AM Markets: Ags Fall, As China Takes Its Turn To Hurt Prices

(Agrimoney) – As if the election of Donald Trump as president of the US wasn’t enough for investors to get their heads around, the world’s second biggest economy, China, is providing cause for jitters in commodity markets too.

Talk that was around late last week – of a hedge fund blowing up, and of raised margins for investors trading on Chinese commodity exchanges – remained live on Monday.

And it was easy to see why.

“All heads will be watching China for direction Sunday night,” broker Benson Quinn Commodities had said.

The direction from China was in the main pretty negative, setting the tone for prices in the likes of Chicago and Kuala Lumpur too.

Rubber tumbles

It has to be said that the China rumours are coming in various guises, with one idea that a large fund has been forced, rather than closing, forced to cut holdings, after breaching position limits.

On margins, state-owned Shanghai Securities News has reported that Chinese futures brokers have been banned by regulators from providing margin financing.

Whatever, Chinese commodities made a poor start to the week, with rubber futures for January closing down 1.7% at 15,770 yuan a tonne in Shanghai.

Cotton volte face

On the Dalian exchange, soyoil futures for January settled down 2.8% at 6,632 yuan a tonne, while rival vegetable oil palm oil for January tumbled 2.9% to 6,122 yuan a tonne.

Soybeans themselves for January settled down 2.5% at 3,832 yuan a tonne, although corn fared better, adding 0.7% to 1,640 yuan a tonne.

On the Zhengzhou exchange, sugar futures for January eased 0.8% to 6,793 yuan a tonne, but cotton futures for January fared better, in terms of settling up 0.1% at 15,905 yuan a tonne.

This after actually closing at 15,200 yuan a tonne – a slump of 4.3%. Go figure.

Palm slumps

The performances did not play well on other ag markets, with Kuala Lumpur palm oil futures for January slumping 4.4% to 2,842 ringgit a tonne as of 09:40 UK time (03:40 Chicago time), in a decline fuelled by profit-taking, after the contract’s rise to a four-year high in the last session.

The decline came despite a further weakening of the ringgit, of 1.1% against the dollar, which would improve the value in Malaysian terms of assets such as pal, oil traded internationally in dollars.

Still, with China being the second-ranked palm oil importer, after India, the drop in Dalian futures was hardly helpful.

In Chicago, the weakness in palm oil undermined values of rival soyoilalthough, with soyoil having ascended to lower heights, its descent was less rapid too, with the January contract down 1.0% at 34.33 cents a pound.

‘Currency gyrations will weigh on prices’

And that in turn dented prices of soybeans themselves, which also struggled against a soaring dollar, up 0.7% against a basket of currencies to one-year highs, as expectations grow that Mr Trump’s policies may stoke inflation, and so warrant interest rate rises.

A stronger dollar hurts the competitiveness of dollar-denominated assets, such as many agricultural commodities, with soybeans in particular looking to export demand to sap US supplies buoyed by a record harvest this year.

“Good demand should support soybeans, but the recent currency gyrations will weigh on prices,” said ag advisory group Water Street Solutions.

At Commonwealth Bank of Australia, Tobin Gorey flagged the impact – but not yet – of last week’s weakness in the real (which was actually stable against the dollar in early deals on Monday), Brazil being the top rival to the US in soybean exports.

“Brazil’s falling currency, should it continue, may prove to be a concern come northern 2017 spring,” Mr Gorey said.

Promising canola results

Brazil might have a strong harvest then too.

“The market is giving more attention to South American crops after larger Brazilian production estimates began to trickle out late last week,” he said.

Soybeans for January fell by 0.6% to $9.79 ¾ a bushel, finding a bit of support at their 50-day moving average.

And, also on the matter of a boost to oilseed supplies, he highlighted some sanguine talk on the canola harvest in Australia, a major exporter of the rapeseed variant.

“CBH, Western Australia’s largest grain handler, has said the canola crop in the west [of Australia] may be larger than anticipated with higher oil content,” Mr Gorey said.

In Winnipeg, canola futures eased 0.2% to Can$513.00 a tonne.

‘Upside looks to be limited’

Back in Chicago, grains were also in negative territory, with cornfutures for December trading down 0.5% at $3.38 ½ a bushel, they weakest in a month, also feeling a bit of pressure from optimism on Brazilian prospects, besides over the US Department of Agriculture’s upgrade last week to its estimate for the domestic crop.

Corn futures have “struggled… following the USDA report reminder that there is plenty of supply to get us through the marketing year,” Water Street Solutions said.

Benson Quinn Commodities said that “the corn market still feels to have a bearish tone coming off the USDA report.

“Upside looks to be limited in the near term, with the technical structure of the market leaning lower.”

‘Poorly established’

And corn’s decline kept pressure on rival wheat, despite some supportive signs for the bread-making grain, in terms of a 100,000-tonne purchase by Tunisia, optional origin, and continued talk of the dryness threat to the US winter crop, sown ahead of the 2017 harvest.

“Traders should continue to monitor the warm and dry conditions across US hard red winter wheat country and drought conditions across Delta states,” said Terry Reilly at Chicago broker Futures International.

Commodity Weather Group said that “Plains hard red wheat dryness is likely to persist the next two weeks, leaving the western one-third of wheat poorly established.

CBA’s Tobin Gorey said that” wheat now might not be able use any moisture anyway as temperatures descend.  Crops will be poorly established and so vulnerable to cold”.

Chicago wheat futures for December eased, although by a relatively modest 0.4% to $4.01 ½ a bushel.