(Agrimoney) – Agricultural markets endured a roller-coaster ride on Monday, as the bursting of the Chinese bubble sent contradictory messages to the commodity markets, which had to balance fears over demand against the bearish effect of a routing dollar.
Richard Feltes of RJ O’Brien noted that “macros dominate trade” on Monday, as equity markets demonstrated some historic volatility.
In the end wheat and corn managed to rise, while soybeans and softs were down, but markets for almost all agricultural commodities closed considerably higher than morning trade would have suggested.
Gloomy picture
US and European markets woke up to a gloomy macroeconomic picture on Monday.
The slump in the Chinese stock market gathered pace, as the Shanghai Composite Index dropped 8.5%, in what commentators were quick to call China’s Black Monday.
Markets had been banking on a significant government intervention, such as some flavour of government monetary easing, after last week’s equity losses and weak economic data.
When it became clear that the taps were not about to be turned on, investors scrambled out of the market.
Global contagion
The Chinese stock market is fenced off from world markets by capital controls and ownership requirements, and is dominated by individual investors.
There was some surprise therefore in the readiness with which global equity markets took their que from the Chinese rout.
The pan-European FTSE Eurofirst index plummeted 5.4%, marking the worst day for European stocks since the 2008 financial crisis, while the Nikkei was down 4.6%.
As well as fears for the state of the global economy, European exchanges bore the brunt of currency factors, as the euro, and to a lesser degree the pound, bounced as panicked investors sought safe havens.
With collapsing equity markets and a stronger Euro, European agricultural commodites took a beating. Paris November rapeseedfinished down 2.5% at E348.75 a tonne, while December Paris wheatclosed down 1.4% at E173.50 a tonne.
Flash crash
And the Dow Jones opened with a crash, plunging over 6% or more than 1,000 points down, surpassing even the flash crash of 2010.
But US equities found their feet through the day, trimming losses to around 3% in the afternoon.
Markets found some cheer in the growing certainty that September will not bring an increase in US interest rates.
The receding prospect of fiscal tightening pushed the dollar sharply down, plummeting through the 200 day moving average for the first time in over a year, marking a significant reversal in the greenback’s direction of travel.
The dollar was trading down around 1.4% against a basket of global currencies in the early afternoon.
Committee weakness
But the falling dollar, which is supportive for dollar denominated commodity prices, could not prevent the prospect of a slowdown in China, the world’s biggest importer of raw materials, weighting on the broad commodity complex.
The Bloomberg commodity index fell by 3% at one point, to reach its lowest level since 2015.
As well as macroeconomic effects, oil was pressured by growing evidence of very thick and secure global supplies, with Brent crude below $45 a barrel for the first time since 2009.
Surprising strength
All of which means that what might otherwise have been an average day for agricultural commodities showed up as surprising strenght.
After a predictably weak start, grains started to draw strength from a plummeting dollar, and the quick bounce of the Dow Jones.
One reason for the relative strength in agricultural markets was the fact that many of the demand fears, particularly over Chinese demand, had already been priced in by agricultural markets.
“The commodity sector has some of this already built in so after the initial sell off, the commodity sector has made its way back to two sided trade,” said Darrell Holaday of Country Futures.
Demand data
One bullish factor was some reassuring data on US grain exports.
Corn inspections were reported at 883,987 tonnes, toward the top of market expectations.
Soybeans were also decent, at 210,128 tonnes.
There was also some support from the prospect of renewed dryness in the Midwest.
“Below normal precipitation is expected across most areas in the 6-10 day period, which may lead to soil moisture declines in some areas,” said Kyle Tapley.
December corn closed up 1.2% at $3.80 ½ a bushel.
Disappointing wheat
But wheat exports disappointed, at 277,992 tonnes.
“Wheat inspections missed the low end of expectations, and this was the 3rd lowest total this marketing year,” said CHS Hedging.
“Wheat will need to hit 511,000 MT each week to meet the export figure. Export inspection year to date are down over 1.2 million tons compare to last year at this point,” CHS added.
“The slow start is concerning as the gap is widening and U.S. wheat values are still not very competitive.”
Wheat prices dotted in and out of the black, but managed to finish up on the day.
December Chicago wheat was up 1.0% at $5.08 a bushel.
Biofuel fears
Decent US exports, drier weather and a weaker dollar weren’t enough to lift soybeans, which are particularly exposed to both China (due to role of the country’s pig industry in global soybean demand) and oil prices (due the use of soy oil in biofuel).
November soybeans closed down 1.65% at $8.74 a bushel.
December soybean oil closed down 2.9% at 26.86 cents a pound.
But soymeal actually found some strength, with October meal, the most widely traded contract, up 0.3% at $326.4 a short tonne.
Coffee finds recent lows
Softs fared worse than grains on Monday.
Coffee and sugar were hit by the falling Brazilian currency once again, as well as fears over Chinese demand.
The real was trading down 1.7% against the dollar late in the day, plumbing fresh 12 year, a feat particularly noteworthy given the weakness in the greenback.
December arabica settled down 3.6% at 121.70 cents a pound, a contract low, while front month September contract, on which volumes are now extremely low, reached its lowest level since early 2014.
Sugar showed more resilience, with October raw sugar down 0.2% at 10.42 cents a pound.
Cotton prices plunged 4.3% to settle at 64.06 cents a pound. China is the world’s top consumer of cotton, although direct exports from the US are limited due to customs restrictions.
