Wheat prices fell sharply overnight as it looks more likely that US prices had reached an uncompetitive level, stalling much needed exports.
The US Dollar was little changed on Monday against most of the other agri-exporter currencies. The Brazilian Real was a notable exception as it climbed to close the day at the highest level since July 2015. The Brazilian Real (BRL) seems to be experiencing a “re-rating” – jargon for a sea change in perception about the fundamental nature of a market. Brazil seems, to a significant group of investors, to be a nation that has achieved a large degree of political maturity. Sure, a scandal that has taken down a sitting President, her predecessor and assorted Brazilian pezzonovante was unedifying (or even Ishmaelian at times). But in the end the scandal was only unedifying. The whole process was carried out according the laws and rules of the body politic. The process did not precipitate some broader, violent social convulsion. A country that is rocked by such a huge scandal, but manages it and moves on is demonstrably stable. Investors are clearly willing to give Brazil the benefit of the doubt. And high interest rates – an inflation-adjusted 5% or so – are hard to resist in a world of uber-low rates elsewhere. The BRL’s strength is already an issue oilseed, sugar and cattle markets. A sustained re-rating rally will substantially later Brazil’s position in competitive queues. The Australian Dollar is all but unchanged this morning at a little over 76¢.
Grains & Oilseeds
- Wheat futures prices fell on Monday, with heavier falls in the US winter contracts. The sharp drop was precipitated by a couple of events. The USDA reported a very weak export inspections number for last week. US exports generally fall sharply at this time of anyway. The size of the fall was still something of surprise even allowing for that. The US Dollar’s continued strength is an unhelpful headwind in that context. The markets vigorous response likely reflects it latent prejudice that prices had risen enough to make US wheat uncompetitive. Chicago and Kansas prices are now firmly back in the old range, and near season lows. Those markets might just come to a halt near current price levels. Minneapolis futures were relatively little changed by contrast. Another weak export on Thursday might see this market give up some gains too. 2017 crops still have nascent issues – they have not been eliminated. US hard red winter wheat country has little prospect of any rain in the next 7-10 days. The regions temperatures will also remain high enough for evaporation to be material. Weather forecasters expect southern Russia and western Kazakhstan to get some rain over the next week or so. But, it is too early to guess whether the rainfall will be enough to scratch the region off the watchlist. France remains on the watchlist because rainfall has heavy enough to sustainable increase soil moisture.
- ASX East January wheat futures fell a dollar or so on Monday close just over 235$. Australian basis has narrowed sharply after overnight moves. We may see some further dip in prices today. 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 in some areas.
- Corn futures weakened Monday on the back of profit taking. Dry conditions in the US have aided corn harvesting, with around 61% of the crop in the bin. That’s now all but caught up with the five year average pace. Weekly US corn inspection data was well below where analysts had pegged it, which means the market will now be adjusting its expectations for export sales accordingly lower. The stronger greenback will be throwing some sand in the wheels here. On the weather front, most of the US will get another week or so of favourably dry harvest conditions. Forecasters say Brazil’s Mato Grosso and surrounding areas will see regular showers over the coming fortnight. If that rainfall does evolve as forecast then it will help to erase those last few patches of dryness from our watchlist.
- Oilseed prices continued to strengthen on Monday, pulled higher by the booming vegetable oil market. December palm oil futures hit fresh contract highs overnight on expectations for lower Malaysian output in October. Canola, with a comparatively higher oil content, is placed to benefit the most from that price strength. A sharp rally in the Canadian Dollar and some profit taking action at the day’s highs though appeared to limit the ability for prices to go higher. US soybean harvesting in now just over three quarters complete – on par with the five year average pace. Forecasters say South America will receive regular rounds of showers over the next fortnight to keep soils favourable for planting and establishment. The northeast of Argentina will be the exception where conditions may start trending a little too wet.
US cotton futures prices spent Monday stuck in a sideways trading pattern. The December contract ended the day though sitting below its 100 day moving average – a weak omen from the technical tea leaves. On the fundamental side, US cotton conditions have, surprisingly, improved by one percentage point. The USDA reported that about half of the US crop is currently in good to excellent condition. Fieldwork advanced swiftly too last week, with more than a third of the crop now harvested.
Sugar futures made hefty gains on Monday to veer from shaky to more solid ground. The jump is important because the market was looking a little wobbly. Looking for a cause is not something that's always necessary in such a thinly traded market. Not much needs to happen to buffet such an inert market around. China's imports though, surging to a five-year high, are a candidate. There is obviously some headline value in that announcement - and sometimes that is all that is necessary to prompt trades. Whether there is genuinely news is the announcement is another question. People who follow the market closely will not be too surprised by data – the extra imports will have already been evident in other data sources. Analysts have also been adding substantial (½mmt or more) unofficial (smuggled) imports to China’s official import estimates for a number of years. So China’s sugar imports have been substantially larger than official estimates. China’s efforts to stops smuggling might boost the official import numbers as the unofficial channel is squeezed.
Australian spot cattle indicators have opened the week on a weaker tack. All categories have experienced chunky falls in the last week or so. Some heat was inevitably going to come out of prime sales with the drier turn in the weather allowing previously delayed supplies to come on to the market. Queensland slaughter, for example, was up nearly 10% on the week prior. And forecasters say that, aside from some showers in the southeast, much of Australia will see a restricted rainfall pattern over the next week so there will be little obvious impetus to push prices back up. In the US, fed cash markets are clawing their way back above the 100c/lb level. Live cattle futures opened sharply higher on Monday and then spent the remainder of the day tracking sideways. We’re not convinced this rally has legs, but the short‑term impact for Australian beef is certainly price positive. US domestic 90CL beef prices are up a couple of cents overnight.
NZX WMP futures did not trade on Monday as NZ enjoyed their Labour Day holiday. The market has opened sharply higher in early trade today. Burra Foods, a large Australian milk processor, bumped up the milk solids price they expect to pay to farmers in the 2016 season. The new forecast range is 10¢ higher at 4.50-4.70$. NZ’s northern dairy regions continue to see only modest rainfall. Should the drier conditions continue that will mean no further production losses.
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