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Agri-commodities update: Sugar again veers to the wrong side of the road

Sugar prices stumbled and spreads tumbled.

Currencies

There was nothing among the agri-exporter currencies that could be described as a pattern over the past day.  And none of them went far, nor anywhere novel.  The Australian Dollar had a day of big swings.  Australia’s inflation rate remains subdued according to data published yesterday.  But, traders concluded, not subdued enough to enhance the case for the Reserve Bank to cut interest rates next week on Melbourne Cup Day.  The Aussie promptly jumped a half cent to trade near recent highs.   A currency that was once an exemplar of the aphorism “up by the stairs, down by the lift” did the opposite yesterday.  The Aussie gave up most the gains over the remainder of the day to start today only a shade higher at just under 76½¢.

Grains & Oilseeds

  • Wheat futures prices were mostly a little higher on Wednesday.  Chicago made larger, sharp gains.  Broadly the market has veered away from recent lows.  That action is consistent with our expectation that the market will range trade for a time.  Forecasters see little chance of rain the dry western third of US hard red winter wheat country over the next week or so.  The region’s high temperatures of late have substantially widened the area where there is no sub-soil moisture.  Temperatures will continue be on the warm side for this time of year.  The catch-up task for rainfall is getting larger.  Forecasters also expect France’s wheat regions to return to a dry pattern for the next week which would take soil moisture levels back to problem levels.  Weather forecasters continue to expect southern Russia and western Kazakhstan to get some this weekend that might get the area off the watchlist.
  • ASX East January wheat futures were marked unchanged, at 234$, at Wednesday’s close.  Australian basis leaves Australian wheat a little more competitive after sympathetic moves in futures markets.  Weather forecasters expect mostly dry conditions in eastern Australia for the next week.  Wetter areas in the south will get more time dry and now temperatures seem likely to rise a little to boost both drying and progress to crop maturity.
  • Corn futures were moderately higher Wednesday.  Market chatter suggests farmer selling remains limited as producers are content to sit and wait for more attractive prices.  A lot of grain still in the hands of would-be sellers at higher prices is likely to limit the ability for corn to sustain any rally.  That in itself is not an issue if it’s met by eager buyers on the other side.  Our view though is that there’s not, at this point in time, enough fundamental evidence to entice investors to build large long positions.  Demand from the livestock sector is strong, but there’s also copious amounts of cheap feed wheat for corn to contend with.  Investors though will be on the lookout for any potential weather events in South America that may transform the current supply and demand landscape.
  • Oilseed prices posted solid gains on Wednesday – canola was up modestly, soybeans more sharply.  January soybeans closed at their highest level in three months.  Volumes soared too as investors, having cleared a material chunk of their long position through September, are stepping back into the market as big buyers.  Analysts have been impressed by strong export demand and are expecting to see that strength continue in today’s USDA export sales report.  We also think that ‘bean prices will have premium because South American crops are still uncertain.  And with that so is a huge chunk of world soybean exports.  For now there are no problems with South American ‘beans, but at this point those crops are still an idea rather than a reality.

Cotton

US cotton futures bounced on Wednesday as the market drew out some buying support at price near 68½¢.  The China Cotton Association also published its forecasts for China’s 2016 season cotton crop.  Their 4.64mmt forecast is a touch higher than the USDA’s latest production estimate.  The forecast is, nevertheless, still a 4% year-on-year fall and the fourth consecutive annual drop in China’s production.  China’s farmers have responded to the elimination of price support policies by planting significantly less cotton.  Whether or not that qualifies as “news” though is questionable.  More like a timely reminder that China will, eventually, need to return to the global market to source some of its cotton needs.  On the weather front, conditions are looking excellent in the US Southern Plains, with warmer than average temperatures and restricted rainfall aiding harvest progress.  Forecasters say China’s harvest remains sluggish amid wet weather. 

Sugar

Sugar futures prices fell sharply Wednesday.  Trading volumes remain dire.  The sugar zombie, driven by this minimal impetus, is simply weaving around, direction determined only by the slope of the road beneath its dragging feet.  Were that the night’s only action we would write the day off as uninformative.  The day does have a bigger story though: the sharp drop in the New York March-May spread.  While price levels have not really fallen out of the range on any recent dip, the spread has been threatening to do for the last week or so.  The March-May spread made good on that threat last night the premium fell ten points.  The March premium, at 56 points (or about a half cent), means the September step-up has almost been eliminated in the spreads.  The market looks decidedly wobbly.

Cattle

Australian cattle markets continued to correct lower Wednesday.  Yesterday’s falls however were more modest in scale.  Several selling centres reported materially smaller offerings compared to the previous week which will have buffered prices somewhat.  Despite the lower prices interest remains strong from restockers - the abundance of pasture and cheap grain will be supportive of overall margins.   In the US, live cattle futures spent Wednesday consolidating their recent gains.  The futures market will be looking for a solid improvement in the cash market either today or tomorrow – no cash bids have been recorded in the last few days so the “anchor” point remains somewhat elusive.

Dairy

NZX WMP futures had a second day of sharp gains on contracts out to May next year.  Most WMP contracts remain some way below the highs set in September.  Victoria and Tasmania’s wet dairy regions have had a couple of dry days.  Weather forecasters expect any rain in the region to turn light and patchy after today for almost a week.  Realising those forecasts would allow the regions to dry down from excessively wet 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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