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Agri Commodities Update: Small tolerance, big imbalance

Egypt’s zero-tolerance of ergot fungus has upset the wheat market’s delicate balance.

Currencies

The US Dollar had a quiet Monday with the London holiday.  The other agri-exporter currencies most regained some lost ground on the greenback.  The Australian Dollar followed that pattern, gaining a quarter-cent, to start trading today at 75¾¢. 

Grains & Oilseeds

  • Global wheat futures prices fell sharply again on Monday, continuing the malaise that set in last week.  Egypt's renewed zero tolerance of ergot fungus in wheat is still ringing in the market’s ears.  Traders are likely to have ear-marked a considerable quantity of wheat to go Egypt.  Egypt’s action means that those sales are now highly doubtful. The wheat market is heavily supplied right now so finding another customer to take up that wheat is no easy task.  The wheat market’s fragile peace has been shattered.  The market has showed clear signs of the stress as prices fell sharply.  Spreads to hint at similar stress.  The Kansas September-December fell to a 28US¢ discount.  That spread has been intermittently setting post-1970 lows since May.  Last night’s was another such instance.
  • ASX East January wheat futures fell by 4$ on Monday to close at 232$ (new season lows).  Overnight trading in wheat and currencies suggests we are in for more of the same today.  Yesterday’s falls did take Australian wheat closer to competitiveness but did not reverse all of Friday night’s decline.  Add in the overnight action and the required fall in prices is even larger today.  Australia still has too much wheat from last season.  That paunch has been around for a while but the issue becomes more pressing a time rolls on to what most expect to be a very large harvest.
  • Corn futures prices continued to move lower Monday, with Chicago December making fresh contract lows.  The corn market is under immediate pressure from plunging wheat prices.  Harvest pressure is also looming.  Weakness in energy markets on Monday also added to the day’s softer tone, as did unwaveringly strong US crop ratings – around 75% of the crop remains in good to excellent condition.
  • Oilseed futures were weaker Monday (though they fared better than grain markets).  A sizeable sale of US ‘beans helped to put a floor in soybean prices.  The pressure of a looming US harvest though was again front of mind after US soybeans rated in good to excellent condition were reported to have improved 1% (to 73%).  Canola futures also softened Monday, dragged down by weakness in both soy and palm oil.  The market is also a little jittery about the implementation of stricter Chinese dockage rules that are due to come into force on September 1.  China is decreasing the level of waste product it will allow in Canadian canola shipments from 2.5% to 1%.  The Canadian canola industry is concerned that the higher processing costs associated with the tougher Chinese regulations will result in lower prices for growers.  Weather forecasters say that Australia’s canola crop looks in good shape overall, but there are some concerns that additional rainfall this week will see the ground become too wet in parts of the east.

Cotton

US cotton futures eased on Monday.  China’s Cotton Information Centre has revised its forecast for 2016/17 imports slightly lower, to 1.05mmt.  The extended reserve auction period is pushing back the need for China to return to the world market to source more of its cotton requirements – bearish for US prices in the short-term.  Take-up rates from the daily reserve sales continue to fluctuate, though there is little visibility on whether this is due to mills having adequate stocks or a reflection of the quality of cotton that remains in China’s stockpile.  In the US, cotton conditions were reported to have improved 1%, though at 48% good-to-excellent they remain well below year-ago levels. 

Sugar

Sugar futures prices continued to grind sideways without direction on Monday.  Trading was subdued by a London holiday but that does seem like an excuse given it was no worse than Friday.  Sugar seems firmly stuck in the northern summer doldrums.  We do not think that can persist for much longer. September looms which means the New York October contract’s end-game will soon begin.  Always something of an event anyway, investors holding huge long positions that need to be rolled or exited might well spice up that end-game.

Dairy

NZX WMP futures had a quiet start to the week.  A couple of contracts posted modest gains, though most were untraded Monday.  The next GDT auction is scheduled for next Tuesday, not tonight - apologies for any confusion.

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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