AM Markets: Wheat Misses Grains Revival. But For How Long?

September 14th, 2016

By:

Category: Grains, Oilseeds

Young man in wheat field 450x299(Agrimoney) – Falling through price floors can be a dangerous business for agricultural commodity futures.

Wheat investors were reminded of that last month, when Chicago’s December contract, having looked to have found its nadir at about $4.25 a bushel, found after jumping up and down on it for a few sessions that the floorboards were not so solid.

The result was the contract setting even lower 10-year lows (for a nearest but one contract), eventually at $3.86 ¾ a bushel, a further 9% or so below.

Soybean battle

Wheat futures were undergoing something of a smaller battle of a similar type on Wednesday, when the December contract stood at $3.99 ¼ a bushel as of 08:30 UK time (02:30 Chicago time), down 0.4% on the day, and losing the campaign to hold above the psychologically important $4.00-a-bushel point.

But perhaps a more significant fight was going on in the soybeanmarket, battered by the US Department of Agriculture’s surprisingly large upgrade, of 1.7 bushels per acre to an even bigger record of 50.6 bushels per acre, in its estimate for the domestic yield this year.

That has depressed November futures, which in the last session closed within 1% of a five-month low of $9.37 a bushel, set a couple of weeks ago.

Still, in early deals on Wednesday, at least, the contract found a bit of bounce near the price floor, and rejected the idea of heading into territory not travelled since April, standing up 0.2% at $9.46 ¼ a bushel.

‘Very bearish yield trend’

Not that awe over the US yield figure has subsided.

“The market is trying to come to grips with the record large soybean yield,” said Joe Lardy at CHS Hedging.

“The yield will be the first time over 50 bushels per acre. It is also the biggest positive deviation from trend line yield in the past 20 years.

“It will also be the first time since 1995 that yields have increase for four years in a row. We are in a very bearish yield trend right now.”

‘Vulnerable to further liquidation’

At Chicago broker Futures International, Terry Reilly said that “if the September yield were to remain unchanged, the 10-year trend yield for 2017 would end up at 49.3 bushels per acre.

That “would be the second highest in history”, behind only this year’s forecast result.

And this of course before factoring in the prospect of an upgrade to the USDA’s sowings estimate for this year, as Agrimoney.com highlighted 24 hours ago, besides that fact that soybean, and corn, markets typically head lower at this time of year, as the US harvest sends supplies soaring and allows the removal of the last vestiges of risk premium from prices.

The “seasonal tendency for beans and corn to score harvest lows around September 29 to October 5 implies market is vulnerable to further liquidation,” said Benson Quinn Commodities.

‘Trending too dry’

Not that there is no hope of a price revival further ahead.

“Once gut slot harvest pressure is beyond market, record US demand and prospect for lower South American planted acres and need for southern hemisphere weather risk premium should offer support,” the broker said.

Still, the prop from South American weather may be already being felt, in part thanks to dryness in Brazil, where Mato Grosso farmers are preparing for the end (on Thursday) of the soy-free period, ie the spell when live soybean plants are not allowed in fields, in an effort to cut the spread of disease.

Sure, it is early days, but “Brazil’s moisture profile is trending too dry and rain will be needed soon”, said Tobin Gorey at Commonwealth Bank of Australia.

Tax dilemma

In Argentina too, there is reason to believe that 2016-17 soybean production may fall short of expectations, with Mr Gorey flagging “market chatter” on whether the country’s government will realise it promise to cut the tax on soybean exports by a further 5 points, to 25%.

“Argentina’s Agriculture Minister though is reported to have said, ‘what people need to understand is that beyond electoral promises, the reality limits us’.

“If the current 30% tax is maintained, Argentine farmers’ planting decisions might be affected in 2016-17.”

‘Tight stocks’

Such dynamics would imply a stronger hand for US soybean supplies on export markets, at a time when the carry-in for last season, at least, is not so generous.

“Tight old crop stocks are keeping spot cash basis bids firm,” Benson Quinn Commodities noted.

“Inventories along the river into Gulf export markets are dwindling with deliverable stocks report today down 533,000 bushels from last week to 1.2m bushels, just slightly higher than last year’s deliverable stocks of 769,000 bushels.”

The dollar helped on Wednesday by showing flat against a basket of currencies, failing to extend its gains of the last session.

In the products, soybeans gained supported from soymeal, which gained 0.6% to $307.90 a short ton for December delivery, helped what looked like the unwinding of spreads with soyoil, which dropped 0.6% to 31.67 cents a pound for December.

Vegetable oil markets have been hurt by a downturn in Malaysianpalm oil exports so far this month, besides the last session’s tumble in oil prices. (Vegetable oils are used largely in making biodiesel.)

Palm oil itself was 1.7% lower at 2,547 ringgit a tonne in Kuala Lumpur.

‘Yield reports lean disappointing’

Corn followed its fellow row crop soybeans higher, gaining 0.2% to $3.30 ¾ a bushel in Chicago for December delivery.

Sure, the USDA in Monday’s Wasde crop report cut its forecast for the US yield this year by less than investors had expected, by 0.7 bushels per acre to 174.4 bushels per acre.

But there remain expectations of further downgrades ahead.

“Latest corn yield reports lean disappointing,” said Richard Feltes at broker RJ O’Brien, if adding that he was “starting to hear some very good yields”.

Seasonal trend

It was wheat which lagged this time, falling below $4.00 a bushel in Chicago for December delivery, with the Kansas City December contract dropping in line, by 0.4% to $4.14 a bushel.

That said, there is some hope for prices from seasonal factors, with the northern hemisphere harvest wrapping up (although Australia’s is soon to begin), and indeed with history showing that wheat prices have a strong tendency to outperform corn in the last half of September.

RJ O’Brien’s Richard Feltes viewed the risk to this trade being repeated as “minimal, given the historically low premium of December wheat futures to December corn futures, and the strong tendency for corn prices to erode during the last half of September, just as full scale corn harvest operations ramp up”.

‘Quality concerns’

In New York, cotton sided with corn and soybeans and showed a little headway, adding 0.3% to 67.11 cents a pound for December delivery, helped by some weather concerns, and the contract’s return in the last session back above its 100-day moving average.

“Meteorologists see more wet weather on the horizon for west Texas – regular rounds of rain are expected to stretch for another 10 days,” said CBA’s Tobin Gorey, speaking of the top US cotton-producing state.

“We might see some quality concerns emerge from that in the next few days,” he said, flagging again the worries over Brazilian dryness too.

 

Add New Comment

Forgot password? or Register

You are commenting as a guest.