AM Markets: Flat Grain Market Waters Hide Swirling Spreads

October 4th, 2016

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Category: Grains

Young man in wheat field 450x299(Agrimoney) – Grain investors, having enjoyed spreads for lunch and dinner, had a bit of appetite left for consumption at breakfast too.

We are not talking of edible spreads, of course, as daubed on bread or crackers, but the investment variety – of futures in one ag contract spread against those in another.

Agrimoney.com highlighted 24 hours ago the need for lower grades ofwheat to fight – through lower prices versus corn – for feed demand after official data showed US stocks of the grain bigger than expected.

(As an extra depressant to prices of hard red winter wheat, as traded in Kansas City, the US Department of Agriculture also on Friday revealed that the domestic harvest of the grain had been bigger than thought.)

And wheat’s premium over corn indeed collapsed later on Monday – by 23% to $0.61 a bushel as regards Kansas City hard red winter wheat, while Chicago-traded soft red winter wheat, the world benchmark, lost 24% of its advantage over corn, reducing it to $0.49 ½ a bushel (all December basis).

‘Different story entirely’

The standout performer in the complex has, of course, been Minneapolis-traded spring wheat, the highest-protein variety, which has been helped by concerns that this season’s record world wheat harvest is of poor quality.

Rains which have dogged some of the late harvest in Canada, a major spring wheat producer, and a USDA downgrade on Friday to its estimate for the US spring wheat harvest have only accelerated spring wheat’s advantage.

And the Minneapolis-Chicago spread grew further on Tuesday – hitting a contract high of $1.24 ¼ a bushel at one point December basis, up from $0.29 ¼ a bushel four months ago – as spring wheat futures added 0.6% to $5.19 ¼ a bushel as of 10:00 UK time (04:00 Chicago time).

“Minneapolis is a different story entirely” to winter wheat, “with extremely limited offers despite a 20c rally over the past week,” said Minneapolis-based broker Benson Quinn Commodities.

“Spot cash continues to firm as soybean harvest has made freight difficult to find [for spring wheat], and Canadian/world quality issues are still getting a lot of press.”

Meal vs oil

But there are other spreads going on to, such as, in the oilseeds complex, an apparent appetite for betting one soybean processing product against the other, in the form of long soymeal-short soyoilbets.

In the last session, soymeal futures for December gained 2.9%, while soyoil for December lost 0.6%.

And USDA data overnight, showing a 41% tumble in US soymeal stocks over August, but a more modest drop of 8.4% in inventories of soyoil month on month.

“So a large fall in soymeal stocks could prompt additional meal/oil spreading,” Terry Reilly at Futures International said.

Indeed, soymeal did outperform, adding 0.2% to $309.10 a short ton for December delivery, while soyoil futures for December dropped 0.6% to 33.05 cents a pound.

Winning spreads

And there are a range of other spreads to be watching out for too, now we have started October, Richard Feltes at RJ O’Brien said, extracting juice from Moore Research charts.

One is to buy December soymeal futures, while selling those for the following July, a “winner in 14 of [the last] 15 years” up to October 27, Mr Feltes said, if adding that he was “in no hurry” to on this bet this time “until the pace of US soymeal export sales accelerates”.

Another is to buy November soybean futures, spread against December corn – a bet which has also reaped gains in 14 of the last 15 years, when followed from October 6-27.

That said, a typical upward pattern in soybean prices “should be muted this year by increasing US soybean yield estimates and favourable early season Brazil [sowing] weather”, Mr Feltes said.

‘Compelling investment case’

And then there is the corn vs wheat spread, which has proved gains in 13 of the past 15 years, putting in a buy on March corn futures versus a sell in Kansas City wheat for March, from October 1 to November 20 – and reason to expect the trend to work this time too.

“Fundamentals support erosion in wheat versus corn, with US and global balance tables showing a larger in wheat stocks than corn,” Mr Feltes said.

“While wheat is already cheap on corn for early October, the long-term erosion in wheat versus corn into winter months is compelling.”

‘Prices could rally’

And the spread was working in early deals on Tuesday too, with corn – down 0.1% to $3.45 ¼ a bushel for December, depressed by profit-taking after its bravura performance in the last session – still falling less than Kansas City wheat, which for December was 0.4% lower at $4.05 ½ a bushel.

Corn found a modicum of extra support from USDA data overnight showing a, rare, decline in the condition of the US crop, rated at 73% “good” or “excellent”, down 1 point week on week.

Furthermore, there was some technical support for the grain too.

“With December corn breaking through technical resistance [on Monday], I would look for a continued uptick in the corn market,” said Benson Quinn Commodities, if adding that it “wouldn’t be surprised with a minor profit taking for ‘turnaround Tuesday” since December corn rallied $0.16 ¾ a bushel in the past two days”.

Futures International’s Terry Reilly restated that “traders believe prices could rally over the short term before testing recent lows over the next 6-8 weeks amid harvest pressure”.

‘Effect on crops unknown’

Still, news is not all bearish in the winter wheat complex, and Chicago soft red winter wheat performed a little better than its hard red peer, in easing 0.1% to $3.95 a bushel for December.

There are some concerns over the newly-started Australian harvest, given weather setbacks such as frost and persistent damp.

And grain handler Viterra overnight, revealing the delivery of the first 30 tonnes of crop for 201`6-17, warned that “South Australia suffered a major storm in the last week of September with the effect on crops unknown.

“In light of this, Viterra will continue to talk with growers and remain focused on its harvest preparation.”

Egyptian tender

Meanwhile, as regards plantings for the 2017 harvest, “the US and Black Sea winter wheat regions still require some rain to boost moisture for crop planting”, said Tobin Gorey at Commonwealth Bank of Australia.

“In the US, the dry western sections of the winter wheat regions are unlikely to get much rain over the next week.

And, on the demand side, Egypt, the top wheat buyer, overnight unveiled its latest tender for the grain, results of which will be announced later on Tuesday.

The return of Egypt to the fray – after ditching a zero tolerance policy on ergot contamination which had seen it ostracised by traders – has already supported prices of wheat in Russia, a top origin for the North African country’s grain purchases.

Prices of Russian wheat with 12.5% protein are up $2 per tonne week on week to $171 per tonne, according to SovEcon.

Yield upgrade

Soybeans, meanwhile, eased 0.2% to $9.71 ¾ a bushel for November delivery, depressed by profit-taking after strong gains in the last session.

USDA data overnight were mixed, showing the proportion of the US crop rated good or excellent rising by 1 point week on week to 74%, but with harvest progress, at 26% complete more positive for prices.

“This was less than trade expectation to be 30% complete, versus last year’s 36% complete for same period,” Benson Quinn Commodities said.

As an extra setback for prices, INTL FCStone raised its estimate for the US yield by 2.4 bushels per acre to a record 52.5 bushels per acre.

Strong exports

But the data flow is not all going bears’ way, with much comment over healthy demand for US soybean exports.

USDA data on US soybean exports last week, as measured by cargo inspections, came in at 40,6m bushels, up from 14.1m bushels the week before, and 39.0m bushels in the same week of 2015.

“Just one month into the 2016-17 marketing year, accumulated inspections total 125m bushels, 136% above last year’s pace,” Benson Quinn Commodities noted.

Meanwhile, shipments from top export rival Brazil are in seasonal decline, falling “to only 1.773m tonnes in September from 3.8m tonnes in August and 3.7m tonnes in September 2015”, Futures International’s Terry Reilly said.

 

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