(Agrimoney) – Could the first rise in US interest rates in nearly a decade be overshadowed, on ag markets at least?
Sure, it will be momentous if the US does lift interest rates, as most investors believe, putting a 78% probability on an increase of 0.25-point increase, according to Bloomberg calculations.
Higher interest rates imply a stronger dollar which in turn makes dollar denominated exports, such as many commodities, less competitive, although with a rate rise seen on the cards for months, the dollar may not show so much reaction to a move upwards.
What actually may be more influential are comments from Janet Yellen, the Federal Reserve chair, in giving signals on when further rate rises might come, but her press conference is not due until 13:30 Chicago time (19:30 UK time), ie after US grain and softs markets have closed.
(The interest rate decision is out at 13:00 Chicago time, giving grain investors a little time to react.)
Peso news too?
But for ag investors, the more important currency worry of late has not been so much the dollar as the Argentine peso, and what might happen when Mauricio Macri, the new president, relaxes currency exchange controls.
The betting is that it will take the rate, currently fixed at 9.7 pesos to $1, nearer to the black (or so-called “blue”) market rate of 15 pesos to $1, so improving the affordability of Argentine exports.
With Mr Macri having already ditched export taxes and restrictions on grains, and having cut the soybean export levy by 5 points to 30%, the fear is of a flood of crop releases by Argentine farmers who have been hoarding crops as a dollar-denominated hedged.
And the peso liberalisation process may begin even in a few hours time.
Benson Quinn Commodities flagged reports that Argentina’s new administration is “positioning to devalue the peso prior to the Holiday break, possibly as early as Wednesday.
Certainly, an announcement “is expected before Christmas with trade anticipating drop in peso from 9 to $1 to around 12 to $1”.
‘Brazilian export offers dry up’
Anyway, with such uncertainty abroad, movements in ag markets were somewhat limited in early deals, with what direction there was largely downward.
Corn futures, for instance, eased 0.3% to $3.76 ¼ a bushel for March, as of 09:15 UK time (03:15 Chicago time), albeit staying marginally ahead of its 10-day moving average, while the 40-day line, at $3.77 ½ a bushel, capped the upside.
OK, “producer selling in Argentina is expected to increase later this week after the Argentine president resets the local currency”, Terry Reilly at Futures at Chicago–based International noted.
But on the more positive side for prices, Richard Feltes at RJ O’Brien noted that “no Brazilian corn is offered for export”, as “domestic bids are better, and farm selling scant”.
Moves later in Chicago futures may be determined somewhat by weekly US ethanol production data, which will be viewed with particular interest given movements in energy markets.
(Brent crude was actually back on the decline in early deals, down 2.2% at $37.62 a barrel, but above the six-year low of $36.33 a barrel reached on Monday.)
Hard vs soft
Wheat, of which there is talk of 2m tonnes of Argentine exports being lined up, was a little lower too, by 0.1% to $4.94 a bushel for Chicago soft red winter wheat.
That said, that represented outperformance over Kansas City hard red winter wheat, which fell by 0.4% to $4.90 ¼ a bushel, with its effort stalling to close further its – unusual – discount to its lower-protein-content Chicago peer.
After making rapid ground to reverse the discount from an early November high of $0.26 ¼ a bushel, March basis, the market has been reluctant to let the discount fall to zero, let alone reverse it to the more typical premium.
But then, Kansas City-traded hard red winter wheat (the most common type grown by US farmers) is relatively high priced against some foreign supplies, and unlike soft red winter wheat, lacks the supportive story of successive poor US harvests and tight supplies.
Kansas City vs Paris vs Sydney
In fact, the discount of Kansas City wheat futures to Paris soft milling wheat futures has hit “the lowest levels since early August”, Tobin Gorey at Commonwealth Bank of Australia said – even while highlighting a 1.9% rise to E178.75 a tonne in the last session in Paris wheat futures for March.
The rise in Paris was spurred by a weaker euro, he added, which warranted higher values of what is a primarily dollar-denominated commodity.
Kansas City-traded wheat has closed its discount to Sydney traded wheat too, to some Aus$25 a tonne.
While Australian wheat “is still not ‘cheap'” from a comparative perspective, “it is in a bracket of basis levels we have rarely seen in this half of the year”, Mr Gorey said.
‘Under pressure’
Back in Chicago, soybeans for January actually managed small gains, of 0.1% to $8.68 ½ a bushel, albeit representing only a small reversal of the recent losses which have been encouraged by worries of a slew of Argentine exports.
“If the downward trend continues beans may find themselves flirting with season lows once again,” CBA’s Tobin Gorey said.
In fact, the “market remains under pressure ahead of anticipated devaluation of Argentine peso and what is now looking to more likely be a US blender rather than producer biodiesel tax credit,” Benson Quinn Commodities said.
Lawmakers have been toying with the idea of switching a biodiesel tax credit to producers, which would then mean it applying only to domestic supplies, rather than also to the imported fuel which makes up a proportion of US use, but is a move which has attracted some controversy.
“The blender versus producer biodiesel credit is in the hands of Congress,” Benson Quinn said.
“It is not included in the latest House spending bill while the senate bill appears to be favouring the blender.”
Soyoil slips
All this matter for soybeans as biodiesel is made from vegetable oils, and in the US notably soyoil.
Soyoil for January in fact fell by 0.7% to 30.48 cents a pound, falling below its 200-day moving average, which it has not closed beneath for two weeks.
Rival vegetable oil palm oil was little help, easing 0.3% to 2,404 ringgit a tonne, feeling pressure from data on Tuesday showing a sharp drop in Malaysian exports this month.
US industry data on Tuesday on the domestic soybean crush was also negative for soyoil, in showing US inventories at 1.477bn pounds as of the end of last month, above expectations for a figure of 1.45bn pounds.
And this despite a soybean crush which, at 156.1m bushels, was well below the consensus estimate of 162.6m bushels (and indeed below the range of forecasts).
