Grains accelerate revival on US heat fears

(AgriMoney) – Grains and oilseed prices accelerated their recovery amid growing concerns over a US heatwave which questioned ideas of megaharvests this year, catching out hedge funds which had been banking on lower prices.

Many commodities struggled on a day marked by further strength in the dollar, which gained 0.5% against a basket of currencies, helped by a solid start to the US corporate earnings season.

The CRB commodities index stood 0.1% higher in late deals, with some soft commodities, such as arabica coffee, posting declines.

Arabica beans for September closed 1.0% lower at 122.25 cents a pound in New York for September delivery, deepening a decline over which the International Coffee Organization warned of potentially “devastating” effects for producers.

‘Drier weather profile’

However, wheat, soybeans and, especially, corn enjoyed strong gains, centred around fears for hot Midwest weather, with one spell this weekend to be followed by another late next week.

This is poor timing for corn pollination, which is beginning to ramp up, and which is a heat-sensitive process.

“The drier weather profile that is expected to extend for the next 10 days in the south west with some ridging expected further east through the weekend is the catalyst in the corn,” Benson Quinn Commodities said.

At RJ O’Brien Richard Feltes said: “The weather leans positive [for prices] as morning weather models confirm extended dryness for the south west 25% of key US row crop areas into the third week of July.

“The western Delta also on track for below average precipitation that is already developing across Arkansas and northwest Missouri.”

Overexcitement?

There was some scepticism around, with WxRisk.com pointed that “over the western portions of the western Corn Belt temperatures reach 91-95 degrees Fahrenheit, which is not that hot for mid-July.

“The Plains see a lot of temperatures of 97-103 Fahrenheit. But the heat retreats west early next week because of a strong cold front that moves into the western Corn Belt.”

And as for the second round of heat, WxRisk.com said that “some data suggest this second round of heat moving into the western Corn Belt and Delta could be hotter than what we will see this coming Friday Saturday and Sunday.

“But not all data supports this idea.”

Furthermore, Conab, the Brazilian crop bureau, lifted its estimate for the domestic corn crop this year by 600,000 tonnes to 78.5m tonnes, nudging the figure for soybeans 200,000 tonnes higher to 81.5m tonnes.

Hedge fund positioning

However, the urge to inject risk premium back into prices was supercharged by the fact that it caught the market off guard, and leaning the other way with its positions.

Not only were grains and oilseeds technically oversold, to a factor of 2.8 times in the case of December corn, according to US Commodities.

Hedge funds had also been betting heavily on lower prices, hiking their short positions in futures in corn, soybean and wheat futures and options in the week to July 2, overnighted regulatory data showed.

That left prices prone to a spike if expectations of huge crops took a knock, as hedge funds covered some of these short lots.

Temporary surge?

There is no certainty the rally will continue.

Mr Feltes said: “Does the current row crop rally have the upside potential of recent summer rallies?

“We think not given largely favourable US temperature pattern, above average US spring and early summer rainfall, large 2013 S American crops, slowing Chinese economic growth and the ongoing shift out of commodities to equities.”

However, there was enough buying power to lift December corn more than 4.5% at one point before Chicago’s best-traded lot eased back a little to finish at $5.21 ¾ a bushel, up 4.2% on the day.

New crop November soybeans ended 1.9% higher at $12.76 ¼ a bushel.

‘Risk of a grain downgrade’

For wheat, the prospect of hot US weather is less concerning, coming amid the winter wheat harvest, when dryness allows combines to make speedy progress.

Indeed, the undue wetness in some areas of the Midwest, which has helped get row crops off to a decent start, has encouraged disease and prevented harvesting in some soft red winter wheat areas.

However, there was more to a lift from fellow grain corn in a rise in September wheat in Chicago, with Russian officials, for instance, confirming damage to crops from undue dryness.

“There is a risk of a grain crop forecast downgrade,” agriculture minister Nikolai Fyodorov said, with the previous forecast being a wheat harvest of 54m tonnes.

“But some regions said that the last rains eased the situation, at least for spring grains,” he said.

“So we are not changing our forecast as of now.”

‘Chinese buying spree’

Furthermore, there is continued comment over China’s strong start to 2013-14 for wheat imports.

“Traders coming back from a holiday week were surprised by the announcement of active grain sales,” Paul Georgy at broker Allendale said.

“Wheat continues to find support from the Chinese buying spree. China has now secured 75% of last year’s soft red winter wheat commitment,” US Commodities said, following purchases of 1.3m tonnes from the US over the past week, despite talk of orders from Australian and France.

And, indeed, a Bloomberg survey said that Chinese-based analysts expect Chinese wheat imports of 5.5m tonnes in 2013-14, well above the 3.5m tonnes that the US Department of Agriculture is forecasting.

Prices rise

That gives traders another reason to anticipate the USDA’s Wasde report on Thursday, when it will update world crop supply and demand forecasts (the domestic corn and soybean numbers being the main course).

But for now, September wheat added 2.2% to $6.77 ½ a bushel in Chicago.

In Europe, Paris wheat for November added 1.6% to E196.75 a tonne, while London wheat added 1.6% to £169.45 a tonne.

Weakness in sterling – which dropped to a three-year low of $1.4812 against the dollar, after official manufacturing data showed a 0.8% decline last month from May – added an extra support to sterling denominated assets.

Indeed, cocoa for September added 1.2% to £1,526 a tonne in London, while adding only 0.6% to $2,186 a tonne in New York.