(Agrimoney) – If month-end was unusually strong in Chicago, for corn and soybeans at least, would the start of a new month prove unexpectedly weak?
Historically, month beginnings have been seen as times when investors take out fresh positions, meaning typically new money and higher prices.
But would they be tempted to reinstate the short positions they closed on Monday, in a profit-taking wave?
‘Supportive’ to prices
The answer was “no”, at least, not in early deals, with enough news overnight to make investors think twice about extending short positions, especially at prices which remain pretty low by standards of the decade so far.
One bit of news was a lurch by hedge funds further into net short territory in positions on grains, by a net 15,000 lots week on week (including the soy complex and Kansas City-traded hard red winter wheat) to nearly 227,000 lots.
The extent of the declines provoked some concern that hedge funds might be overextending themselves on the bearish side, with Benson Quinn Commodities terming the report “supportive” for soybeans, at least short term, adding that it “leans supportive” for corn too.
For wheat, the broker said that the “fund short in Chicago merits some consideration before adding to shorts near these levels”.
Ethanol rethink
Another piece of data overnight was from the US Environmental Protection Agency, which issued revised estimates for the US the renewable fuel standard, ie minimum usage levels.
It has to be said that not everyone was screamingly supportive of the fresh ethanol usage floor figures, with the Renewable Fuels Association saying they “will deepen uncertainty in the marketplace and thus chill investment in second-generation biofuels.
“Unlike Big Oil, the ethanol industry does not receive billions in tax subsidies and the renewable fuel standard (RFS) is our only means of accessing a marketplace that is overwhelmingly and unfairly dominated by the petroleum industry.”
Societe Generale said that the EPA announcement was “largely immaterial” to its outlook for usage of corn, the main raw material in the US for making ethanol, flagging the increased efficiency of cars as a bigger threat to demand for the biofuel than the agency’s efforts to lower the RFS.
‘Short covering ahead’
However, not all ag commentators were quite so phlegmatic over an EPA figure which, while leaving mandated ethanol use below levels initially set (eg 15.0bn gallons for 2015 and 2016), raised them from May proposals by 530m gallons for this year, and 270m gallons for next.
(The May proposals were for 13.4bn gallons for 2015 and 14.0bn gallons for 2016.)
The overall renewable fuels standard, at 18.11bn gallons, was up 711m gallons for May, “slightly more than the 400m-500m gallons that the trade had anticipated”, Benson Quinn Commodities said, adding that this should also be “supportive” to corn prices.
At Futures International, Terry Reilly said: “Look for some shorts to cover positions, especially post EPA announcement.
“We estimate 2015-16 corn for ethanol use will increase to 5.30bn bushels,” compared with a previous estimate of 5.250bn bushels, and up from 5.209bn bushels consumed last season.
The US Department of Agriculture has use in the current season at 5.175bn bushels.
Dollar eases
Certainly, corn had a bit of a spring in its step in early deals, adding 0.4% to $3.74 ¼ a bushel for March delivery as opf 08:30 UK time (02:30 Chicago time).
It helped that the dollar was 0.2% lower against a basket of currencies, rebuilding a little the competitiveness of dollar-denominated exports, and a continued lack of deliveries against the close-to-expiry December contract helped too.
And firmness was a feature in the soybean market too, with the EPA announcement nudging higher the 2015 biodiesel mandate to 1.73bn gallons from the 1.70bn previously proposed, and the 1.63bn gallons in 2014.
“A rise by 100m gallons roughly could mean an extra 370m pounds of soyoil use to make the biodiesel, assuming 50% of the feedstock is used to make the biofuel,” said Futures International’s Terry Reilly, if adding that imports could play a role in filling demand.
‘Deemed friendly’
Soyoil for January rose by 1.0% to 29.70 cents a pound, while soybeans themselves for January nudged 0.1% higher to $8.81 ¾ a bushel.
Some less downbeat thinking on Argentina helped too, with Benson Quinn noting some glass-half-full thinking on the announcement of plans to cut the soybean export tax by 5 percentage points to 30%.
The news “was deemed friendly with some in trade talking that tax could be lower 10-15% while others were looking for a tax free grace period,” broker said.
“For now the measures approach by the new government appears if not supportive higher prices at least not bearish on impending flood of beans into the market,” it added, noting that Argentina “holds some 40% of the world’s soybean stocks”
More deliveries
Perhaps a bigger question mark was in calling wheat, which for March delivery ended the last session in Chicago at its second lowest ever for the contract.
One of the factors pressing prices on Monday continued, in terms of notable deliveries against the expiring December contract.
A further 1,517 lots were delivered overnight, taking the total in just two days of the expiry process to 3,860 contracts.
Furthermore, on the bearish side, the USDA reported a two-point improvement to 55% in the proportion of US winter wheat rated “good” or “excellent”, 1 point above market expectations, and catching up with the year-ago figure of 58%.
Demand question
Still, on the more upbeat side was the extent to which hedge funds have already taken out short positions on wheat, and a downgrade by Abares, the official Australian crop bureau, to its forecast for the domestic harvest.
Abares cut its estimate to 23.982m tonnes, from a previous estimate of 25.284m tonnes, citing dryness blamed on El Nino.
“Prospects for Australian winter crop production in 2015–16 weakened during spring, reflecting generally unfavourable seasonal conditions in many cropping regions,” the bureau said.
Furthermore, there is some idea that wheat is wholly undervalued, with Mike Zuzolo at Global Commodity Analytics questioning why USDA and International Grains Council estimates for 2015-16 “show consumption up only fractionally, even though the world price of wheat as fallen 7-23% versus a year ago”.
And with some fears for crops sown for the 2016 harvest too “I hold to my value levels for the July soft red winter wheat contact of $5.40 a bushel ‘undervalue’ and $6.75 a bushel ‘overvalue’,” Mr Zuzolo said.
Wheat futures for March made a small step in that direction, adding 0.4% to $4.77 ¼ a bushel in Chicago.
The contract was also helped by corn, outperformed dramatically last month, cutting its discount March basis to $1.03 1/4 a bushel at month end, from an early-November high above $1.46 a bushel.
Can this discount go below $1.00 a bushel?
