(Agrimoney) – Many investors may be bearish on grain and oilseed futures, with the US on course for record corn and soybean crops, and most places bar the US looking positive on wheat.
But downward movement looks like it may be becoming a little bit harder to secure.
As on Friday, when soybeans enjoyed a reasonable bounce, helping ease pressure on grains too.
Not that, currently, there looks much to suggest a sustained rally. But the market is beginning to look less of a one way street.
‘Can’t keep going down’
One reason, of course, is that prices in grains especially have already lost quite a bit of altitude.
“You can’t keep going down in corn 10 cents a bushel every day,” Jason Roose at US Commodities told Agrimoney.com.
The December contract has lost more than $0.50 a bushel since early May, taking it below $4.50 a bushel, and closing in on levels around cost of production in the US, the top grower, which typically offer a bit of resistance.
US Department of Agriculture data imply a production cost of about $4.30 a bushel for last year, although this varies widely of course between farms with different yield prospects.
‘Below-normal rainfall’
Indeed, with so little risk premium on the market, there is little allowance for any threat of poor weather cropping up.
And there is a little chatter now emerging of less than perfect conditions in some areas.
“It’s worth noting that there is a region – north east Iowa, south east Minnesota, south Wisconsin and north west Illinois – which has experienced below-normal rainfall over the last 30 days,” Brian Henry at Benson Quinn Commodities said.
He also flagged that on Thursday, “the midday run on the GFS model is perhaps a bit drier and warmer than previous runs”, and noted “talk of a high pressure ridge developing”, if adding that the bottom line is that “for now, the weather pattern supports good development”.
‘Leaning hot’
Commodity Weather Group meteorologists have also noted that the GFS weather model is “leaning hot”, although after its failure two years ago during the US drought, many observers prefer the European model.
Indeed, CWG itself sees active rains in the central Plains and Midwest, and temperatures around normal, or maybe a little cooler, into mid-July, except for areas west of the Missouri river.
Whatever, it all helped bring a more positive stance to the market heading into the weekend, if only thanks to investors taking profit on short positions in case the weather models take a more convincing turn hotter and drier over the weekend.
Excessive heat and dryness would bode ill for corn pollination, which occurs in earnest in the US next month, and which is in turn a big determinant of yields.
Palm springs
Soybeans also had help elsewhere in the oilseeds complex from palm oil, which jumped 1.6% to 2,439 ringgit a tonne in Kuala Lumpur as of 09:30 UK time (03:30 Chicago time), extending a rally attributed in part to ideas of strong demand ahead of Ramadan.
Demand ideas have also received help from strength in prices of crude, with biodiesel a major use for palm oil, while the prospect of an El Nino, which typically brings dryness to South East Asia, is maintaining some production jitters.
In Chicago, rival vegetable oil soyoil gained 1.0% to 39.00 cents a pound for July delivery.
Soybeans themselves for July added 0.7% to $14.25 ½ bushel, recovering much of the ground lost in the last session, outperforming a 0.4% rise to $12.16 ½ a bushel in new crop November futures.
Indeed, the collapse in the July-to-November spread close to $2.00 a bushel in the last session raised some comment that the July lot had been oversold.
‘Concern about availability’
The rebound was also helped by a revival in soymeal, which has come under pressure from China’s decision to suspend imports of US distillers’ grains (DDGs), a rival high protein feed ingredient.
The US Grains Council in fact offered some consolation, signalling that it may not be too hard to find other homes for the DDGs.
“China’s massive purchasing has led to concern about availability in a number of other countries,” the council said said.
“From Mexico to Southeast Asia to North Africa, one of the most frequent questions is whether Chinese demand will crowd out other buyers.
“Any disruption of exports to China will create opportunities for other buyers.”
‘Lack of producer selling’
Soymeal for July added 0.8% to $473.00 a short ton.
And the reassurance over DDGs, a byproduct of corn ethanol manufacture, helped prices of con itself too, which added 0.8% to $4.47 ¾ a bushel for July delivery, which gaining 0.6% to $4.46 ¼ a bushel for the new crop December lot.
Investors also noted firm cash markets, buoyed by resilient demand and a reluctance by growers to cash out, when experience of recent seasons has shown the benefit of hanging on for a price rebound.
“Basis levels continue to firm on a lack of producer selling,” CHS Hedging noted.
‘Crop deterioration’
Wheat gained to, adding 0.5% to $5.88 ¼ a bushel in Chicago for July, helped by corn, and by ideas that the US weather has handed a further dent to domestic production prospects, this time in the form of too much rain, rather than the excessive dryness which has been the problem for most of the growing season.
“Heavy rains in the hard red winter wheat areas are raising concerns about further harvest delays and crop deterioration,” said CHS Hedging.
“With some of the hard red winter wheat areas receiving in excess of five inches of rain the concerns are going beyond harvest delays, and starting to focus on quality concerns.”
Notably, Kansas City hard red winter wheat for July outperformed, gaining 0.8% to $7.11 a bushel.
‘Prices are still too high’
Still, it has to be remembered that there is plenty of bearish talk still out there.
For wheat, for instance, Citigroup’s Sterling Smith said that “while the funds have become short they are not short enough to start looking for a short-covering rally.
At Chicago broker RJ O’Brien, Richard Feltes said that “row crop markets are on a mission to purge the remaining managed fund longs”, which remain at elevated levels.
And this when there is growing talk of a potential corn yield of 170 bushels per acre or more, and a soybean yield of 46 bushels per acre plus.
“Current prices are still too high if US row crop yields approach these record, and plausible, yield levels,” Mr Feltes said.
‘Potential for large upside move’
Among soft commodities, new crop December cotton eased 0.3% to 77.62 cents a pound, with the southern US rains more positive for spring crops in boosting development prospects.
Still, July cotton extended gains, adding 0.2% to 85.79 cents a pound, continuing to receive some glow from US weekly export data on Thursday which, at 182,700 running bales in shipments, were up 9% week on week.
Arabica coffee extended headway too, up 0.2% at 172.35 cents a pound for July delivery,
“Worries over production losses continue to keep the market supported, and as further damage is uncovered there is potential for a large upside move,” said Sterling Smith at Citigroup, referring to the debate on crop losses to early 2014 drought in Brazil, which are only now beginning to be quantified through actual harvest results.
