(Agrimoney) – If you can hear a faint hiss, it is the sound of further risk premium escaping from grain prices.
The epicentre of the pressure drop is corn, of course, which has been hurt by dire data on US production of ethanol (largely made from the grain), besides the improvement in US growing weather which has eased feared for yield-sapping heat and dryness.
The drop in US ethanol output of 51,000 barrels per day last week to 962,000 barrels per day, the biggest drop in seven months, was so large that some commentators questioned whether officials had made a mistake.
“We are unsure if there was an error in the data,” said Terry Reilly at Futures International.
“We were relooking for production to be near unchanged.”
‘More rain has fallen’
Meanwhile, the Corn Belt weather outlook remained improved.
At Commonwealth Bank of Australia, Tobin Gorey said: “More rain has fallen in the US Midwest. Most areas are expected to see more by Monday too.
“While there will be some exceptions – notably the south western Corn Belt – forecasters say the recent rain will provide a number of regions with enough moisture to retain current crop conditions into early July.”
At CHS Hedging, Joe Lardy, in something of an understatement, said that “the markets are just not finding the same support since the weather has not lived up to the warm and dry hype.
“In fact, the current 6-10 day model run is showing a huge blob of below-normal temperatures over the Corn Belt.”
Brazil downgrade
In fact, the newsflow is not all bearish for corn.
US Department of Agriculture staff in Brasilia overnight estimated the Brazilian corn harvest in 2015-16 at 75.0m tonnes, 2.5m tonnes below the USDA’s official estimate, citing a smaller-than-expected safrinha crop – although many analysts were already assuming a lower figure.
And on the demand side, India has unveiled plans to import 500,000 tonnes of duty-free corn in 2016-17, with South Korea buying an additional 500,000 tonnes.
‘Corn rally is over’
Still, corn futures for July dropped 1.0% to $3.89 ¼ a bushel as of 09:00 UK time (03:00 Chicago time), taking losses so far this week to 11%.
Richard Feltes at RJ O’Brien said he was “hearing more talk that ‘the corn rally is over’, amid a building consensus that high pressure ridge is unlikely to lock in over Midwest during July”.
More on demand will be known later, with weekly US export sales statistics, expected to come in for corn at 750,000-1.0m tonnes for old crop, and 200,000-400,000 tonnes for 2016-17.
Decade low in sight
But if the epicentre of the correction is corn, the contract most precariously positioned is Kansas City hard red winter wheat, which for July touched $4.32 a bushel in early deals.
Another cent lower, and the lot would have matched a 10-year low for a spot contract.
This time of year is especially difficult for wheat futures anyway, in bringing the harvest, which means a ramp up of supplies, swinging market power buyers’ way.
But prices are feeling extra pressure from ample US and world supplies left over from last season, besides from the losses in rival grain corn.
Wheat has been trading low in part to price itself into feed demand, in place of corn, with the Kansas City wheat premium over corn futures last week touching $0.20 a bushel, down from $1.33 ¾ a bushel in early April.
Harvest delays?
If there is some good news for bulls, it comes from the US rains which, while positive for crop seedlings, is a negative for harvest progress.
“More rain activity is expected late in the week,” said Brian Henry at Benson Quinn Commodities.
“I don’t expect major delays, but there are some heavier amounts expected over the course of the next week.”
Furthermore, there are some signs of demand here too, with Algeria buying 450,000-550,000 tonnes of milling wheat.
And rain remains a threat to crop quality in France, a major supplier to the North African country. (In fact, Algeria’s latest order is believed to have been sourced from the Black Sea or the Baltic states.)
US wheat export data later are expected to come in at 400,000-600,000 tonnes for 2016-17, which started this month for the grain in the US.
In the meantime, Kansas City wheat stood at $4.32 ¼ a bushel for July, down 0.2%, while Chicago soft red winter wheat, the world benchmark, was flat at $4.58 ¾ a bushel.
‘Layer of uncertainty’
As for Chicago soybeans, they dropped 0.6% to $11.31 ¼ a bushel for July delivery, moving more in line with fellow row crop corn, although offered some protection by the fact that their vulnerable period for weather is August, rather than next month.
That makes prices less vulnerable to shorter-term weather forecasts.
“Like corn, improving US weather is pressuring oilseed prices lower,” CBA’s Tobin Gorey said.
“However US soybean’s critical development stage occurs a month or so later than corn, so the time factor adds a layer of uncertainty to the outlook.
“For now at least, that uncertainty should work to keep a floor under prices.”
Data ahead
The market also has one eye on US sowings data due on June 30, which are expected to show a rise in soybean area, but by how much?
“The trade knows that anything less than a 1.5m acre gain in US soy acres,” compared with an initial estimate made in March, “may trigger renewed buying” in soybean futures, RJ O’Brien’s Richard Feltes said.
“A 3m-acre or greater gain in soybean area versus March, accompanied by non-threatening weather, may spark renewed liquidation of sizeable managed fund soybean long.”
As for US export sales data later on Thursday, they are expected to come in at 400,000-700,000 tonnes for 2015-16, and 600,000-800,000 tonnes for next season.
Palm oil vs soyoil
Elsewhere in the oilseeds sector, the soy processing products were weaker to, with soymeal for July down 1.0% at $387.30 a short ton, setting a one-month low, while soyoil lost 0.9% to 31.26 cents a pound for July, although remaining above its 200-day moving average.
Rival vegetable oil palm oil for September was down by a lesser amount, by 0.8% to 2,356 ringgit a tonne in Kuala Lumpur, but to more dramatic effect, in earlier setting a six-month low, for a benchmark contract.
Palm oil prices are being undermined by expectations of weaker exports from Malaysia, at a time of seasonal uptick in production.
Data earlier this week showing a 60% tumble year on year to 194,749 tonnes in China’s palm oil imports last month has also done little to boost bulls’ confidence.
With soyoil imports soaring 217% to, an albeit modest, 16,576 tonnes, the data has fuelled ideas of palm oil customers turning to other vegetable oils.
