(Wall Street Journal) – A recent rally in agricultural commodities markets spurred by the prospect of weather damage to harvests looks vulnerable to a turnaround, traders and analysts said Thursday.
“The chances of a correction are quite high,” said Fiona Boal, director at London-based Fulcrum Asset Management.
Flooding in Argentina is threatening to drown swaths of the soybean harvest, prompting traders to predict as much as 5% of the 2015-16 soybean crop—estimated by the USDA at 59 million metric tons—could be destroyed.
In Brazil, the government lifted a tax on corn imports this week to keep its domestic market adequately supplied, raising the prospect of reduced exports from a key producer.
Prices have surged across the grain and oilseed markets. Chicago-traded soybean futures for May delivery have risen around 13% since April 7, trading around 8 cents higher at $10.17 cents a bushel around 1445 GMT. Corn futures have gained around 7.5% in the same period, but erased some of their gains in afternoon trading Thursday, losing 6 cents to around $3.89.
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Against the backdrop of a well-stocked global market, the extent of the rally led to predictions of a reversal. Ms. Boal said the market’s focus will soon move back to the U.S. plains, where the weather outlook for the coming months is comparatively benign.
“For the grains we’ve seen a South American weather rally, and the market will very quickly turn to the U.S. farmer,” she said.
Vincent Jeannin, a futures trader at Al Ghurair Resources LLC in Dubai, said the world’s oversupplied oilseed market would easily absorb all but the most drastic reduction in Argentina’s soybean harvest.
“When markets realize that everything’s going well and we have a better view on what’s the actual damage, maybe it will realize it has rebounded a bit too much,” he said.
Mr. Jeannin said the rally had a “huge technical component”. Bearish speculators who had been betting on falling prices were caught out by the initial rise, prompting them to cover their short positions.
Cole Martin, a senior commodities analyst at BMI Research, predicted that the rally will “eventually flame out”. He said a recent spike in options market activity has been confined to near-dated contracts expiring in the next few weeks—suggesting that market participants aren’t concerned about severe shortages later this year.
“Even with nearby option activity rising, we’re not seeing this play out down the curve. What the options markets are telling us is that the increase in speculative interest may not be fully fundamental-related,” Mr. Martin continued, adding that speculators are “merely riding the current rally.”
Cocoa, coffee and sugar have also benefited from renewed investor interest in recent weeks, supported by a stronger Brazilian real against the dollar and worries over dry weather in major producers in Latin America and West Africa.
Ms. Boal at Fulcrum Asset Management said the widespread rally points to greater investor appetite for exposure to commodities as a whole.
“A lot of what we’ve seen in the past week or so is a reinvigoration of people’s interest in commodities,” she said.
