AM Markets: Grain Futures Gain, as Index Fund Buying Looms

(Agrimoney) –  Brace yourselves. This week looks like being altogether more significant to agricultural commodity markets than the last one.

Not only will it bring the annual rebalancing exercise by index funds, which are expected to buy large amounts of corn and wheat futures to rejig their portfolio weightings to the levels dictated by the index followed, but it will witness a slew of important US Department of Agriculture data too.

As if the USDA’s monthly Wasde crop supply and demand report, a key part anyway of the agricultural commodities calendar, was not enough for investors, Thursday will also see the publication of quarterly data on US grain stocks, briefings with a particular history of causing price movements.

On top, there will be data too on US winter wheat sowings – which could show area at its lowest in a century, if low prices deterred plantings as much as most investors believe.

‘Leaning friendly’

And this before factoring in the market factors we saw last week too, such as the idea that investors are more ready to buy commodities this year.

“The commodity indexes are leaning friendly,” said Water Street Solutions, with the CRB index, for instance, up 8% from a low set two months ago.

“While more confirmation is needed, as 2017 progresses we may well see a stronger commodity environment.”

On a more negative tone, there was the hangover from Friday’s poor US export sales data, for corn, soybeans and wheat, which hurt prices in the last session, to factor in.

Furthermore, were the weekly Commodity Futures Trading Commission data on hedge fund positions to consider, showing more buying in some ag contracts than had been expected (which can be taken as a negative signal, in meaning that much buying pressure has already been realised).

‘Look for a firmer tone’

All in all, Richard Feltes at RJ O’Brien advised investors to “look for a firmer tone” to trading in early deals on Monday, factoring in “Friday’s row crop sell-off, Monday’s kick-off of the index fund rebalancing, and the lower-than-expected managed fund corn short”.

And that was just about the way things started, with grains in particular firm, marrying with ideas of substantial index fund buying ahead.

“Index fund rebalancing starting January 9 reportedly will trigger 60,000-100,000 new corn long contracts and 30,000-50,000 new wheat longs,” Mr Feltes said.

At CHS Hedging, Joe Lardy also flagged a figure of 60,000-100,000 contracts for index fund corn buying, but put wheat at 40,000-60,000 contracts.

“That market is much thinner than corn so the chatter is that the buying impact will be more influential,” he said.

“There should be significant buying of wheat futures in order to get the wheat allocation back in line.”

Still, in soybeans “the rebalance is less than 10,000 contracts so it shouldn’t be a market moving input”.

‘Support should fade’

Benson Quinn Commodities went with the idea that index funds are “needing to buy an estimated 35,000 Chicago wheat contracts, 15,000 Kansas City wheat, 63,000 corn and a nominal 6,600 soybeans”.

Still, the broker urged caution over expecting too much of a boost to prices.

“Any support from rebalance should fade about midweek with corn and wheat overbought and trade squaring for USDA reports that should show record large US corn and bean stocks and record global supplies.”

Furthermore, there is the idea that other investors, noting the buying that index funds will make this week, have front-run it – ie buying corn and wheat ahead, and potentially selling into the index fund purchasing wave.

(Hedge funds cut their net short in corn by more than 17,000 lots in the week to last Tuesday, although the buying in Chicago wheat, at 5,334 lots, was more muted, latest CFTC data show.)

‘Spotty winterkill’

Still, as of 09:30 UK time (03:30 Chicago time), Chicago wheat futures were 0.5% higher at $4.25 ½ a bushel, remaining above their 100-day moving average, gained last week for the first time in six months.

Cold weather is also in focus, presenting a potential threat of frost damage to crops in many geographies, including the US, where according to MDA, “some spotty winterkill was noted in western and central Nebraska.

That said, “milder temperatures will return this week,” the weather service added.

Agritel flagged temperatures in Russia too, where also in the south of the country (important for wheat exports) “weather is mild, near Moscow temperatures fell to -25 degrees Celsius”.

Still, snow cover “looks good enough to protect the crops where temperatures are the lowest, limiting the risk of winter killing”.

More price gains to come?

On the bullish side, there is the prospect of Thursday’s USDA winter wheat acreage data, expected to come in at 34.35m acres, according to a Bloomberg survey, down from 36.14m acres last year.

And then there is the idea that after more than four years of falling wheat prices, the bear market in the grain may be over, a factor which some technical signals are indicating.

“We’ve been waiting for wheat to break above resistance on the chart and it looks like a new year is what it needed,” said Water Street Solutions.

“A ‘bull run’ is unlikely to be sustained in the wheat market with the ample global supplies. But in the short term wheat can always demonstrate illogical behaviour.

“Watch Chicago opportunities at $4.45 a bushel and if possible, $4.90 a bushel.”

‘Margins have dropped off very sharply’

Wheat’s headway helped corn too, a key rival in the feed grain market.

Chicago’s March corn contract was up 0.3% at $3.59 ¼ a bushel.

Still, its discount, at more than $0.66 a bushel, is substantially higher than in early December, when it touched $0.42 a bushel (March basis), as strong signs from Argentine and Australian harvests added to ideas of huge world wheat supplies.

Although corn has gained support from strong demand from ethanol plants, this dynamic could fade, given declining output margins.

“Margins have dropped off very sharply from 50 cents just 3 weeks ago to the current level of 8 cents,” CHS Hedging said.

Export assessments

Corn outpaced soybeans, which added 0.1% to $9.95 ½ a bushel for March delivery, in line with what would be expected from assessments of what the index fund rebalance has in store.

Also on the negative side for prices is continued talk over the poor USDA export sales data unveiled on Friday of just 87,500 tonnes – down 91% week on week.

Still, are investors being too glum?

“It should be noted importers have already booked 86% of USDA’s export projection” for 2016-17, said Terry Reilly at Futures International.

“We would not be surprised if USDA lifted their soybean export figure for the US on January 12” in the Wasde report.

‘Wetness concerns’

Also on the more positive side for values is what MDA said was a slightly wetter outlook for weather in Argentina than thought on Friday.

“Rains in southern crop areas will result in some minor improvements in moisture,” the weather service said.

“However, rains in central areas will increase wetness concerns,” with the extent of moisture provoking worries over whether seeding will be completed.

Elsewhere in the oilseeds complex, palm oil was strong too, adding 1.2% to 3,113 ringgit a tonne in Kuala Lumpur, although the firmness did not translate to rival vegetable oil soyoil which gained 0.3% to 35.07 cents a pound in Chicago.