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Agri-commodities update: Leaner Beef

US feedlot numbers are declining, and the cattle are coming in lighter, to suggest the burgeoning of US beef supply is slowing.

Currencies

The US Dollar had a mixed day against the other agri-exporter currencies on Friday.  The greenback though remains around recent highs.  The greenback continued to gain against the Australian Dollar on Friday.  The Aussie has fallen the best part of cent to start today at about 73¼¢. 

Grains & Oilseeds

  • Wheat futures rallied sharply on Friday.  The US Dollar is not proving to be such a headwind for prices.  News that the US exports are healthy has traders re-thinking their views.  The run-down in EU and Black Sea milling grade inventories means the whole market is somewhat less price sensitive.  Added to that, Russia’s Deputy PM said the government is “99% sure” that it won’t need to use export restrictions.  The market can only interpret that saying that if the “need” does arise then they will.  Traders will be worried in some degree about Russian wheat cargoes so that will add a bid elsewhere.  Weather forecasters seem to be stepping back from earlier forecasts for storms through the US’ hard red winter wheat region.  Weather models have certainly turned drier.  The region remains a concern.
  • ASX East January wheat futures jumped 5$ on Friday to finish the week at 229$.  In our view the jump is overdue.  The Aussie Dollar’s decline has made Australian wheat cheaper.  And the broader rise in global prices should benefit Australia too.  Australian wheat still looks cheap so we can prices to rise some more today.
  • Corn futures prices were modestly higher on Friday, despite the US Dollar remaining stubbornly near recent highs.  Market chatter suggests that prices are low enough to prevent much farmer selling from occurring.  On-farm storage though will be rapidly filling up as the US harvest winds down.  The weekly position report suggested investors remain wary that these crops will, eventually, come on to the market.  In the week to last Tuesday investors were actively selling off some of their long bets and replacing them with shorts.
  • Oilseed prices had a mixed end to the week.  Soybeans closed a shade either side of firm.  The front contracts were supported by a sale of US ‘beans to China.  Later contracts were less buoyant as ideas of large production potentials out of South America start to firm up.  Brazilian crops have gotten off to a good start this season and drier weather in Argentina will allow for better planting progress over the coming fortnight.  There have even been murmurings about Argentina becoming too dry in December, but forecasters say most areas have more than enough subsoil moisture to support good crop establishment.  Canola futures closed Friday on a weaker note after Canadian crop forecasters left their estimate for canola production unchanged at 18.4mmt.  We remain wary of future downgrades.  Alberta was reporting only 83% of its canola harvested as of last week.  Winter looms and the harvest window will be rapidly closing.  Drier weather has been helpful but a mid-week disturbance is expected to bring additional snow and slow fieldwork down once again. 

Cotton

US cotton futures were mostly a touch weaker Friday in quiet trade.  Spread action has become something of a feature in the last week, with the December-March soaring to 122 points.  The December contract’s first notice day looms (Wednesday), so its end game is resulting in a lot of volatility.  The spread is also widening because farmers will now be selling into the March.  After lagging behind the last several weeks, the US harvest has recently begun to pick up the pace.  US producers will still have plenty of cotton left to hedge.

Sugar

Sugar futures prices fell a little on Friday across all seasons.  The New York March is now just a shade above 20ٴ¢.  The March spent much of August and half of September skipping along support “stones” at about 20¢ - we may be in for a similar episode here.  20¢ is a big number even in the big number club it so tends to be trigger for many different decisions, buying and selling.  Friday’s positions report showed that investor’s long position had fallen by 10-15k lots – a sizeable fall.  Trading since that time suggests there has been little by way of further sales.  Investors, despite that, still remain heavily long and so still a potentially potent source of pressure on prices.  Weather forecasters are looking for wetter conditions in Brazil’s southern cane regions this week.  The market will keep an eye on how much, and for how long, rain falls as late season crushing in Brazil remains important to early calendar 2017 sugar supply.  Australia looks likely experience good harvesting weather in cane regions for another with only light rain fall expect in the region.

Cattle

US live cattle futures traded sideways ahead of the USDA’s November cattle on feed report.  The report (released after the close) estimated that US cattle placements fell 5% year-on-year on the back of reasonably good grazing conditions and poor feedlot margins.  That was 2% fewer cattle than analysts had expected and the lowest October placement level in four-years.  The decline was most noticeable in the placement of heavier cattle too, supporting ideas that the long awaited slowdown in production could arrive early next year.  October cattle marketings lifted in line with expectations, up 5% year-on-year.  We expect a sharp, positive reaction from the market today.  Weather forecasters say a powerful blizzard swept across the US Northern Plains over the weekend, which may have caused some stress to livestock and delayed stock movements.

Dairy

NZX WMP futures were a shade lower on Friday.  The NZ Dollar continues to make new lows, trading just below 70US¢ this morning.  The Kiwi’s decline, for now anyway, makes Fonterra’s farmgate milk price of 6NZ$ easily achievable.  Our new NZ team think it has upside risk.  The rise in farmgate milk prices is occurring broadly.  Several processors in Ireland have bumped up their prices in the past couple of weeks 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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