AM Markets: Rouble Recovery Keeps Wheat Futures in the Fight

(Agrimoney) –  The dollar is recovering against most currencies, care of comments by Janet Yellen, chairman of the Federal Reserve, hinting at the potential for US interest rate rises.

But if that is a negative for commodities priced in dollars, making them less affordable as exports, wheat had the consolation that the rouble is proving even stronger.

The Russian currency, which has been helped by the improved oil market, besides by hopes for improved Moscow-Washington relations, touched 56.45 to $1 in early deals, the strongest since July 2015, and taking gains so far this year to 6%.

With Russia such an important exporter of competitively-priced wheat, the rouble’s recovery is growing as a source of hope for wheat bulls at a key point for the market, with a debate ongoing, as Agrimoney.com has highlighted, that a bear run stretching back to 2008 could be at an end.

Farmer hoarding

The stronger rouble offers two sources of cheer for wheat bulls – the first being simply that it cuts Russia’s ability to fight on price in exports, and flood the market with supplies from last year’s record harvest.

Russian farmers enriched during the spell of currency weakness, and by improved subsidies, are sitting tight and awaiting better offers.

Russian traders “have the wheat surplus, but haven’t seen the producer selling needed to be more aggressive”, Minneapolis-based Benson Quinn Commodities said.

‘Only a matter of time…’

And merchants may not have much scope to raise their offers, with the rouble in recovery mode, slicing margins already to wafer thin levels.

Tregg Cronin at North Dakot-based Halo Commodity Company said that while Russian wheat export offers “continue to be the cheapest in the world, boots on the ground suggest offers at port and up-country prices paid to the farmer are roughly the same as the Russian farmer digs in his heels amid the strengthening currency.

“If commercials can’t buy replacement from the Russian farmer, then it is only a matter of time until [export] offer prices rise and make other exporting origins competitive.”

Paris-based Agritel, speaking from a European Union perspective, said that “already the decline of the euro is favouring our origins and at the same time the surge of the Russian rouble is strengthening Black Sea prices”.

Spring wheat spurned?

The second reason for wheat bulls to cheer is that if wheat falls out of favour with Russian producers, they may switch to other crops in their spring sowings campaign.

And spring wheat accounts for a more sizeable proportion of total wheat output in Russia than in most other growing countries (Canada and Khazakstan being notable exceptions).

“Spring plantings could change amid the stronger currency,” Mr Cronin said.

“Winter plantings are already in the ground, obviously, but spring wheat plantings still comprise a meaningful portion of Russian production.”

Chart battles

Such ideas are all helpful to prospects for wheat prices at a time viewed by many technical analysts as a key one for the market, with Chicago futures fighting for a foothold above their newly-won 200-day moving average, a key chart point, at a little above $4.51 a bushel.

(In fact, Chicago’s March contract was the smallest of margins above it as of 09:55 UK time [03:55 Chicago time], standing up 0.4% at $4.51 ¼ a bushel.)

And a few cents above that stands the downtrend line from the bear market.

A breach of that line might persuade more funds to cave in on their, still substantial, short positions in Chicago wheat, driving prices higher still.

‘Important day’

In fact, Wednesday is “an important day” in wheat for chart followers.

“Trade below the lows of the last couple of session should trigger heavier fund selling, while trade above the prior highs has a chance to trigger additional fund buying”, Benson Quinn Commodities said.

While in the broker’s view “the fundamental picture doesn’t support” higher prices, given ample world wheat inventories, as far as fund strategy goes “it feels like there is still some reluctance on the sell side.

“If the funds aren’t going to put in a better effort on the sell side than they did on Tuesday, there is a chance that they come back in to buy more.”

‘Another export announcement’

One side effect of the revival in wheat prices has been a recovery in their premium over corn futures – a gap which fell to $0.42 a bushel in December, for March contracts, as wheat competed hard for feed demand to help erode hefty inventories.

And that recovery in the wheat premium nudged higher in early deals, when March corn futures were a modest 0.1% higher at $3.74 ½ a bushel.

Supportive to futures has been continued strong demand for US supplies, with the US Department of Agriculture on Tuesday unveiling, through its daily alerts system, a further export sale, of 229,000 tonnes sold to Japan (albeit for 2017-18).

“Another corn export announcement,” Joe Lardy at CHS Hedging said, noting that “in the 10 business days this month, we have had four days with corn announcements”.

‘Shock value’

The healthy demand has helped settle market nerves at a time when Brazil appears to be progressing well with seedings of its safrinha crop, the source of the country’s corn exports, besides when some politicians in Mexico are agitating for a switch in imports from the US.

Mexican senator Armando Rios Piter, the head of a congressional committee on foreign relations, has grabbed the headlines by saying he will introduce a bill which would redirect the country’s (massive) corn imports to South America from the US, in retaliation for President Donald Trump’s perceived slights at Mexico.

Not that such a bill may succeed, or be able to be implemented, many investors believe.

“We suspect the proposed bill is more about shock value than anything else,” said Tobin Gorey at Commonwealth Bank of Australia, saying that “bringing in more corn by ships instead of rail presents some logistical challenges that will likely prove costly.

“Secondly, Mexico is a large corn importer.   And although Brazil is looking at a record crop in 2016, last season it effectively ran out of corn.

“Brazil’s domestic inventories will need to first be replenished before it can turn its attention to the export market. By contrast, the US still has oodles of corn to sell.”

Data later

Certainly, in the soybean market, Mexico remains a buyer of US supplies, with the USDA on Tuesday announcing a 142,500-tonne deal for 2016-17 delivery.

That said, demand in the US itself will come into focus later with the release by the NOPA industry group of data on the domestic soybean crush last month.

Traders are expecting a figure of 159.0m bushels, below the 160.2m bushels reported for December, but representing a strong rise from the 150.4m bushels seen in January last year.

Rains return to Argentina

Meanwhile, although weather appears favourable for Brazil’s soybean harvest (hence the strong start to the follow-on sowings of safrinha corn) CBA’s Tobin Gorey noted that “forecasters say that Argentina’s wet weather woes may not quite be over.

“Heavy rain is expected later this week and is likely to persist for most of next.

“Southern Argentina crop areas are unlikely to be able to absorb large amounts of rain so more floods are a possibility.”

Terry Reilly at broker Futures International said that “central Argentina will see regular rounds of showers and thunderstorms through this weekend, unwelcome for sunseed crops areas, and some already saturated corn and soybean crop areas.

“Rain in Argentina will be greatest Thursday into Friday of this week.”

Chicago soybean futures for March were steady at $10.45 a bushel, remaining just below their 20-day moving average.