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Agri-commodities update: Dairy adds weight

WMP futures rally to close on their September highs, only this time the market has more evidence that milk production is declining.

Currencies

The US Dollar got back to rallying on Thursday as the case for higher US interest rates consolidates.  All the other agri-exporter currencies, even Brazil’s Real, fell in the face of the stronger greenback.  The greenback’s strength is a headwind for US$ prices.  The Australian Dollar has fallen about a half-cent in that broad pattern.  Our FX strategy team does not expect the Aussie to fall all that far – they now expect it to end the year at 77¢.  Large rises in coal and iron ore prices are boosting Australia’s economy and export revenues which will support Australia’s currency.  We are sceptical all the price rises can be sustained but they are lasting for long enough to bolster the Aussie.  The Aussie starts today at a little over 75¾¢.

Grains & Oilseeds

  • Wheat futures prices made modest gains on Thursday.  US export sales came in near the high end of expectations but only gave the market a brief boost.  All the gains are perhaps in the US Dollar.  Looking forward we can see weaker prices near-term.  The combined lift in prices and currency makes us, and probably others too, suspicious that strong export numbers can be maintained.  Weather forecasters see little chance of rain in already dry regions in the western third of US hard red winter wheat country and France over the next week.  Weather forecasters are also more confident that dry areas of southern Russia and western Kazakhstan will enough rain over the next few days and so probably get the area off the watchlist. Argentina’s wheat regions are too wet and will need to continue Thursday’s drier weather in order to dry down.
  • ASX East January wheat futures were bumped up a couple of dollars to 236$ on Thursday.  Australian basis means Australian wheat remains competitive through much of the Asian region but not far beyond.  Weather forecasters expect mostly dry conditions in eastern Australia for the next week.  Wetter areas in the south will get more time dry and so allows crops to progress to maturity.
  • Corn futures finished modestly higher on Thursday.  The market dipped in early trade after the USDA reported US corn export sales at levels weaker than analysts had anticipated.  Plenty of fund buying emerged at the day’s lows though which helped December corn to close above its 100-day moving average for the first time since July.  Solid gains in the wheat market on the day will also have been viewed as supportive.
  • Oilseed futures were broadly stronger on Thursday.  The USDA reported another 2mmt+ week of US soybean export sales.  And there were a couple of fresh deals, totalling more than ½mmt, locked in on Thursday too.  Soybeans, which have a higher meal component, are also getting a boost from rallying soymeal prices.  Soyoil’s premium to soymeal has declined sharply in the last week, prompting traders to unwind their long soyoil-short soymeal spreads.  Canola futures largely followed ‘beans higher, with a weaker Canadian Dollar also proving helpful.  Canada’s weather woes have not yet diminished despite forecasts for drier conditions.  Saskatchewan reported another week of minimal harvest progress.  The canola harvest is normally all but wrapped up by the end of October, but currently about 20% of the Saskatchewan crop is still sitting in the field with the ground not yet firm enough to support harvest activity.  There’s now talk of crops potentially being left in the field over winter if soggy topsoil conditions don’t improve soon.

Cotton

US cotton futures finished just a shade stronger Thursday.  Analysts were expecting much weaker cotton sales in yesterday’s US export report (sales the week earlier had been very large) and that was exactly what they got.  Prices dipped lower after cotton sales came in at just under 130k running bales (down 62% week-on-week) but managed to recover those losses as the day progressed.  US harvest pressure should step up over the next few weeks as weather forecasters say conditions are set to remain largely fine and dry.  By contrast, China’s harvest continues to lag under wet conditions. 

Sugar

Sugar futures prices were all but unchanged Thursday on, yet again, listless trading.  Lingering around recent lows is still not a good look.  Some of south Brazil cage regions have been a little wet of late.  The rain is helpful for next year’s cane but if it lingers it might slow, or even stop, the harvest.

Cattle

 The downward correction in Australian cattle prices took a breather on Thursday.  Heavy steers and medium cows finished the day just shade lower.  Young cattle prices firmed up though, with the EYCI regaining a couple of cents.  Along with restockers, lotfeeders’ share of the young cattle market remains strong.  Grain prices have taken another material step down this month which will help support the spread between cost of gain and value of gain.  In the US markets, fed cattle cash prices jumped and US domestic beef prices have stepped higher too.  That, coupled with this week’s slide in the Aussie Dollar, will be positive for Australian beef prices.  FOB imported Australian 90CL beef prices were quoted at ~598Ac/kg cwt this week, up more than 6%.

Dairy

NZX WMP futures made further gains yesterday and have continued to do so in early trade today.  Most WMP contracts out to May 2017 are about 100US$ off their September highs.  The news flow continues to support prices.  Fonterra has quantified the impact of wet weather in northern New Zealand.  The processor now expects to collect almost 7% less milk solids this year – the previous forecast was down 3%.  Fonterra also bumped up the prices they will pay to Australian farmers by 10¢ to $5.20.  Victoria and Tasmania’s wet dairy regions completed a hat-trick of largely dry days.  Obviously that is helpful but cool temperatures will make drying a slow process.  Weather forecasters expect any rain in the region to turn light and patchy for almost a week that would allow these 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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