  Secondly, we think there’s still plenty of grain in the hands of potential sellers.  The main argument ranged against that is the big buyer coming the other way.  Investors still have to buy a lot of futures to exit their short position.  We think this is most likely to end in draw – both sides will cancel one another out.  Both sides timing though will determine whether that is dull, scoreless draw or an exciting high-scoring one.  The west of US hard red winter wheat country, parts of southern Russia and western Kazakhstan remain on the weather watchlist.  The US region is set for high temperatures over the next week so the need for rain in the region grows.  We can also add France to that list as dry conditions creep north into winter wheat regions.
  • ASX East January wheat futures dropped another couple of dollars on Thursday to close at 235$.  Australian basis has been cut by the sharp fall in the Aussie over the past day and is back in competitive territory.  Weather forecasters expect mostly crop-friendly conditions in to evolve in eastern Australia.  Wetter areas to the south will see a largely drier trend emerge after a little weekend rain.
  • Corn futures retreated on Thursday.  US export sales came in at a very healthy 1mmt but a rallying US Dollar proved to be the stronger force on the day.  More active trade selling has probably added to the downside.  With prices so low, US farmers have been reluctant sellers of new season corn.  Prices at three month highs this week though appear to have motivated some to offload a bit of supply.  Weatherwise, the two week outlook is largely non-threating for the major producers.  The US harvest is likely to make good progress until some brief wet weather disruptions occur late next week. The South American forecast maintains that more rain will fall in central and northern Brazil.  Argentina’s corn planting has been slowed by recent rains and about 35% of fieldwork is currently complete.
  • Oilseed prices were lower Thursday – soybeans modestly, canola a little more sharply.  US weekly soybean export sales were exceptional at a touch above 2mmt.  A stronger US Dollar though was a headwind on the day.  And dry weather in the US is speeding up harvesting to add to supply pressures.  Beyond the day-to-day price oscillations though, we think the cumulative effect of these big export numbers is going to be significant.  Compared to grains markets, sentiment in oilseeds is probably more susceptible to being swayed towards a more bullish outlook.  Global supplies look comfortable now, but sustained US export numbers like last week’s mean there will be less cushion if problems do crop up later in the South American season.  Canola futures fell on Thursday as some investors took profits on the recent price rally.  The market still has more risk to the upside in our view as harvest delays drag on.  The clock will be ticking louder for Canadian farmers to get fieldwork complete before colder temperatures and snow return.

Cotton

US cotton futures fell sharply on Thursday as several large sell orders hit the market.  Spreads were volatile as the December-March traded as high as -13 and as low as -35, finishing the day in the middle of that range.  US cotton exports had an exceptional week, with sales reported at 340,000 running bales.  Such long awaited evidence of better demand would typically send cotton prices surging, but the market was apparently too absorbed by a rallying US Dollar yesterday to give it much attention.  Forecasters say the US Delta and Southeast will get a bit of rain late next week but, apart from that, the near-term weather outlook is largely favourable.  India’s weather remains ideal for harvesting, whereas conditions China are now trending a little too wet.

Sugar

Sugar futures prices fell sharply Thursday on the largest trading volumes for some time.  New York March fell early to support levels - seemingly somewhere around 22.75¢ - and then fell sharply on a hefty volumes.   The market has not fallen out the range that has persisted since the September step-up but it came close.  The market tracking sideways is a slow burn problem for momentum investors.  Sharp falls like this, if repeated frequently enough, are an explosive problem.  We have characterised sugar as a market riding the treacherous Yungas Road – we think that still applies.  True, the market has not slid off the road yet, but that doesn’t mean it is not still in danger of doing so.

Cattle

Australian spot cattle indicators continued on the path of least resistance on Thursday.  Heavy steers and cows to slaughter bore the brunt of those falls.  In the US, packer bids in the cash market were mostly steady to a shade higher Thursday.  By contrast, live cattle futures rallied sharply, regaining all of the previous day’s losses and finishing limit up.  Some stronger US beef export data likely inspired another wave of short covering.  The market is once again murmuring about cheap beef stoking better US consumer demand.  We remain sceptical.  The US futures market has a reputation for being a widow maker as its weak connection to the cash market can see it drift away from physical pricing for a time.  Growing supply pressure over the coming months could quickly erode that momentum.

Dairy

NZX WMP futures were little changed as the market again showed no inclination to wind back its premium to GDT auction levels.  Weather issues in NZ perhaps make the market cautious to do so.  NZ’s soggy northern regions had another dry day to complete a hat-trick.  The drier conditions are helpful but they cannot clawback production already lost.  In Australia, northern and western dairy regions of Victoria remain too wet.  Weather forecasters expect more rain through the region over the next few days but after that a drier period is looking more likely.  Drying is being slowed by temperatures on the low side for this time of year too.

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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