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Agri-commodities update: Separate lives in Chicago and Kansas

Chicago and Kansas futures continue to inch in different directions as evolving supply conditions point to divergence.

Currencies

The US Dollar retreated a little further against most of the other agri-exporter currencies on Monday.  The greenback remains on the high side but seems to have, for now at least, lost its rally impetus.  The Australian Dollar continued to conform to the broad pattern.  The Aussie starts today a quarter-cent higher at about 74¾¢. 

Grains & Oilseeds

  • Wheat futures had a mixed Monday, recording a range of modest gains and losses. The divergence among the US contracts is worth noting.  Surplus US wheat is all winter wheat, hard and soft red.  The HRW issue is well the larger of the two and large enough to drag other similar wheat prices with it.  The excess SRW by contrast is enough to make things worse but is modest issue on a standalone basis.  The situation though is evolving.  The HRW issue is a big problem that is slowly being resolved. The SRW by is a small problem that is not being resolved, slowly or otherwise.  The fundamental divergence in HRW and SRW is becoming more pronounced and this seems to finding its way in the diverging direction, respectively, of Kansas and Chicago futures prices.  One important implication is that the Chicago market’s value as an indicator of the broader milling grade wheat market is degraded.  Weather forecasters have not changed their outlook all that much for the US hard red winter wheat region.  Temperatures are now low enough that much of the crop is dormant or on the way there.  Importantly, there does not seem to be any snow on the horizon for the next week or so.  Poorly established crops in the region are facing an extended period where they are vulnerable to cold.
  • ASX East January wheat futures closed Monday on season lows of 224$.  Monday night’s moves in the Aussie and US futures have moved basis in opposing directions on Chicago and Kansas basis comparisons.  Australian futures look about mid-range compared to Chicago (SRW US Gulf).  Against Kansas (HRW US Gulf), Australian futures are among the lowest levels seen in the past six months or so.
  • Corn futures closed all but unchanged on Monday.  Export inspection data was strong, but heavy US supply (and the prospect of more from South America) is keeping a lid on prices.  Friday’s position report suggested that, in the week to last Tuesday, investors had been busy buying back some of their shorts.  Both the investor long and short positions are modest in size, so the market is returning to a more neutral mentality – hence the slow and grudging gains that have brought prices back near the 3.60$ level.  Brazil received some helpful rain over the weekend.  Forecasters expect a good mix of sunshine and showers will continue over the next fortnight, so there’s little worry over South American supplies at present.
  • Oilseed markets diverged on Monday.  Soybeans continued to rise, largely led by gains in soyoil futures, though strong US export inspection data also lent support.  The weekly positions report showed that investors have been busy building up their long position.  We expect some portion of the new additions is purely momentum based.  And, while the position remains some way off the June highs, it is starting to look large against the backdrop of an 81½mmt global carryout.  Supply worries in South America can still evolve to justify that position, but for now weather conditions remain mostly favourable.  Rain over the weekend was more beneficial than anticipated for Argentina’s southern regions.   Some pockets of dryness probably still remain, but forecasters have their eye on two possible rain events for early December.  The precipitation will be important for boosting soils in the event that December does trend drier.  Canola futures tumbled late in the Monday session as the Canadian Dollar turned sharply higher.   The market is now awaiting a final crop report from Alberta (due out at the end of the week) to get a better idea of how much Canadian canola will be harvested this season. 

Cotton

US cotton futures advanced on Monday.  Managed money funds continue to pile into the market.  The weekly positions report showed that investors have increased their long position to levels not far off the August highs.  The market though will start today testing key resistance levels.  Synthetic alternatives remain much cheaper so any forays above 72¢ have been short-lived as cotton starts to find itself priced out of the production mix.  Weather forecasters say some disruptive rain will fall in the US southeast in the coming days.  West Texas will also see a few showers over the weekend, but probably not enough to cause much worry in the market.

Sugar

Sugar futures prices were mixed on Monday. The day featured small gains in 2016 and 2017 season prices with a small retreat in 2018 pricing.  The position’s report – delayed by US Thanksgiving – showed that investors had made large cuts to their positions as of last Tuesday.  The position is no longer especially large and so is less influential for that reason.  Nonetheless, we figure there is still some 25-50k lots that investors might sell – still large enough to drag prices somewhat lower.  Weather forecasters expect condition to continue to support late harvesting and crushing in south Brazil and Australia.

Cattle

US live cattle futures retreated a little on Monday.  With prices closing last week at three month highs, investors likely took the opportunity to cash in some profits.  Australian saleyard cattle indicators were mostly a little lower Monday.  The EYCI continued its decline, but the speed and scale of its fall has slowed as the lift in spring supplies looks as though it may have peaked.  Eastern states slaughter was back down to around 131k head last week.  The dip in numbers has prompted most processors to keep their direct-to-works rates steady once again.  Dry conditions and above average temperatures are expected to prevail this week though, so there is a risk that could push some extra cattle onto the market.  However forecasters are looking for a few helpful showers and thunderstorms to pop up in east-central Australia next week.

Dairy

NZX WMP futures made further gains on Monday and have continued on that tack this morning.  Prices are still close to levels set at the last GDT auction.  But further gains would suggest the market’s mood is turning bullish ahead of next week’s GDT auction.

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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