Rally mitigates high dollar

Futures rally mitigates high dollar

ANALYSIS
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The rally in futures has not quite covered the impact of the much higher Australian dollar, but it is close.

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Chicago Board of Trade July futures peaked last week at 770.75 US cents a bushel, with a daily closing high of 739.5 USc/bu. The market then traded in a sideways pattern to close last Friday night at 737.5 USc/bu.

In $A terms we have done a little better, with July futures closing at $A350.12 a tonne on Friday night last week. Since early 2008, that is a price level only beaten on two trading days in March last year.

Last year the high $A value of CBOT futures was driven by the Australian dollar, as we plunged to a low of 57.44 US cents in the panic of the COVID-19 outbreak. This week the Australian dollar is worth 77.11 US cents.

Over the past 13 months, the lift in the $A has pulled $A81.47 from the $A value of CBOT futures, while the rally in underlying CBOT futures has added $A75.29/t. So, the rally in futures has not quite covered the impact of the much higher Australian dollar, but it is close.

Corn is still a driving force. There have now been multiple daily limit gains in corn prices as the market comes to grips with drought in Brazil, which threatens to pull significant tonnage from their production, putting more pressure on already tight US corn stocks.

That is a help for wheat as more wheat finds its way into livestock feed rations, but wheat has its own supporting factors as well.

As the US growing season has got under way, there have been two areas of focus. One has been the Southern Plains and dryness in the Hard Red Winter wheat heartland. That dryness has come on top of very low temperatures which are thought to have damaged some crops as well.

The other has been drought in the northern spring wheat areas of the US, extending up through the Canadian prairies.

Both factors have been enough to support wheat futures, with the added help from strong corn prices. As we have said before, it has become a classic North American growing season weather rally, with a fight for acres between soybeans and corn thrown in for good measure.

The US price signals are encouraging US farms to stick with their plans for growing corn, rather than switching to soybeans, even as cold soil temperatures have meant that corn establishment is being delayed.

At some point the season will have advanced enough that the acreage battle will be over. We will also get to the stage where at least some rain will have filled in some of the dry regions across the US and Canada.

That is when this current weather spike will take a breather, and the current selling opportunity will have passed.

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