AM Markets: Wheat Futures Extend Recovery. Can It Continue?

(Agrimoney) – OK, wheat futures staged a bravura performance in the last session.But is there much scope for further gains, given the huge extent of world supplies of the grain?

In fact, Chicago futures extended their recovery in early deals on Friday, adding 0.7% to $4.19 a bushel for December delivery as of 09:00 UK time (03:00 Chicago time), and earlier hitting a fresh six week high of $4.20 ½ a bushel – where the contract had gained 6% in less than 24 hours.

‘Approaching being competitive’

The question is whether this is down to anything more than short-covering, spurred by the evidence on Thursday from Egypt’s tender that US hard red winter wheat is the cheapest in the world – but not looking so competitive after its surge.

“Recent tender activity indicates that US values were at least approaching being competitive,” said Brian Henry at Benson Quinn Commodities.

“I wouldn’t say that requires the market making US offers less competitive, but that tends to happen more often than not when the funds have a large short position in Chicago.”

‘Looking more competitive’

OK, the Egyptian tender details, coming at a time when many other major importers are in the market, may have been the spark for the rise in futures, in showing US hard red winter wheat priced more competitively than Russian and Romanian wheat offers.

At CHS Hedging, Joe Lardy said: “Saudi Arabia is seeking 595,000 tonnes of hard wheat.

“US wheat values are looking more competitive so it will be interesting if the US participates.”

At Commonwealth Bank of Australia, Tobin Gorey said that Egypt’s tender showed that “US wheat is close to being competitive at the east end of the Mediterranean” despite the extra shipping costs across the Atlantic.

“Just a week ago it was the most competitive at the west end, in Morocco’s tender.”

‘Turbo charger’

But the extent of the rally is down, at least in part, to what Mr Gorey called a “turbo charger in the form of a large investor short position”, which was actually as a record as of last week.

“The export news flow and a short position are contradictory so we a getting more ‘bang’ from the news than otherwise.”

This short-covering process may not be over yet.

Brian Henry at Benson Quinn Commodities said that “I wouldn’t be surprised to see some profit-taking on length at some point… but it feels like the momentum is good enough to give us another day of higher trade.”

Open interest signal

After all, besides the fundamental factor of the cheap US export price, there are some technical pointers in the grain’s favour too, with Chicago’s December wheat contract closing the last session above its 50-day moving average for the first time in nearly four months.

The lot’s refusal, on downswings, to head towards 10-year lows set in August is another, with sell-offs tending to peter out above $3.90 a bushel.

But a short-covering rally will soon run out of steam when the number of short positions gets to a level deemed manageable.

Potentially more interesting for those hoping for a longer-term rally is the fact that despite the apparent short-covering, open interest – ie the number of live contracts – in Chicago wheat rose in the last session, by 6,685 lots, after increasing in the previous two sessions too.

If this is indicative of actual buying in the contract, rather than position closing, then the rally’s foundations may be a little more secure.

‘Logistics difficulties’

What wheat bulls may need is some kind of fresh fundamental supply scare to rally around.

There are some helpful snippets, including signs of a transport squeeze hurting Ukrainian wheat exports, so reducing that major competitor’s influence on the market.

“A number of operators have confirmed they are currently facing logistics difficulties,” Agritel said, adding that rail “wagons are scarce, a sign of the seasonal rebound of corn loadings”.

Longer-standing support would come from worries over winter wheat being sown for the 2017 harvest.

While rains have eased dryness concerns in the former Soviet Union, Agritel flagged dryness “stress” remained an issue in France, the European Union’s top wheat producer and exporter.

Meanwhile, in the US, the latest US Department of Agriculture drought monitor did show growing drought in the southern Plains – but not in the key winter wheat producing states of Kansas and Oklahoma.

‘Reduced rainfall’

The rise in wheat helped corn too. Indeed, corn for December outperformed in adding 1.1% to a three-month high of $3.53 ½ a bushel.

Prices of the two grains are tied particularly closely at the moment, given the huge volume of world wheat of low quality which will need to compete with corn for a share of feed rations.

There are some worries over sowings of corn, and in particularsoybeans, in Brazil too, where CHS Hedging’s Joe Lardy noted that the “weather situation has changed from last week.

“The Mato Grosso area has seen some rain but it has been much more limited and some forecasters are calling for reduced rainfall for the next 3 to 4 weeks.”

‘Key price point’

Soybeans themselves for November gained 0.7% to $9.62 ¾ a bushel, ticking a bullish technical box in the process.

“Whether or not soybeans can trade above the $9.60 level is the key to the overnight session,” said Benson Quinn Commodities adding that “it feels like this market has enough momentum to extend Thursday’s move into Friday”.

The broker also noted that “while soybean production/supplies are very likely getting bigger”, given strong US harvest results, “it does feel like there is decent demand for soybeans below $9.50 a bushel”.

More on demand will come later, with the release of US export sales data for last week expected to come in at 900,000-1.20m tonnes for soybeans.

For corn, sales are expected at 800,000-1.0m tonnes, and for wheat at 350,000-550,000 tonnes.

‘Spread has tightened up’

In New York, cotton made a firm start too, adding 0.4% to 69.55 cents a pound, looking for what would be a third successive winning session, but with the fibre having difficulty breaking above the psychologically-important 70-cents-a-pound mark.

CBA’s Tobin Gorey noted that the “December March spread has tightened up a bit – hence our thinking that a tighter than expected US balance sheet may be worrying traders who sold aggressively into the recent rallies.

“The worry will grow if the damage to cotton in the Carolinas [from Hurricane Matthew] is as extensive as some have suggested.”

March futures underperformed a bit again, in adding 0.3% to 69.94 cent a pound, and lost a little more premium.