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Agri-commodities update: Sugar lightens the load

Sugar prices fall sharply again as investors continue to sell an uncomfortably large long position.

Currencies

The US Dollar was little on the other agri-exporter currencies on Tuesday to remains around recent highs.  The Australian Dollar gained about a quarter cent.  The Aussie is bang-on 74¢ in early trading today. 

Grains & Oilseeds

  • Wheat futures prices continued to make modest gains on Tuesday.  The cumulative impact of recent gains now means that prices are mostly near the upper-end of recent ranges.  That has happened rather quickly, but less because of the size of the gains, and more because the range is so narrow.  There are a few potential seams of trading that could see the market break out of that range.  Investors are heavily short Chicago wheat.  And a lot of Soft Red Winter remains, financially, in US hands.  Either could be promoted into action and take the market out of this narrow range.  Weather forecasters have not changed their outlook all that much for the US hard red winter wheat region.  Storms over the next week or so are most unlikely to yield any useful moisture.  The market though is eyeing prospective protective snowfalls in early December.
  • ASX East January wheat futures dropped a dollar on Tuesday to finish the evening session at 231$.  Modest overnight moves offshore futures and the Aussie are a “nil-all draw” for the market today.  Australian wheat prices remain competitive in global markets.
  • Corn futures prices closed a touch higher on Tuesday.  The market appears to be moving grudgingly higher as farmer selling in the US remains limited at current prices.  Although the global market will have plenty of supply comfort in season 2016 the US will remain the only seller of corn until South American supplies start to emerge around March/April.  Consequently US farmers have a few months yet to sit on their hands and wait for better prices.
  • Oilseed futures varied on Tuesday: soybeans finished stronger, while canola prices eased.  ‘Beans pushing through technical resistance levels on Monday has encouraged some additional speculative buying.  Near-term weather forecasts for South America remain largely benign.  Confidence in South American supply for early next year will keep sellers on task.  Some meteorologists are warning about potential dryness for Argentina in their longer-term models, but that far out the crystal ball is foggy.  A forecast rain event in Argentina this weekend would help buffer crops in the event that December does trend drier.

Cotton

US cotton futures had a mixed Tuesday, though nearby contracts were mostly a shade weaker.  The US harvest (now 67% complete) should continue to advance well amid mostly dry conditions.  Late-season harvesting in eastern China is still being dogged by frequent rainfall.  Forecasters say that the western portions of Australian cotton country are now in need of some rain.  However the precipitation that does occur this week will largely be restricted to the east.

Sugar

Sugar futures prices recorded large falls on Tuesday. The falls were substantially larger in the 2016 season contracts and tailed off into subsequent seasons. The trading pattern looks like more investors are exiting their longs. The market nonetheless absorbed the selling.  We suspect buying below 20¢ will be substantial for at least a short period purely because it is such an obvious area to target for buyers with time on their side.  We still think materially lower prices are more than likely from here in the short-term.  The investor long, the overwhelming majority of which is momentum-based, has the auto-pilot set to sell.  In light of that most buyers will think they can afford to be patient.  Momentum investor’s positions are of course finite so they will eventually clear the position – we think they still have more to do for now.  Weather forecasters continue to expect wetter conditions in Brazil’s southern cane regions over the weekend.  How this affects late season crushing in the region will depend on how much, and for how long, rain falls.  Soil moisture in the region is on the low side so it might take quite heavy rain before crushing is materially delayed.  Australia’s cane regions looks likely experience good harvesting weather until at least the weekend and, more than likely, into early next week.  Weather models keep on projecting rain about a week out but this seems to dissipate as the dates get closer.

Cattle

US live cattle futures edged higher again on Tuesday.  Open interest has been climbing steadily as new money looks to be flowing into the market.  The USDA though released its monthly cold storage report after the close.  The report said that US frozen beef supplies surged to the highest level on record in October.  While that’s not particularly surprising it’s a stark reminder that the US cattle-beef complex will still have plenty of issues to work through in 2017.  That might take some of the wind out of investors’ sails today.  Australian spot cattle indicators turned higher on Tuesday.  Eastern states cattle slaughter edged just above 135k head last week.  The rise in supplies over the last few weeks has taken turnoff back to levels not seen since mid-2016.  Cattle prices though have now largely re-aligned themselves to equivalent mid-year levels.  Fundamentally that would suggest there is no longer a pressing price adjustment to be made.

Dairy

NZX WMP futures recorded sharp falls on Tuesday.  And trading today has begun in the same manner.  Profit-taking seems to have set in.  That suggests some at least think the market has adjusted prices by enough to reflect tighter supply for now.  Next week’s GDT auction looms as test of market conviction.

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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