AM Markets: Ags Dip, as Funds Succumb to Pre-Election Nerves

(Agrimoney) – If last week, the talk in ag markets was all about fund buying – which helped grains post a gain of nearly 5% last month, as measured by the Bcom index – this week the mood has been somewhat different.If a fall in the dollar, down 2% from its late October high, might on the surface appear a positive for ags, in boosting the competitiveness of dollar-denominated exports such as many ags, the reason behind the drop is more important.

That is, the jitters ahead of the US presidential election, for which polls close on Tuesday, and the improved chance of victory by Donald Trump, whose policy direction, should he be elected, is broadly deemed less certain, and thus less comfortable for investors.

‘Pre-election, risk-off selling’

Richard Feltes at Chicago broker RJ O’Brien flagged “pre-election, risk-off selling” across financial markets.

“The macro risk of investment capital heading to the sidelines ahead of next week’s election aftermath across all asset classes persists.”

Benson Quinn Commodities said that “funds have been liquidating positions all week ,getting out of both long and short positions, as trade trims positions and risk in the board commodity and equity markets ahead of uncertainty of next week’s US election”.

‘Sure felt extra tired’

Not that this sell-off has necessarily made for exciting trading, with Joe Lardy at CHS Hedging reporting that in the last session grain markets “sure felt extra tired” .

“This was really a sleepy day with tiny trading ranges of just $0.04 a bushel in corn and $0.08 a bushel in soybeans.”

And movement was not mega in early deals on Friday, although in direction, it was consistent – downwards.

One of the bigger moves was actually in Kuala Lumpur, where palm oil for January fell by 1.0% to 2,746 ringgit a tonne as of 09:05 UK time (04:05 Chicago time), on track for its first losing week in four.

Their cause was hardly helped by a Reuters survey showing that traders expect Malaysian data next week to show a jump in domestic palm oil stocks of 8.8% month on month in October to 1.68m tonnes, the biggest increase in more than a year.

In Chicago, palm oil’s decline weighed on rival vegetable oil soyoil, which for January dropped 1.1% to 34.99 cents a pound.

And that in turn only encouraged a retreat in soybeans themselves, which for January fell by 0.4% to $9.85 ¼ a bushel, falling back below their 200-day moving average, and indeed losing all ground gained, and more, in the last session on mega US export data.

Soybean export sales of 2.51m tonnes last week were “the highest sales total of not only this year but the highest since October 2013”, said CHS Hedging’s Joe Lardy.

Still, on the supply side, there is also the record US harvest to be factored in, and the prospect of an upgrade on Wednesday, in the monthly Wasde report, in the US Department of Agriculture’s estimate for the domestic harvest.

‘Producer selling remains light’

There is a growing idea too that the Wasde could release a small upgrade to the estimate for the US corn crop too, with Informa Economics the latest to reveal a forecast above that the USDA is currently using.

Informa pegged the yield at 174.0 bushels per acre, and harvest at 15.109bn bushels, ahead of USDA figures of 173.4 bushels per acre and 15.057bn bushels respectively.

Still, at least “producer selling remains light” in corn, Benson Quinn Commodities said implying limited pressure on prices from that score.

Corn futures for December fell, but by a modest 0.2% to $3.47 ¼ a bushel.

Wheat vs corn

That decline made it tricky for wheat futures to rise either even though, if investors really are closing up positions and withdrawing ahead of the election, that could imply upward pressure on prices, given that funds have a huge net short in Chicago wheat.

Wheat prices need to stay competitive to those of corn due to the need to gain an increased share of global feed demand, and wind down huge world stocks amid a global harvest long on quantity but short on quality.

Australia, where harvest is in progress, is the latest country to grapple with these dynamics, with a downgrade this week by grain handler CBH to the crop in Western Australia, typically a source of large amounts of milling wheat for export.

‘A big loss of grain’

Tobin Gorey at Commonwealth Bank of Australia said: “To be sure, CBH’s estimates are for Western Australia – a market disconnected from the eastern Australian grain system by the vast expanse of the Nullarbor.

“Even so, that is a big loss of grain. And the biggest question mark over this coming harvest has always been about just how much wheat would be at low end of the quality spectrum.

“That makes pricing milling grade wheat somewhat trickier because a large harvest might not mean heavy milling grade supply.”

Sydney wheat futures for January actually eased by 1.3% to Aus$236.00 a tonne on Friday, but remained within the narrow trading range they have trod for nearly three months.

US dryness

In the US, it is dryness which continues to get attention by wheat investors, with some worries about what a dearth of rainfall could mean for the emergence of newly-planted crop for the 2017 harvest.

And the weekly USDA Drought Monitor did unearth some worrying trends, with 42.3% of the US South deemed in drought, up 9.2 points week on week, helped by an increase of 11.4 points to 36.4% in the rating for Oklahoma state.

In the High Plains, drought was deemed to have spread to 12.9% of the area, from 8.7% the week before, although – crucially – the figure remained stable at 4.2% for Kansas, the top wheat-producing state.

That said, some rain relief is on its way, with forecasters “looking for some modest rain in dry parts of US hard red winter wheat country from the weekend and into early next week”, CBA’s Tobin Gorey said.

“The rainfall quantities still look more likely to relieve rather than resolve the region’s dryness issue.”

‘Export sales were terrible’

Nonetheless, wheat futures for December dropped by 0.4% to $4.10 ½ a bushel in Chicago, given back a bit of their premium against corn, and with continued comment too over poor US export sales data released on Thursday.

Joe Lardy said that “wheat export sales were terrible”, at 234,900 tonnes, “the lowest sales figure of the 2016-17 marketing year”.

In fact, they were notably bad for spring wheat, at 62,000 tonnes – down from 309,000 tonnes the week before, a decline which underlined ideas that the recovery in the premium in Minneapolis spring wheat futures over Chicago soft red winter ones, the global benchmark, may have gone too far.

Minneapolis spring wheat for December in fact recovered a little bit of premium on Friday, in easing by a modest 0.1% to $5.09 ½ a bushel.

But its premium, at $0.99 a bushel, remains well below levels as high as $1.34 ¾ a bushel reached a month ago on the theme of a poor quality world harvest, with spring wheat the highest protein grade.

Some improvement in harvest conditions in Canada, a major spring wheat growing country, has also undermined prices.