Agri-commodities update: China extends, cotton bends

The US Dollar is little changed against the other agri-exporter currencies to start today.  The day’s rates, by and large trading over old ground, held little potential for impact on US$ commodity prices.  The Australian Dollar was a case in point.  The Aussie traded a half-cent higher but then retreated to start today little changed at just over 75¢. 

• US wheat futures were weakened further on Thursday.  Paris prices though bounced higher after tumbling recently.  Chicago prices continue to get the rough end of the pineapple.  Kansas prices weakened too but by less.  And the levels were less significant.  Chicago September closed at new lows for this season.  The contract also closed at just below parity with the Kansas September.  The spread was 11US$/t in late June, now it is under a dollar.  We suspect punters of some sort have been reversing short Kansas, long Chicago trades.  The Kansas curve remains in contango deep enough to carry wheat through until later in the year, suggesting supply remains heavy in the US.
• ASX East wheat futures didn’t trade again on Thursday.  ASX East January was though marked down to 245$/t.  The markdown, at five dollars, was large but it simply corrects an anomalous mark from the previous day.  Australian basis has crept higher in recent days.  Between that and new lows in Chicago overnight, the local market is likely to have a weaker bias today. 
• Corn futures were lower on Thursday to erase all of this week’s gains. The US weather narrative remains largely unchanged.  Forecasters are expecting at least another week of favourable conditions in the Midwest.  A return to hotter and drier conditions is slated for the second week of August.  The market though was more interested in the demand side yesterday.  US corn export sales came in on the low side of analysts’ expectations.  Given that the US is looking at near record acreage and, potentially, excellent yields, any indication of weaker demand for US corn will not sit well with traders and investors.
• Oilseed prices fell modestly on Thursday, with canola faring a little better than ‘beans.  Soybeans were pressured lower after the USDA published some disappointing US export data for last week.  New crop sales were on the low side of analysts’ expectations, while old crop sales were negative due to order cancellations.  The USDA though also reported two large sales of US ‘beans yesterday (and another earlier in the week) so news is not all negative.

US cotton futures were modestly lower on Thursday.  Chinese cotton futures slumped.  Markets are murmuring about China extending its reserve cotton auctions because demand continues to outstrip local supply.  China’s National Development and Reform Commission is yet confirm the change.  Unofficial reports though suggest that the daily sales – originally scheduled to run from May through August – could be extended out until the end of September.  Another month of reserve auctions could delay China’s return to the world market and so caused US prices to tumble.  The late bounce back though suggests that the market retains some confidence that, even with the increased sales, China will soon enough need to import higher quality cotton. 

Sugar futures prices again fell sharply overnight.  New York October tumbled to trade below 19¢ - it was last there in mid-June.  The October's discount to March again deepened, closing at -38.  The spread last saw these levels in early-June.  The uneven retreat in prices and spreads is a divergence that is worth noting.  Prices and spreads need not trade in a synchronised way – we are not suggesting they do.  The divergence we have in mind is the big difference between prices and spreads at early-June and mid-June.  The market took wing as the rain pounded a good half of Brazil’s southern cane region in May and June.  Brazil’s mills, consequently, were going to produce less sugar.  The July contract delivery window look much tighter than the trade’s forward sales plans had allowed for.  Indeed, in mid-May the market was priced to carry sugar into the first quarter of 2017.  Cue a scramble to buy that results in prices and spreads rallying sharply!  The next act of the drama sees prices rally but spreads largely stand still.  So, on one perspective, we can see that spreads simply have to less gains to give up – no issue then.  We though are leaning towards a different view.  The latter, price-only, part of the rally was driven by momentum investors riding the earlier rise.  That large long position looks more tenuous with each passing day.  Investors selling may well close that divergence.

NZX WMP futures were mostly unchanged on Thursday, though the prompt August contract did close a shade lower.  Nearby prices have opened on a weaker note this morning too.