AM Markets: Will History Repeat Itself in the Corn Market?

August 31st, 2017

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Category: Grains

(Agrimoney) –  Will history repeat itself? Corn bulls might hope so. A year ago, the last day of August proved the nadir for a rout corn futures, and heralded a decent rebound in prices.

On August 31 2016, the spot (September) Chicago corn contract bottomed out at $3.01 a bushel, taking losses for that month to 10.0%, before buying returned.

This time spot corn has fallen more heavily during August, by a little over 11%.

But not dropped as low, with the weakest level set so far (on Wednesday) at $3.29 a bushel.

‘Wouldn’t rule out a modest correction’

And actually, the contract gained a little in early deals on Thursday, by 0.1% to $3.29 ¾ a bushel as of 09:40 UK time (03:40 Chicago time).

Is this a sign that the market bottom has come a day early this year?

Benson Quinn Commodities was somewhat doubtful, saying that “I don’t know that I would call for a bottom” in values.

That said, the Minneapolis-based broker added that it “wouldn’t rule out a modest correction at any point”.

‘Too early yet’

Terry Reilly at Chicago-based Futures International was not reassuring at all.

“Lows in corn futures may not be in for corn until mid-September, early October,” when the passing of the gutslot of the US harvest is often viewed as easing pressure on values.

“Not many people want to own corn in this environment,” Mr Reilly said, although adding that a fall in the December contract below $3.50 a bushel in the last session had “triggered light end-user buying”.

Such buying was particularly light in early deals on Thursday, when the December contract indeed eased by 0.1% to $3.45 ¼ a bushel, setting course for what would be a fifth consecutive negative close.

Deliveries fall short

The underperformance compared with the September contract is in line with initial stage of expiry of the latter lot.

Delivery data overnight showed that 844 contracts were delivered against the September lot at first blush, with today being first notice day.

While large, that is below many market expectations, with Mr Reilly, for instance, having forecast deliveries of 1,000-2,000 lots.

Whether that means merely that the September contract is underpriced compared with later contracts, meaning that producers are being rewarded with too much carry for standing by their crop, or something more structurally upbeat for prices, well, bulls were not sticking their neck out.

Where corn ends up may depend on how weekly US export data pan out, and are expected to come in at up to 200,000 tonnes for 2016-17 (which ends today for the crop, and for soybeans, in the US) and 400,000-700,000 tonnes for next season.

‘Strong Chinese demand’

For soybeans themselves, the Chicago delivery data fell short too – at 1 contract. Futures International had forecast at least 100 lots.

(Soyoil deliveries, at 667 contracts, were also light of expectations, although soymeal, at 200 contracts, not so.)

Again, this was reflected in outperformance of the spot, September soybean contract, which added 0.4% to $9.26 ¼ a bushel, while the best-traded November lot gained 0.1% to $9.34 ½ a bushel.

Later, the USDA is expected to announce export sales of a 1.0m-1.5m tonnes of US soybeans last week.

“Demand from China remains strong but with a possible record crop just ahead, supplies will be ample to meet demand,” said Derek Hullett at CHS Hedging.

For soyoil, the Chicago September contract gained 0.2% to 34.40 cents a pound, outperforming a better-traded December lot which edged just 0.01 cents higher to 34.70 cents a pound.

There was no trading in rival palm oil in Kuala Lumpur, thanks to a public holiday.

Varying wheat performances

Wheat, meanwhile, fared the best of Chicago’s big three ags, adding 0.8% to $4.06 ¾ a bushel for the expiring September lot, and 0.5% to $4.32 a bushel for the best-traded December contract.

Again, deliveries, at 0 for Chicago soft red winter wheat and 275 lots for Kansas City hard red winter wheat, were below many market expectations.

“Despite the wide carry, I wouldn’t be surprised to deliveries in all three markets,” said Benson Quinn Commodities.

That said, for the third market, Minneapolis hard red spring wheat, deliveries were a heavy 1,141 contracts.

It was little surprise that Minneapolis spring wheat underperformed, dropping 0.7% to $6.28 ¾ a bushel for September and by 0.8% to $6.50 ¾ a bushel for December.

Kansas City hard red winter wheat added 0.1% to $4.00 ½ a bushel for September, and 0.5% to $4.31 ¼ a bushel for December, given less sign that the carry was too large to deter deliveries.

Dollar factor

As for US export sales data later, these are expected to come in at 300,000-600,000 tonnes for all wheat for 2017-18 (which started in June in the US for the grain).

Tobin Gorey at Commonwealth Bank of Australia flagged the importance of the dollar in the US wheat export performance, given that recent recovery in the greenback has made dollar-denominated assets less affordable to buyers in other currencies.

“Wheat prices have changed very little of the past week or so,” Mr Gorey said.

“The reasons for buyers to wait on purchasing US wheat have thus been entirely about waiting for a still-cheaper dollar.

“Buyers might come to the end of their waiting period if the greenback is no longer making US wheat cheaper.”

The greenback actually stood little changed against a basket of currencies, up 0.8% so far this week, but down 10.5% from a January high.

‘Crop will still be large’

In New York, cotton futures for December eased back 0.5% to 70.48 cents a pound, amid ideas that Tropical Storm Harvey, while causing significant damage in many cotton-growing areas of the US, has not hurt too much prospect of a 20m-bale crop.

Loss estimates heard by Agrimoney.com so far range from 250,000-500,000 bales for Texas, although there are worries over quality losses on other crop too

“Whilst the effect on the agricultural sector, particularly in Texas will be substantial, it will certainly be far less than initially feared, as the intensity of the storm diminished significantly once it made landfall and the huge rainfall was limited to the Gulf states of Texas and Louisiana,” said Nidera’s Australian office.

In Louisiana, where Harvey has moved on to, more than 40% of cotton has bolls open which makes the crop “more vulnerable to damage from heavy rains”, CBA’s Mr Gorey said.

“From that we can assume that the losses will be material for the market but that, for now, comes with a wide band of uncertainty.

“The US cotton crop, though, will still be large this year. As indeed it will be elsewhere too.”

 

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