AM Markets: Grains Dip Again, Despite Stabilising Oil Market

(Agrimoney) – One good piece of news for commodity bulls on Friday was that the rout in crude oil market petered out.

Oil futures went into sharp decline – with Brent crude tumbling nearly 7% over Wednesday and Thursday, and West Texas Intermediatecrude by a little over 7%, to fall back below $50 a barrel –  on data showing record US stocks.

This raised concerns that the production cuts agreed by Opec were being offset by raised output from US drillers.

‘Wondering about the reflation trade’

And, for broader markets, oil’s setback underlined doubts over the commodity trade which has been in vogue in particular since November, when Donald Trump was elected US president, with ideas of revived inflation, and the highest commodity prices this implies, spurring bets on raw materials.

The rout in oil prices “has many wondering about the reflation ideas of the last couple of months”, said broker Benson Quinn Commodities.

Indeed, the CRB commodities index has now fallen 6.7% from a high two months ago, to its lowest levels since November.

Revival in the dollar has also provoked concern, in cutting the affordability of dollar-denominated assets, including many ag commodities.

‘Enough profits in short positions’

Still, the dollar was a little easier in early deals on Friday, falling 0.2% back below 102 against a basket of currencies.

And, with oil prices showing modest recovery – Brent crude was up 0.6% at $52.50 a barrel as of 09:45 UK time (03:45 Chicago time) – ag bulls had a couple of straws to clutch onto.

There was another one too, given that Chicago corn and soybeanfutures have already closed down four successive sessions,  and wheat futures three.

“Going into Friday’s trade, there are probably enough profits in the short positions established early in the week to trigger some light profit-taking,” Benson Quinn Commodities said.

Palm down

If there was short-closing occurring in early deals, well, it was only enough to slow price falls, which were relatively modest for the most of the grains and oilseeds complex – one exception being palm oil.

May futures in the vegetable oil fell by 1.7% to 2,790 ringgit a tonne, in a decline fuelled by data showing Malaysian output last month, at 1.26m tonnes, some 40,000 tonnes above market expectations, if floundering around a seasonal low.

With the market focusing on the pace of recovery in Malaysian production from a blow delivered by El Nino-caused dryness, the – relatively – firm production number somewhat overshadowed numbers showing stocks, at 1.46m tonnes, 13,000 tonnes below expectations.

In Chicago, futures in rival vegetable oil soyoil were dragged lower too, by 0.6% to 32.90 cents a pound for May delivery.

‘Very bearish long-term tone’

This in turn was little help to futures in soybeans themselves, still smarting from the US Department of Agriculture’s 4.0m-tonne upgrade on Thursday, to 108.0m tonnes, in its estimate for the Brazilian 2016-17 harvest of the oilseed.

“The USDA pegging Brazil at 108m tonnes sets a very bearish long-term tone as the additional tonnage is going right to the export corridor,” said Joe Lardy at CHS Hedging.

Indeed, besides resulting in a bigger-than-expected estimate for world inventories, the impact of the upgrade was also felt in a cut to the forecast for US soybean shipments this season, with Brazil seen raising its market share.

“Most people assumed that the USDA was going to raise US exports, and therefore we would see a reduction to ending stocks. But this went in the opposite direction,” Mr Lardy said.

‘Different view to the trade’

Benson Quinn Commodities said: “While export demand and shipments have been humming right along ahead of average weekly pace, USDA sees the big Brazil crop cutting into US demand.

“The reduction in soybean exports and a corresponding increase in the domestic supplies was a different view than the trade has had.”

Soybean futures for May shed 0.6% to $10.04 ½ a bushel, at a two-month low, and taking their decline so far this week above 3%.

The drop has also dented the contract’s technical appeal, with it in the last session surrendering its 200-day moving average, which now looks a long way above, at 10.20 ½ a bushel.

Corn vs soybeans

Futures in rival row crop corn fell too, albeit this time by a more modest 0.3% to $3.73 ¼ a bushel for May delivery.

That said, this follows underperformance by corn in previous sessions, with the contract down 3.7% for the week.

The much-watched November soybean: December corn futures ratio – a measure of the relative financial appeal of the crops in spring sowings programmes – remains at an elevated 2.58, encouraging sowings of the oilseed.

‘Plenty of supply comfort’

The USDA also on Thursday, in its Wasde report, raised its estimate for Brazilian corn output by more than investors had expected, by 5.0m tonnes to 91.5m tonnes.

“On that basis, the global market retains plenty of supply comfort,” said Tobin Gorey at Commonwealth Bank of Australia.

“Working through the excess requires that prices stay lowish through season 2017 unless there are large problems with Brazil’s second crop.”

Rabobank, terming the Wasde data “slightly bearish” for corn, also flagged that Brazil’s safrinha crop had a long way to go yet, saying that “we remain aware of the weather risk that still remains for the… crop, which is still being planted”.

‘Cold temperatures returning’

For wheat, meanwhile, Rabobank termed the Wasde as “neutral”, with upgrades to Argentine and Australian crops expected, and some encouragement to bulls through a small cut to the US carryout stocks forecast for 2016-17, and an upgrade to Indian import expectations.

“Interestingly, Indian imports were forecast up 1.8m tonnes [from last month’s estimate], at 5.5m tonnes, which follows a demand-driven expansion of the country’s domestic supply deficit,” the bank said.

Meanwhile, weather remains a concern for the southern US Plains, where dryness is still spreading, with the proportion of Kansas rated in drought up 2.0 points to 39.3 points week on week, and in Oklahoma by 1.2 points to 74.3 points, according to USDA data.

And there is the threat of the return of cold too for crops which have been encouraged by warm weather to break dormancy early.

“The current wheat forecast still shows cold temperatures returning to the Great Plains and lower Delta next week, increasing the probability for damage to occur,” said Terry Reilly at Futures International.

‘More unwelcome rain’

Still, Chicago wheat futures for May shed 0.3% to $4.58 ¼ a bushel, feeling pressure from rival grain corn, and with the contract falling back below its 50-day moving average.

But Minneapolis spring wheat futures bucked the trend, adding 0.4% to $5.40 ¾ a bushel for May, returning back close to their 200-day moving average, amid worries over wetness in northern US areas preventing sowings.

“The Red River of the North Basin will see some more unwelcome rain and snow through March 22,” Mr Reilly said.