AM Markets: Wheat Futures Shy Away From Key Price Battle

(Agrimoney) –  Will one landmark lead to another in the wheat market?

Chicago soft red winter wheat futures, the world benchmark, for March in the last session achieved some technical kudos by closing above their 200-day moving average for the first time in nearly eight months.

That, in theory, opened up the way to a crack at an even bigger prize, situated at roughly $4.55 a bushel, in a long-term downtrend line.

Breaking above that could be taken by chart followers as a sign that that the bear market in wheat futures stretching back to 2008 is over.

‘Most important number on the board’

According to broker Benson Quinn Commodities, this point at $4.55 a bushel or so “is the most important number on the board at this time”.

If “trade is established above this level, and the funds are forced to cover more of their short position in Chicago,” then higher prices could await, with managed money still having quite a net short position to cover.

(The hedge fund net short in futures and options measured 82,547 lots as of a week ago, latest regulatory data show.)

The alternative is that the threshold is not breached, and “the market corrects” downward.

“The fundamental picture argues for a correction,” Benson Quinn Commodities added.

Latest weather worry

After all, Abares officials have hiked by 2.49m tonnes to a record 35.13m tonnes their estimate of Australia’s newly finished wheat harvest.

And weather threats to northern hemisphere winter wheat crops, to be harvested this summer, have not gained much traction yet.

That said, another one is in the offing.

This time too high temperatures are the immediate worry, provoking crop development in parts of the US Plains which it is feared may make seedlings vulnerable should frost return.

“Really warm weather is causing the winter wheat crop to break dormancy,” said Joe Lardy at CHS Hedging.

“It is supposed to stay warm for a while but the market will be very reactive to any possible freeze.”

Rouble trouble

Meanwhile, even if Russian cold does not appear to be coming to wheat bulls’ aid, the rouble is, in extending its recovery against the dollar, so making Russian exports that much less competitive – a big deal in wheat markets, given the country’s huge exportable surplus after a record 2016 harvest.

The rouble stood at 57.64 to $1 on Tuesday, up 0.6% on the day, and up 27% year on year.

On cash markets, “global values tend to be steady to firmer with the timing of the next push to sell by the Russian producer being the key feature”, Benson Quinn Commodities said.

But thanks to the rouble, that push may not be as strong as might have been, with the Russian Grain Union industry group warning that the country’s grain exports will be hit without a return sharpish in the rouble to 63-64 per $1.

“This means that the official target of 39m tonnes of [grain] exports is overestimated and could be limited to previous season level of 33.9m tonnes,” Agritel said.

Hard vs soft wheat

Nonetheless, bears held sway in wheat markets in early deals, with Chicago’s March contact standing 0.5% lower at $4.50 a bushel as of 10:00 UK time (04:00 Chicago time), back below its 200-day moving average, besides shying away from a confrontation with its long-term downtrend line.

In fact, that meant that the market lost further ground against Kansas City-traded hard red winter wheat, as grown in the southern Plains, and which has outperformed the last few sessions thanks to the Plains weather issue and changes to US stocks estimates made on Thursday.

An unexpectedly large downgrade by the US Department of Agriculture to the forecast for domestic wheat stocks at the close of 2016-17 centred on hard red winter supplies.

The Kansas City premium, at some $0.16 a bushel March basis, has now doubled in three sessions, although remains soft by historical standards.

Paris highs

As an aside, chart factors have been playing a notable role in Paris wheat futures too, where the March contract closed the last session at E173.00 a tonne.

That was a six-month closing high for the March lot itself but, on a spot contract basis, the second-highest close in 13 months.

Agritel said that Paris futures, besides “benefitting from the prices increase in Russia due to the rise of the rouble”, were also being supported by chart factors.

“Wheat prices were up on Euronext yesterday mainly due to the breach of E172-a-tonne chart resistance, paving the way to the test of E175 a tonne on the March contract.”

‘Could be a record’

Back in Chicago, corn futures fell too, amid ideas that the higher prices of the last session, when the key December new crop lot breached $4.00 a bushel for the first time since June, was encouraging farmer selling.

“The market is well aware that Brazil’s [corn] crop could be a record,” said Tobin Gorey at Commonwealth Bank of Australia.

At Futures International, Terry Reilly flagged a retreat in basis offered by some ethanol plants in response to more ready supplies of the grain.

Price spike ahead?

Last week, Juan Luciano, chief executive of ag trading giant Archer Daniels Midland, flagged that North American producers were far more advanced selling soybeans than corn, estimating that “farmers have sold something in the range of 80% of the old crop beans and about half of that, 40%, of the old crop corn”.

This implies more unfulfilled selling from pressure corn yet to come – potentially in the spring.

“Sometimes they see that corn tends to spike a little bit in price traditionally maybe in April and May when people get concerned about the weather,” Mr Luciano said.

Corn futures for March stood 0.4% lower at $3.74 a bushel, while the December lot stood down 0.5% at $3.97 ½ a bushel.

‘Betting on currencies to drop’

For soybeans, for the record, Mr Luciano flagged that it was South American producers who were behind on hedging.

“Certainly, if I look at Argentina, Brazil… we are seeing farmers being reluctant sellers,” he said.

“They are betting on their currencies to drop,” a factor which would boost prices in local terms of crops like soybeans traded internationally in dollars.

CHS Hedging’s Joe Lardy also flagged that in Brazil “the strong real has really slowed down the pace of farmer selling.

“Farmers have been wishing, hoping, and praying that the currency weakens back to R$3.4-3.6 per $1.

“Last year the exchange rate moved way out to R$4 to $1 and was a nice windfall for producers.”

Export slowdown?

In fact, the real has been trading flat at a little over R$3.1 to $1, implying other factors were behind a 0.6% fall to $10.48 a bushel in Chicago soybean futures for March, with traders flagging disappointment at export data on Monday showing US shipments of the oilseed at 1.15m tones last week.

That compared with 1.65m tonnes the week before, and 1.74m tonnes for the same week last year.

This touched a raw nerve following a USDA warning last week over importers shifting trade to Brazil – a message officials expanded on in a report on Monday.

US vs Brazil

While US soybean exports so far in 2016-17, at 1.47bn bushels, were up more than 200m bushels year on year, “these gains may quickly erode in the summer with larger South American supplies compared to last year,” the USDA said.

“The rate of seasonal decline in soybean demand will largely determine the trend in prices for the remainder of the crop year,” it said, noting an “accelerating pace of soybean shipments from Brazil”.

CBA’s Tobin Gorey said: “The market is looking for signs importers are switching from US to South American supply.

“The switch has not really occurred in earnest yet,” he said, if adding that “we wouldn’t be surprised if it is less pronounced than usual”.