(Agrimoney) – The bears are back in town.
Although the end of January witnessed an improvement in sentiment in many financial markets, with New York-traded soft commodities being a notable exception, the cheer had somewhat dissipated by the start of February.
Some share markets did manage headway, such as the Tokyo market, which closed up 2.0%, while Sydney stocks gained 0.8%.
But Shanghai shares dropped 1.8% on more downbeat news on China, the world’s second-largest economy, and a large commodities buyer, where the official manufacturing sector purchasing managers’ index for January fell to 49.4, remaining below the 50.0 level indicating a neutral level.
It was also below December’s 49.7 reading, and forecasts of a figure of 49.6.
In South Korea, data showed not just a sub-50 purchasing managers’ index reading but an 18.5% drop in exports, year on year, a decline being seen as down to Chinese weakness.
‘Fewer offers and higher prices’
Signally, on commodity markets, oil, of which China is a huge importer, traded weaker, with Brent crude down 1.4% at $35.48 a barrel as of 09:30 UK time (03:30 Chicago time).
And in Chicago, grains were weaker too, notably wheat, which dropped by 0.9% to $4.74 ¾ a bushel for March delivery, dropping back below the contract’ 10-day, 40-day and 50-day moving averages.
Notable news for the sector was Egypt’s rejection of a French wheat shipment over claims of contamination with ergot, a toxic fungus, although it is difficult to gauge the impact on global prices.
For Egyptian ones, the rejection looks inflationary, with merchants likely to put a risk premium into offers.
“Many suppliers are unsympathetic with [tightened ergot requirements], which means Egypt will face the prospect of fewer offers and higher prices,” traders at a major European commodities house said.
Hedge fund shift
Still, more important for Chicago wheat prices was data late on Friday showing that hedge funds had cut their net short in the grain by nearly 20,000 lots in a week, to 50,000 contracts, the lowest since before Christmas.
While this may appear an upbeat sign for prices, in terms of apparently improved hedge fund sentiment, an alternative interpretation is that the shift has made the short bet look less “crowded” and more manageable, and so may encourage fresh entrants.
Benson Quinn Commodities said that short-covering in grains overall could prove “a bearish catalyst moving forward as the funds will have the capability to reload on the short side.
“The size of the Chicago position does not look supportive.”
‘No longer supportive’
There was similar thinking over corn futures and options, in which hedge funds cut their net short by more than 70,000 lots to some 87,000 contracts.
“This likely has been squared up even further through the end of the week,” Benson Quinn Commodities said, adding that the fund position “will no longer be a supportive feature in the market” as has been the case of late.
Corn for March dropped 0.7% to $3.69 ¼ a bushel, although finding support at its 10-day moving average just below $3.69 a bushel.
The drop in oil prices was a negative too, with corn tied to energy through its use in the US largely to make ethanol.
‘We remain bullish’
Not, it has to be said, that all commentators are bearish on corn price prospects.
At Futures International, Terry Reilly said that “we remain bullish corn, on strong demand (not China), rain delaying first corn harvesting progress in Brazil, dry weather in Argentina and short production in South Africa leading to demand increases by other southern African countries” among other factors.
In fact, the weather outlook for Argentina appears to have improved for Argentina, with MDA forecasting showers this week for many regions, and saying that “the rainfall outlook is wetter” further ahead – albeit potentially too wet for some areas.
For South Africa, “limited shower activity is allowing dryness to expand”, the weather service said, and indeed Johannesburg futures did buck the downward trend in Chicago.
White maize for July gained 2.5% to 4,883 rand a tonne, while yellow maize for July was up 0.8% at 3,543 rand a tonne.
‘Could be supportive’
Back in Chicago, soybean futures outperformed corn and wheat by easing a more modest 0.3% to $8.79 ¼ a bushel for March, although this was enough to take the lot back below its 100-day moving average.
But then, they missed out on the short covering by speculators in the latest week. In fact, hedge funds raised their net short in soybeans a touch, by 4,683 lots back above 30,000 contracts.
“This could be supportive going into Monday and the new month,” Benson Quinn Commodities said.
And there remain concerns about wet weather in Brazil slowing harvesting of ripe crop (although improving conditions for late-seeded crop too).
“Rains in central and southern Brazil may cause wetness to redevelop,” MDA said.
‘Aggressively offering meal’
Chicago soyoil for March eased by 0.2% to 30.83 cents a pound, while the other main soybean processing product, soymeal, fell by 0.6% to $270.90 a short ton.
“Soymeal has been the weak link of the complex with Argentina aggressively offering meal into world markets,” Benson Quinn Commodities said.
Argentina, the world’s top exporter of the feed ingredient, is expected to see exports gain further ground thanks to reforms to export regime and currency trading enacted by the country’s new government.
Back in the US, Futures International’s Terry Reilly said that a “back-up” of supplies of distillers’ grains, a corn-derived rival to soymeal, “has left some traders wondering if the soybean crush will slow further from an increase in feed competition”.
US exports of DDGS to China are expected to slump thanks to an anti-dumping claim by Beijing.
