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Agri Commodities Update: wheat goes 'slump' in the night

Wheat prices fell sharply Friday, spooked by a stronger US Dollar and a fussier Egypt.

Currencies

The US Dollar rallied sharply against the other agri-exporter currencies on Friday.  US economic news drove the greenback’s move higher as it made higher US interest rates more likely.  The sharp move pressured US Dollar prices lower.  The Australian Dollar fell about a cent from the day’s highs on the greenback’s move.  The Aussie starts trading today at just over 75½¢.

Grains & Oilseeds

  • Global wheat futures were weaker on Friday – US winter wheat futures fell sharply, the others saw only modest falls.  Chicago and Kansas futures both made new season lows – something we were becoming more confident we would not see.  So much for that idea!  Friday’s other worrying feature was that the Kansas September-December spread also made new lows.  We had thought that we were past the worst of heavy harvest pressure but the steeper discount in September calls that into question.  A couple of events forced prices lower.  One was the very sharp rally in the US Dollar.  The other was Egypt, the world's largest wheat importer, again banning imports of wheat with any trace of the ergot fungus.  The market is bemused as to where Egypt expects to find millions of tonnes of ergot-free wheat.  The market though, more pressingly, has lots of wheat with traces of ergot that it might have sold to Egypt so this too dragged prices lower.  The price reaction might be overdone but we are wary of conclusion – we were also a little surprised the US harvest bulge was handled so smoothly.
  • ASX East January wheat futures edged higher Friday to close at 236$.  Guidance from other markets for today is mixed: the Australian Dollar fell, as did global prices.  Australian basis continued to widen on with those moves so the market will be under a little pressure today.  The market though is also likely to be wary of following that global guidance too quickly given it might easily reverse.
  • Corn futures tumbled 2% on Friday, dragged lower by wheat markets.  Kansas wheat in particular is pressuring corn lower, as a portion of heavy US HRW inventories needs to be channelled into feed.  Results from last week’s Pro Farmer crop tour suggest that we may see the USDA’s 175.1bpa yield forecast notched down in their September WASDE.  Pro Farmer has issued an average US corn yield forecast of 170.2bpa.  Even so, fundamental investors have decided that five fewer bushels is simply not enough to spark a turnaround for prices.  The US crop still looks very large.  In the absence of any major disruptions to the harvest the upside for corn looks limited until we see how the Brazilian season pans out.
  • The soybean market had another leg down on Friday. The results of the annual Pro Farmer tour suggest we may not have not seen the high point for US yields.  The USDA forecasted 48.9bpa earlier in the month, while Pro Farmer has since pegged an average of 49.3bpa.  Friday’s position report indicated that investors have increased their long positions in the week to last Tuesday.  However we expect that, since then, they have probably done just the opposite.  By contrast, canola futures were buoyed by a sharply lower Canadian Dollar and closed Friday with small gains.

Cotton

US cotton futures were mostly firm to a shade higher Friday.  Investors have again reduced their long positions as market momentum continues to look weak.  Cotlook raised its forecast global cotton deficit from 1.3mmt to 1.73mmt, citing higher cotton consumption out of China and Bangladesh.  The market though knew as much already (daily auction reporting indicates that China has now sold close to 2mmt of its reserves to domestic mills) and so was little moved by the news.

Sugar

Sugar futures prices were little changed on Friday in again listless trading.  Spreads too were similarly little changed.  Friday’s positions report shows that investors had bought even more sugar as of last Tuesday to post new records.  And that position is very likely to remain about that size given modest trading since that time.  The size of the position means it will dominate trading when investors decide to sell their positions (or roll them into the March contract).  The looming October contract expiry will soon force that issue.

Dairy

NZX WMP futures had a mixed Friday, though most contracts posted modest losses.  We had expected to see some correction given how far prices had risen on relatively low trading volumes.  More robust trading on Friday indicates that the market is perhaps finding its legs at now much higher levels, though a GDT auction looms tomorrow evening to test its resolve.  The NZ Dollar also plunged on Friday.  The Kiwi’s fall though was from recent highs, so the NZ dairy industry will still be getting a reasonably clear “produce less” signal.

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.research.commbank.com.au.

This report was originally published, approved and distributed by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945.

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