AM Markets: Is the Short-Covering Wave in Wheat Over?

(Agrimoney) – Is that it for the short-covering wave in wheat? Chicago soft red winter wheat futures managed three positive sessions in a row (in line with grain market ideas that changes in money flows take three sessions, initially at least, to work their way through).

But then the key December contract lost a bit of ground in the last session, and stood a further 0.2% lower, at $4.19 ¼ a bushel, in Chicago as of 07:50 UK time (01:50 Chicago time).

That looks a sign of the end of the initial phase, at least, of covering of the hedge fund net short position which two weeks ago reached a record high.

Indeed, the extent of the net short position had raised ideas that it looked a little “crowded”, and vulnerable to a reversal which would send prices spiking – especially given that futures were already not that far above 10-year lows, so potentially limiting the opportunity for short bets to come good.

‘Worrisome shorts’

As to whether more short bets are covered, there is potential, with Richard Feltes at RJ O’Brien say that the size of the fund short positions in Chicago wheat, and corn, “are still sizeable, and worrisome” for holders.

He cited the “upturn in the charts”, offering a positive price signal to investors.

However, Brian Henry at Benson Quinn Commodities was more cautious, saying that Tuesday’s “price action followed by a lower close on Wednesday, would be a very strong sign that the funds have covered enough of their respective short positions in the winter wheat contracts and the recent [price] recovery is coming to an end.

In fact, “it feels like the trade is getting ready to gang up these markets from the sell side.

“But I wouldn’t be surprised to see them wait for confirmation that the short-covering is over.”

‘Large amount of wheat’

And, after all, one of the main spurs of the short-covering wave – the appreciation, thanks to offers to an Egyptian tender last week, of just how competitive US wheat has come – is now looking a little historical.

“The globe has purchased a large amount of wheat with the US missing out on the bulk of the higher profile activity,” Benson Quinn Commodities said.

Still, Mr Reilly flagged that “some traders” had taken “heart with optional origin designation” on some cargos purchased during the recent spate of orders by North African and Middle Eastern buyers, meaning that North America could be in with a shout of getting some trade.

Benson Quinn Commodities also, on the bullish side for prices, reminded that “Canadian production and quality is very likely coming down as they struggle to harvest the tail end of that crop” thanks to wet weather.

‘Concerned about cold’

At Commonwealth Bank of Australia, Tobin Gorey said that “rains in the Canadian Prairies have abated but the market remains concerned about cold conditions that are prolonging drying times” for standing crops.

He also highlighted the continued concerns over dryness in the southern Plains, a key [hard red] winter wheat growing area.

“Weather forecasters continue to expect western regions of US hard red winter wheat country to remain dry for the next week or so,” Mr Gorey said.

“High temperatures around the region has accelerated drying in the past few days,” although, so early in the growing season, and with time for any futures rains to revive crops before they go into winter dormancy, “there is not yet a widespread problem” yet.

Hard vs soft

What the pause in the wheat rally has allowed is some correction in spreads which went out of kilter as prices in Chicago soared, driven by short-covering which was not such a feature in the Kansas City hard red winter wheat or Minneapolis hard red spring wheat markets.

Speculators held only a small net short in Kansas City, and a net long in Minneapolis.

Kansas City wheat for December stood 0.2% higher at $4.22 ½ a bushel – a small outperformance, but significant when the contract had lost most of its premium versus Chicago, and indeed returned to a discount for much of the past week.

‘Increase in cash selling’

Against corn, Chicago wheat has been correcting too, in an effort to win greater feed demand, and erode wheat stocks which are large in the US, and indeed in the world as a whole.

Corn for December was 0.1% higher at $3.54 a bushel.

Corn futures are being kept in check by the prospect of a decent harvest pace ahead, meaning strong supplies and so weighing on values.

“The rest of October is calling for favourable weather conditions, this should allow for the northern states to catch up on harvest progress,” said Benson Quinn Commodities.

RJ O’Brien’s Richard Feltes flagged signs of row crop markets “pausing to absorb an increase in cash selling, with more to come amid a largely favourable Midwest harvest outlook”.

Oils find the brakes

Still, soybean futures for November gained 0.3% to $9.75 ½ a bushel, finding support at their 50-day moving average, even after failing in the last session to hold on to their 200-day line.

“Fair weather for central and southern Midwest had producer actively cutting and marketing beans on Tuesday’s bounce to near a one-month high,” Benson Quinn Commodities said.

It was also helpful that vegetable oils consolidated, rather than extending declines of the last session.

Palm oil futures eased 0.1% to 2,712 ringgit a tonne in Kuala Lumpur, while Chicago soyoil for December actually bounced 0.4% to 35.21 cents a pound.

‘Poor emergence’

As an extra prop to the oilseeds sector, worries remain about the slow harvest of the Canadian canola crop, hampered by excess wetness, while a lack of rain is provoking concerns about the early progress of the European rapeseed crop for 2017’s harvest.

“The emergence of rapeseed sowed last month remains poor due to the dry conditions hampering a proper vegetative development,” and with the test of winter approaching, Agritel said.