AM Markets: Grain, Cotton Futures Slip as Wasde Looms

(Agrimoney) – That’s more like it. That is, corn and soybean futures headed lower in early deals, as is more typical at this time of year, with the US harvest hotting up, bringing with it a jump in supplies and allowing the removal from prices of the last vestiges of risk premium.

“The seasonal tendencies are for lower prices during September,” said Water Street Solutions.

And Chicago corn futures obliged by dropping 0.4% to $3.39 ¾ a bushel for December delivery as of 09:30 UK time (03:30 Chicago time).

‘Outlook is drier’

Weather factors played to bears’ hands too, with worries over wetness in the Midwest, which would slow harvesters and potentially threaten crop condition, easing a touch.

Sure, for this week, “expected rains in central and western [Midwest] areas will increase wetness concerns for corns and soybeans”, MDA said.

However, in the six-to-10 day timeframe, the “outlook is drier in western and central crop areas and warmer in eastern areas versus Friday’s outlook”, the weather service said.

“Drier weather in the central and western Midwest and Delta would ease wetness and improve corn drydown.”

And in Canada too, “drier weather in the Prairies will support wheatdrydown and harvesting. The same is true in the Northern Plains”.

Wasde ahead

All that said, losses for the session are nowhere near a dead cert, with the day to bring a monthly US Department of Agriculture Wasde report on world crop supply and demand – briefings which are highpoints of the agricultural commodities calendar.

And particularly this time, when there is some debate raging over the US corn yield, and whether it will achieve the record 175.1 bushels per acre that the USDA pencilled in last month.

Most analysts see that figure being downgraded later, although some see scope for an upgrade, with an upper forecast for the Wasde result of 175.6 bushels per acre, from INTL FCStone.

The question is what yield figure would be required for futures to resume their winning streak, with the consensus estimate that the Wasde will show 173.4 bushels per acre, but potential for “buy the rumour, sell the fact thinking”.

Big downside price risk

A notable, bullish, shift in sentiment “would require a significantly larger-than-expected cut to US yields in tonight’s Wasde report”, said Tobin Gorey at Commonwealth Bank of Australia.

(He added that, with investors now short more than 180,000 corn futures and options, the most bearish position in nearly five months, “investors are so now so short that the market, when it eventually does turn, will likely be in for a sharp recovery”.)

Benson Quinn Commodities said that corn futures had gone on “an impressive run with harvest nearing.

“If the report doesn’t have a reduction in yield, it would be hard to believe that that we won’t trade lower again.

“If yield would increase, I wouldn’t rule out testing the lows for the year,” which for the December contract was the $3.14 ¾ a bushel set late last month.

‘Moisture and heat challenges’

More important yet, ultimately, to the corn price will be what yields actually are achieved, and with harvest reports – anecdotal though they are – generally showing strong results, but not quite as strong as had been hoped.

One commercial grain specialist reported for the Delta region, “good yields although below high expectations – ditto for initial Midwest corn harvest,” according to Chicago broker RJ O’Brien.

Growers in top producing state Iowa are “not as confident of a high corn yield as one month ago”, while South Dakota, north west Iowa silage yields are “falling short of expectations”.

Water Street Soluations said that “southern Corn Belt areas have seen some less-than-expected yields off moisture and heat challenges”, adding that “reports in the eastern belt look to be at to below expectations too”.

That said, “central Illinois reports are showing impressive results so far”.

Further west, “Nebraska has shown a wide variation – even in irrigated fields – due to pollination and green snap issues”, when stalks are broken in the growing period by high winds.

Extra output vs extra exports

For soybeans, the debate heading into the Wasde is somewhat different.

There is less doubt over a high yield – traders see the USDA raising yield estimate by 0.3 bushels per acre to 49.2 bushels per acre, with some seeing a figure above 50 bushels per acre.

However, the question is to what degree the extra supplies will be offset by stronger exports, with shipments in the newly finished 2015-16 beating official expectations, and sales for 2016-17 starting strong too.

“Trade is looking for USDA to raise old crop demand… based on Census exports running well ahead of FAS [USDA] data,” Benson Quinn Commodities said.

“Trade would not be surprised to see increase in new crop sales either but may be too early in marketing year for an adjustment with USDA already forecasting record exports of 1.940bn bushels.”

‘Planting too dry’

There is another large issue looming too, in the Brazilian sowing season which starts this week (ie when the soy-free period in top producing state Mato Grosso ends).

“Watch Brazil’s weather,” said Water Street Solutions, adding that “right now they are going into planting too dry and will need above-average rainfall over the next five weeks to alleviate the persistent dry conditions – the same ones that devastated their second crop corn”.

CBA’s Tobin Gorey said that “forecasters say both Brazilian and Argentinean crop areas are in need of rain to promote a favourable planting environment”.

However, the “big La Nina worry appears to be on the back burner, with forecasters saying the odds now disfavouring much influence in South America”.

Soyoil slips

Certainly, soybean futures for November dropped 0.6% to $9.74 ¼ a bushel, although remained above their 200-day moving average.

Prices were little helped by a drop of 1.0% to 33.04 cents a pound in December soyoil futures, defying Friday’s 1.2% jump to 2,639 ringgit a tonne in futures in rival vegetable oil palm oil in Kuala Lumpur.

Palm oil has been gaining support from the prospect of official Malaysian data on Tuesday showing inventories in the second-ranked producer, and exporter, of the vegetable oil dropping last month to 1.6m tonnes, the lowest since 2011, in part thanks to buoyant exports, largely to China.

That said, Malaysian exports have fallen so far this month, by 16.7% month on month, data from cargo surveyor ITS on Friday showed.

And earlier on Monday, palm oil futures in China, where a restocking has been seen as boosting its imports, closed down 0.6% at 5,530 yuan a tonne.

Hard wheat loses premium

Back in Chicago, wheat for December followed rival grain corn lower, shedding 0.6% to $4.01 ¼ a bushel.

Still, that was better than Kansas City-traded hard red winter wheat, which dropped 0.8% for December to $4.15 a bushel, taking its premium back below $0.14 a bushel.

Indeed, had investors overcooked, for now, the story of a squeeze on supplies of milling wheat (vs ample supplies of feed)?

Hedge fund positioning

Data late on Friday from the US CFTC regulator showed hedge funds cutting their net short in Chicago wheat futures and options to a record high of 132,577 contracts, while trimming their net short in Kansas City.

At 16,857 lots, the net short in Kansas City is well below the record high of 29,268 lots set last month.

On the bearish side for prices, a Reuters survey revealed expectations of a 28m-tonne Australian wheat harvest, above, for instance, the 26.5m tonnes being factored in currently by the USDA.

That counters, for instance, SovEcon’s reduced estimate for the Russian crop, downgraded on Friday by 500,000 tonnes to a still-record 70.8m tonnes.

Cotton frays

In New York, cotton for December dropped 0.6% to 68.68 cents a pound, in line with its fellow row crops.

That said, investors are expecting the Wasde to show a small drop in the estimate for US cotton stocks at the close of 2016-17, with a  Dow Jones survey showing a figure of 4.42m bales, representing a downgrade of 280,000 bales.

Cotton futures eased on China’s Zhengzhou exchange overnight by 0.7% to 14,010 yuan a tonne.