(Agrimoney) – Grain futures made a soft start to the week. Why?
“The forecast trended wetter for the Ohio Valley this week, as a couple of disturbances track from north west to south east across the Corn Belt between Monday and Thursday,” said Commodity Weather Group.
This after a weekend which brought heavy rains to a few areas, and temperatures which “eased yesterday” from highs in the 90s-100s Fahrenheit, in the central Plains and south east, failing to live up to the worst-case scenarios which drove prices higher at the end of last week.
With dryness fears easing for much of the key US corn and soybean producing regions, that gave investors cause to remove a bit of risk premium from prices of the grains, plus wheat too.
‘Primary area at risk’
Not that the bullish cause is lost.
Commodity Weather Group, looking further out to forecasts up to two weeks out, said that the outlook suggest that “while few areas would have ideal moisture, parts of northern Ohio, Michigan, north eastern Indiana, south west Illinois and central Missouri – one-quarter of the Corn Belt – would be a most risk for notable rain deficits”.
On temperature, “the south west Corn Belt will remain the primary area at risk for periods of notable heat,” in the mid-90s-100s Fahrenheit, that could stress early-pollinating corn in drier spots before easing in the 11-15 day [timespan].”
Furthermore, on a macro level, there was a generally risk-on feel in markets, with polls indicating a reduced, although still significant, chance of the UK voting to leave the European Union.
London’s FTSE 100 share index opened 2.1% higher, with strong gains in other European bourses too, while on commodity markets, Brent crude gained 1.7% to $49.98 a barrel as of 08:25 UK time, (02:35 Chicago time), edging back nearer to the psychologically import $50-a-barrel mark.
‘Onslaught of export sales’
Furthermore, returning to ags, demand has been strong.
CHS Hedging, for instance, flagged an “onslaught of US fresh export sales announcements” for crops.
“We have had a new announcement every day for the past two weeks, except for Wednesday,” the broker said.
“Eight of those days had soybean sales,” although corn and, unusually, sorghum were represented too.
“The sales volume on Friday was particularly large with sales of 395,000 tonnes to ‘unknown’ and 129,000 tonnes to China.”
‘Demand shift’
The demand comes, of course, against a worsened picture for South American crop exports, with the Brazilian real strengthening, cutting export competitiveness, while weather has undermined production.
“The real has rallied about 20% since the start of the year and local Brazilian prices have strengthened considerably,” said Tobin Gorey at Commonwealth Bank of Australia.
“While the Argentine peso’s gains have been comparatively more modest, Argentine soymeal port prices have jumped around 50% since the April floods.
“The resulting deterioration in South American basis is seeing demand shift towards US soybeans.”
‘Tug of war’
Still, just to underline the importance of the US weather outlook, Water Street Solutions’ advice on what investors should look for was:
“Weather, weather, weather.
For corn, “the market will continue to spend the next few weeks in the tug of war between the good carry-out expectation for the upcoming crop and the fear over a drop in planted acres June 30 coupled with a hot/dry summer that could quickly push the carry-out expectation to sub-1.5bn bushels”.
(The US Department of Agriculture will on June 30 unveil a much-watched update on US crop sowings.)
Hedge fund positions
And investors have scope for selling too, with updated investor positioning data showing that as of last week hedge funds held a net long of more than 950,000 contracts in the top 13 US-traded ag contracts – the highest figure since May 2014.
This was helped by a rise of more than 44,000 lots above 250,000 contracts in the net long in Chicago corn, the highest since July last year.
For soybeans, the net long has bumped around for some time just above 200,000 lots, at levels not seen for two years or more.
These positions could be vulnerable to selling if weather worries suffer some permanent damage – and with a key time of year ahead.
Time of year
In soybeans, for instance, Water Street Solutions noted that price highs are typically set in “both mid-June and early-July unless the fear of August weather turns into the realisation of August weather problems”.
Soybean futures for July eased 0.7% to $11.51 a bushel, remaining just below the 10-day moving average that they couldn’t quite break back above in the last session.
Both soybean processing products were lower too, with July soymealfutures down 0.6% at $405.00 a short ton, while July soyoil eased 0.4% to 31.79 cents a pound.
On corn, on which Water Street said that “we are currently trading at the top of the long-term trading range”, weather problems have “to settle in past the July 4 to sustain the rally”, with next month key for pollination, and thus yields.
Corn futures for July dropped by 1.7% to $4.30 ½ a bushel.
‘Beware selling quiet markets’
In fact, Water Street was most upbeat about the one grain that bears have had their firmest grip on of late – wheat.
The ag advisory group acknowledged that “wheat is the bear of the bunch with the ample supply and good harvest yields continuing to weigh on the market.
“The US continues to struggle to compete on the export market and has led wheat to lose a dollar in premium to corn since last summer as it looks for new demand.”
However, with “so much bearish information built into the price – wheat could be the sleeping market that surprises people when it finally does break out.
“Remember the old trader adage – beware selling quiet markets.”
‘Qualitative degradation’
In fact, wheat was lower too, but less so, shedding 0.4% to $4.79 ½ a bushel in Chicago for July delivery, remaining just above its 50-day moving average.
Concerns remain about the quality and quantity of the European Union crop, the world’s biggest, after weeks of inundations.
“Climatic conditions remain centre stage, with persistent fears about qualitative aspects for next harvest,” Paris-based Agritel said.
“The memory of 2014, with qualitative degradation that generated a large spread about quality at the beginning of the campaign,” after France suffered a rain-hit harvest, “is still in mind”.
In fact, the EU did see further rains this week, “but a drier pattern” ahead should “ease problems”, Commodity Weather Group said.
‘Stalled monsoon’
Still, In New York, cotton bucked the negative trend adding 1.1% to 65.30 cents a pound for July delivery, while the best-traded December contract gained 0.9% to 66.52 cents a pound, returning close to the 15-month intraday high the lot set in the last session.
The gain reflects continued concerns over weather in India, and other cotton-growing areas.
“Internationally, the annual monsoon over India and southern Pakistan continues to stall and concerns about droughty conditions are mounting,” said Louis Rose at the Rose Report.
“Weather conditions have reportedly been less-than-favourable for this season’s crop across much of China, as well.”
And in the US South East, “some pockets of drought affected areas remain,” while “soaring temperatures across the Midsouth, and especially western Texas, will likely increase the need for supplemental irrigation over the near- to medium-term,” Mr Rose said.
‘Has taxed or banned exports’
Still, it is the situation in India, the top cotton grower and second-ranked exporter, which is causing most alarm.
“India has planted less cotton for the 2016 season than was expected. So, coupled with a slow start to the monsoon season, analysts are cutting their Indian production forecasts,” CBA’s Tobin Gorey said.
“An India facing tight cotton supply has taxed or banned exports in the past just to add an edge to that.
We expect prices will trend higher until the monsoonal rains push further north.”
