Chicago wheat eases, as ‘pain trade’ idea mulled

November 6th, 2015

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Category: Grains, Oilseeds

Corn_Chart450x299(Agrimoney) – A theory attributed to Jesse Livermore, a legendary investor who made a fortune by going short ahead of the Wall Street Crash, has been surfacing in ag market talk of late.

And that is that markets will move in the direction which causes the most pain.

It has been used, for instance, as an explanation for the unusual strength of Chicago soft red winter wheat futures, which have driven their premium over Kansas City hard red winter to some $0.40 a bushel, a level rarely seen.

Their premium over corn returned over $1.50 a bushel in the last session for the first time in four months.

The “pain trade” idea is that Chicago wheat’s strength is being driven by funds feeling the heat on short positions, and closing them.

Wheat spreads

Is that pain that can be dealt on wheat shorts now past its peak?

Certainly, it was Chicago wheat’s turn to suffer investor selling on Friday, with the December contract down 0.6%, or 3.25 cents, at $5.23 a bushel as of 09:05 UK time (03:05 Chicago time).

That was, for once, a smaller slide than being suffered by Kansas City wheat, which for December was 0.4%, or 1.75 cents, down at $4.84 ¼ a bushel.

The drop also compared with a smaller loss in corn, which for December basis dragged its discount back below $1.50 a bushel.

‘Issue with near-term supply’

There are, of course, some fundamental reasons behind Chicago soft red winter wheat’s strength, with US farmers this year achieving, another, disappointing harvest, in quality terms in particular.

That implies a squeeze on supplies of a lower-protein wheat needed by bakers making, for example, crackers or biscuits.

Tobin Gorey at Commonwealth Bank of Australia, said that there was “clearly… an issue with near-term supply of US soft red winter wheat as a premium that size, this close to expiry, was last seen in the 1970s”.

That said, Benson Quinn Commodities noted that “basis levels in the hard wheats have firmed”, signalling that prices of Kansas City and Minneapolis futures will gain support.

“Ultimately, we will see a correction of some type,” the broker added, if flagging the potential for investors to “look for something even more absurd” in terms of the Kansas City discount before closing it.

Australia vs US spreads

It is not only spreads within the US that are under scrutiny, but between, for example, Australian and US contracts, which are looking steep, or not, depending on whether you compare with Chicago or Kansas City.

“Australian wheat at around Aus$30 a tonne over Chicago is, prima facie, neither expensive nor cheap by the standards of this season,” CBA’s Tobin Gorey said.

“The same measure against Kansas is about Aus$50 and within a few dollars of its most expensive level for this season.”

Which looks more appropriate may depend on what view you have of the extent of the damage to the Australian crop now being caused by rain which, while badly wanted a few weeks ago to boost grain fill, is now a threat to quality, encouraging disease and sprouting on ripe kernels.

‘Challenges keep on coming’

“The challenges to Australia’s milling grade wheat supply keep on coming,” Mr Gorey said, noting that “the wet weather in regions that are ready to harvest has created some problems.

“One is obviously delays but that is likely to be temporary. Quality problems, where they occur, persist.”

According to World Weather, New South Wales and parts of South Australia have received 1-3 inches of rain over the past week, with 1.5 inches in western Victoria.

Grain handler CBH Group flagged issues in Western Australia too.

“We’re seeing a lot of variety in quality and yields this year,” said David Capper, CBH general manager of operations.

“We are seeing some issues with screenings and protein with wheat, barley and oats,” he said, noting that more rain is in the forecast.

‘A lot of pain’

Back in Chicago, the pain trade idea found mention re: the last session in the soybean pit, where teh January lot ended at a contract closing low.

“A customer said it best today, the role of the market is to inflict the most financial pain,” Benson Quinn Commodities said.

And Thursday’s decline in the January lot to a contract closing low was “certainly causing a lot of pain for the undersold US producer”.

Producers’ heartache was eased a little in early deals by some recovery, of 0.2%, in the January lot to $8.65 ¾ a bushel.

‘Excessive rainfall’

There still remain some doubts over sowings in Brazil, with mixed reports on weather for the main central Brazilian growing belt, although the consensus is certainly that conditions are better than they were a month ago.

Still, in southern Brazil, rains continue to prove too much, with sowings in Rio Grande do Sul, for which November is the key month, having got off to a slow start, thanks to rains which are also threatening the spread of soybean rust fungus on what is seeded.

“The excessive rainfall has already resulted in a very disappointing winter wheat crop and now the rainfall is delaying the rice planting and the soybean planting in the state,” said Michael Cordonnier, the respected crop analyst.

Corn the follower

Soyoil for December, meanwhile, was offering support by adding 0.5% at 27.97 cents a pound, helped by a relatively positive US export performance.

Terry Reilly at Futures International said: “Soyoil is the only commodity that is running above the year-ago level” in terms of the percentage sold out of the total the US Department of Agriculture is projecting for 2015-16.

But corn futures continued to feel a pull from wheat rather than dance so much to its own tune.

“Corn still hasn’t found anything to separate it from the pack and therefore remains at the mercy of daily moves from beans or wheat,” said CHS Hedging, with wheat proving the more influential of late.

Corn for December was 0.1% lower at $3.74 ½ a bushel.

 

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