AM Markets: Grains Ease, Despite Another Renminbi Surge

(Agrimoney) – Is the decent start that corn futures made to 2017 down to a fund-buying spree?

If so, there may be more gains ahead this week – if the grain market adage is true that big money flows come in three-day batches.

The last session marked “day one of fund buying in soybeans and wheat, and day two in corn”, said Benson Quinn Commodities.

“Momentum, and the tendency for fund buying to take place in three-day cycles suggest higher trade” on Thursday.

“Look for higher trade.”

‘All whipped up’

And that is not the only fund dynamic under the microscope, with focus also on the prospect next week of index fund rebalancing, a one-a-year process in which these funds rejig their portfolios back to the percentage weightings suggested by the index followed.

This can involve buying laggards of the previous year, while selling top performers – and front-running by other investors seeking to exploit the process.

“The fund community is all whipped up about some decent-sized buying that will need to happen in corn and wheat,” said Joe Lardy at CHS Hedging, if adding that for soybeans, rebalancing looks like proving less significant.

“The soybean rebalance is almost nothing and should not have any effect on the markets.”

History to repeat?

But buying was not in vogue in grain markets in early deals, with investors more content to take a bit of profit on gains of the last session, when corn, soybeans and wheat made decent gains, thanks to factors ranging from poor southern US crop ratings to renminbi strength to excess rains in Argentina.

Not that many of these worries have gone away, with Argentine, for instance, poised for more of the rainfall which has provoked fears over progress in late sowings.

“After a dry start to planting, Argentina has now become a little too wet and that is fresh in trade’s mind after April rains this past year supported a rally that took beans from $8.50 a bushel to $12 a bushel in just three short months,” Benson Quinn Commodities said.

CHS Hedging’s Mr Lardy said: “The question is really how much rain is going to fall and will that prevent some of the planting from getting finished by the January 10 deadline.

“It looks like the heaviest rains in the next week stay to the far north eastern part of Argentina.”

Farmer selling

According to Terry Reilly at Futures International, “rainfall by this time next week will range from 2.00 to more than 5.00 inches from northern Cordoba and southern Santiago del Estero in Argentina,” besides in southern Parana, Santa Catarina and Rio Grande do Sul in Brazil.

Meanwhile, a lack of precipitation remains a worry in north eastern Brazil.

Still, profit-taking is not the only motive for sellers, with plenty of potential for a pick-up in farmer pricing, after what Richard Feltes at RJ O’Brien termed a “slow year-end/new-year” spell.

Benson Quinn Commodities said: “Rallies will certainly be met with producer selling and outlook for prospective increase of 5.0m planted acres in the US this spring is also bearish.”

Prices ease

Furthermore, anyone hoping for strength in the renminbi to spur extra buying by China, a huge importer of agricultural commodities, may have been disappointed by the lack of reaction overnight on the country’s own commodities exchanges.

Soybeans for May, the best-traded contract, rose by a modest 0.8% to 4,271 yuan a tonne on the Dalian exchange, where palm oil, another major import, fell by 0.7% to 6,170 yuan a tonne.

This despite the offshore version of the yuan on Wednesday rising 1.3% to stage its biggest one-day gain against the dollar in a year, and adding a further 1% in early deals on Thursday to reach 6.80 per $1.

In Chicago, soybeans for March fell by 0.3% to $10.12 a bushel as of 10:00 UK time (04:00 Chicago time), while Kuala Lumpur palm oil dropped by 0.9% to 3,114 ringgit a tonne for the benchmark March lot.

‘Potential for above-trend yields is limited’

Selling was the order in grains too in early deals, even in wheat, despite the enhanced ideas of damage from dryness and cold to the US winter crop – ideas underlined by crop condition data released earlier this week.

“Ratings tend to decline over the winter, but these declines are more significant than normal,” said Benson Quinn Commodities.

“March, April and May are still key for winter wheat production, but these lower ratings, along with dry conditions and cold temperatures this week, suggest the potential for above-trend yields to be limited at this time.”

As an extra support to wheat, Algeria has tendered for the grain, illustrating end-user demand, although, less satisfactorily for US markets, with European sellers seen as likely to win a lot of the business.

“European origins could get the lion share with probably a reduced share of French wheat compared to previous seasons,” Agritel said.

It will be interesting too to see if Argentina – which is believed to have won part of an Algerian tender last month, besides winning Egyptian business too with super-low prices – enters the dray again, having missed an Egyptian tender last week.

Data ahead

Meanwhile, if buyers needed another excuse, besides the prospect of index fund purchasing ahead too, there is the potential for a US Department of Agriculture report next week (January 12) on US winter wheat area to come in below forecasts.

RJ O’Brien’s Richard Feltes flagged a “strong tendency for trade to overestimate US winter wheat acres on the January crop report,” ie to forecast a figure higher than that which the US Department of Agriculture actually issues.

“Recall that the trade has overestimated USDA January winter wheat seedings in each of last four years by 900,000-2.7m acres,” Mr Feltes said, with the 2.7m-acre overestimate being in 2016.

“Trade estimates of 2017 US winter wheat seedings for the January 12 report are not available as yet, but I suspect the market is looking for a decline of 2.5m-3.0m acres, with 75% of the area cut being hard red winter wheat.”

Still, Kansas City-traded hard red winter wheat for March traded 0.2% lower to $4.25 ½ a bushel, although that was a better performance than Chicago soft red winter wheat, which for March dropped 0.4% to $4.16 ¾ a bushel.

One comfort for bears is a forecast for snow in the Plains, which Futures International’s Terry Reilly said “will see snow in western areas through the end of the workweek that may help protect the winter wheat crop from cold temperatures”, and prevent further condition declines.

‘Dampener on feed demand’

With wheat lower, corn, a key rival in the feed market, dropped too, if by a modest 0.1% to $3.59 ¼ a bushel.

“Bird flu concerns,” after outbreaks in many geographies, including Europe and China, and (overnight) Chile, continue to put a dampener on feed demand,” Mr Reilly said, if adding that “we believe the trade has yet to really see the impact on this event until evidence global feedgrain trade slows”.

On the more supportive side for prices, Benson Quinn Commodities said that the worries over rains in Argentina were increasing the willingness to add “a risk premium back into the market.

“The fear is that above normal amounts of precipitation will delay planting or increase the possibility of acres switching to soybeans.”