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Agri-commodities update: Unloading carbs

Sugar and grain prices recorded sharp slumps overnight as markets unloaded excess positions.

Currencies

The US Dollar did some zigging and zagging on Tuesday but went nowhere novel in the end.  The greenback’s rally continues to lose impetus.  The Australian Dollar too did some zigging and zagging but starts today little changed at a shade over 74¾¢. 

Grains & Oilseeds

  • Wheat futures mostly took big tumbles over the past day or so.  Even the high protein end of the spectrum saw some significant falls in prompt prices.  We had been looking at a nascent trend for Kansas to gain a premium to Chicago.  Kansas led the charge lower overnight so we that is, at the very least, a setback for that idea.  First notice in the December contracts is today and that might have something to with the drop.  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.
  • ASX East January wheat futures dropped 5$ on Tuesday to close at new season lows of 219$.  Overnight moves in the offshore futures markets will leave Australian wheat more expensive today.  More expensive, yes, but not expensive in an absolute sense so no reason fall all that far.  Still, we have said that for now for more than ten dollars in price falls, so we will not be surprised if the market trades lower again today to follow the sharp falls in offshore prices overnight.
  • Corn futures tumbled on Tuesday.  The sharpness of the fall suggests there was more to the day’s action than just profit taking ahead of the first notice day for the December contract (though it certainly looks to have been a contributor).  US supply is heavy and global demand for feed is strong.  Consequently the US has a strong incentive to, ASAP, channel as much grain as possible towards the export market.  The prospect of heavier South American supplies in 2017 puts a clock on that export window.  US prices have been creeping steadily higher for the last fortnight.  Perhaps the recent run up in prices had taken prices to the point where export demand was beginning to falter.
  • Oilseed futures experienced modest falls on Tuesday.  Profit taking featured, but there was also some spillover weakness from outside markets - crude oil prices plunged Tuesday on doubts that OPEC would strike a deal to cut output.  For the time being global demand for US ‘beans remains strong.  As we move towards the New Year though investors are likely to start worrying about how quickly that demand will be lost to South America.  US supplies are very heavy and so need a strong export program to persist through the 2016 season.  Weather conditions in Brazil are set to remain ideal for crops over the next fortnight.  Meteorologists though have significantly reduced the amount of rain that was forecast Argentina this weekend.  That is noteworthy because it increases the likelihood of those crops becoming stressed through December.  So, perhaps for now, the big run up in ‘beans prices will prove justified.

Cotton

US cotton futures weakened on Tuesday in choppy trade.  The 72¢ level once again proved to be the market’s technical Achilles heel.  Some bothersome rain is forecast for West Texas later this week.  The rain is unlikely to be all that heavy but Texas still has a significant amount of cotton left to harvest, so the disruption to fieldwork will be unwelcome. Overall the US harvest is now a little over three quarters complete.

Sugar

Sugar prices fell sharply again on Tuesday to make new lows for this sell off.  The decline was across all seasons. Several pieces of news toppled a market that was already teetering. Firstly, south Brazil's mills continue to produce more sugar than the market expects.  Secondly, more analysts are calling for small surpluses in season 2017.  Finally, the world's biggest sugar refiner (Al-Khaleej) reminded the market with words about excess capacity in sugar refining.  They also did it with deeds by delivering sugar into the recent London refined sugar expiry.  Al-Khaleej also said they estimate that the Middle East-North Africa (MENA) region has about twice the sugar refining capacity it needs to meet current sugar demand.  That leads us, and probably numerous others, to wonder about what strong demand for raw sugar in the region represents.  In light of the London delivery, some of the demand from the MENA region looks like it is just shifting sugar along the production pipeline, not having it consumed.  Overall that is a wall of sound so worrisome that you suspect Phil Spector might have produced it.  The move lower is probably being amplified by investors lightening their long position here.  But there is also what looks like some trade selling too that is taking the 2017 and 2018 season prices lower.

Cattle

US live cattle futures were a shade lower on Tuesday as investors continued to take profits on the November rally.  Wholesale US boxed beef prices though have continued to edge higher, so that should provide some fundamental support to the market today.  Australian spot cattle indicators were broadly weaker Tuesday, albeit to varying degrees.  While the broader EYCI eased only a cent, prices for trade and feeder steers fell much more sharply.  Most markets reported solid young cattle competition coming from restockers, but support from feedlot buyers was more erratic.

Dairy

NZX WMP futures made further modest gains on Tuesday.  Early trade today has a similar tone.  The futures market’s continued price gains hints at a bullish mood ahead of next week’s GDT auction.  Synlait, an NZ milk processor, upped the price they will pay to their farmers to 6NZ$ yesterday to align it with Fonterra.  We expect Australian processors to up prices at some point too with Australian supply much tighter this year.

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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