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Agri-commodities update: Greenback headwinds intensify

The US Dollar continued to rally and place pressure on US$ commodity prices.

Currencies

The US Dollar continued to strengthen sharply against the other agri-exporter currencies.  Traders and investors, more and more confident that US interest rates are headed higher, are buying the greenback.  The greenback’s rise is putting some downward pressure on $US prices.  The Australian dollar has dropped almost 1¼¢ since the start of Friday to begin this week at a little over 76¢.

Grains & Oilseeds

  • US wheat futures prices fell modestly on Friday to further ease down from recent highs.  We expected the higher prices to run into some selling eventually so the retreat is no surprise.  And the US Dollar’s strength is not helping either.  Friday’s positions report showed that investors remain heavily short so there is also potentially a substantial buyer on the market from time-to-time.  That is a recipe for the various US markets to be range-bound for a time barring some other surprise emerging.  2017 crop issues can provide that.  US hard red winter wheat country, parts of southern Russia and western Kazakhstan remain on the watchlist.  Forecasters do not expect significant rainfall in either region in the next week or so.  France also remains on the watchlist for now.  We await final weekend rainfall tallies in Europe to see whether or not the rainfall has been sufficient to allay worries.
  • ASX East January wheat futures gained 1½$ on Friday to close at 236½$.  Australian basis remains though in competitive territory – the Aussie’s decline has offset the rise in Australian prices.  We think basis is about where it should be given the crop that is coming.  Weather forecasters expect mostly dry conditions in eastern Australia for the next week.  Wetter areas in the south will get more time dry but temperatures remain on the low side so evaporation is slow.  Summer crop areas were the wettest on the weekend but amounts were not enough to widely delay winter crop fieldwork.
  • Corn futures consolidated on Friday.  The investor short position dropped sharply in the week to last Tuesday.  That has taken the position back to levels that are neither here nor there.  That begs the question – have investors bought back enough shorts for the time being?  Trading since Tuesday has been decidedly sideways which suggests perhaps the short covering boost has now run its course.  The liquidation is a sign that market is far less bearish about corn.  Pushing prices higher though would require investors now to swing towards a bullish mentality.  In our view that mentality would be difficult to sustain when one, there are no major weather worries in South America at present, and two, wheat’s price prospects also remain limited.  Heavy US feed wheat supply means wheat and corn will have to remain closely connected until that surplus is delivered safely into buyers’ hands.
  • Oilseed prices were higher on Friday – canola a shade, soybeans by a little more.  Friday's positions report showed that investors have increased their bullish bets on 'beans.  By historical standards though the long position remains only modest, so there is potentially room for more buying in the near-term if export demand continues to surprise to the upside.  Some harvest pressure though will probably remain for prices.  Forecasters say that, overall, the US harvest should progress favourably this week, despite some rain in the northern Midwest.  Brazil has reported that its soybean planting is about a quarter of the way complete, with soil moisture conditions looking much better than they did a few weeks ago.  In the canola market, Canada has held its 2016 crop forecast steady at 18.4mmt.  Cool and wet conditions though continue to dog the final stage of the harvest.  Progress was at a near standstill last week in both Alberta and Saskatchewan – around 72% and 81% complete, respectively.  Both are now significantly behind last year’s pace.

Sugar

Sugar futures prices made some modest gains on Friday.  Trading volumes remain very subdued.  The lack of action, and in particular the lack of any real bounce after Thursday's sharp drop, is perhaps the day's message by omission.  Friday’s positions report shows that investors had sold 5-10k lots of their long position.  The overall long though is so large that the decline just means the position is now in a slightly lower orbit.  The position remains a danger to the market, and all the more so because of the feeble volumes.

Cattle

US cattle markets had an action-packed end to the week.  Prices in the fed cash market were a shade lower Friday, but live cattle futures continued to rally strongly.  The USDA’s latest cattle on feed report caught the market somewhat off-guard.  Cattle placements were down nearly 2% compared to last September, whereas the market had been expecting a 3.6% increase.  September marketings were higher year-on-year, albeit not quite as much as analysts anticipated.  In short, the report suggested that more cattle had been exiting the feedlot system and less entering it.  That will mean fewer market ready cattle available in the coming months, and so less beef produced (assuming weights remain below year-ago levels).  How much price impact can that have though when beef supply is already very heavy?  While the latest cattle on feed numbers are undoubtedly “market friendly”, prior to September year-over-year cattle placements had run higher for seven months straight.  Moreover, cold beef stocks in the US were up 4.5% compared to last September, at 520.7 million pounds - the highest September number ever reported.  End-users are clearly still struggling spur increased beef consumption, despite very low prices.  That tempers our enthusiasm for a sustained lift beyond some short-term position jostling.  Cattle prices in the US are going to need to stay low to push more product onto the market.

Dairy

NZX WMP futures were all but unchanged on Friday.  NZ’s soggy northern dairy regions have had dryish weekend to that will have allowed some drying.  Should the drier conditions continue that will mean no further production losses.  Dairy Australia published September milk production data for Australian on Friday.  The data showed a weak picture for Australian production.  Our estimates suggest that milk production is on a trajectory to be down 9% in season 2016.  We don’t think the fall will ultimately be that large because there will be some catch-up the fall is going to be a hefty one.  Northern Victoria is the hardest hit region.  Production there is on a trajectory to be down 15% in season 2016.  Production news is again supportive of futures prices at these levels.

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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