(Agrimoney) – It’s always one of those questions, after a futures contract soars or plunges its daily price limit, how much further would values have gone without the exchange caps on movement? For Chicago soymeal, it looked like the limit down, $20-a-short ton finish lower in the benchmark December contract in the last session was not too far off fulfilling selling pressure. “Synthetically, soymeal traded $3.00-4.00 a short ton lower basis December, to around $374-376 a short ton, just before the settlement,” said Terry Reilly at Futures International. And that was where the contract was sat as of 08:30 UK time (02:30 Chicago time), at $374.80 a short ton, a drop of 0.9%, albeit after reaching $372.10 a short ton earlier, only to bounce just before testing 50-day moving average (which it has not touched in three months).
‘Big export sales’ to come? If that finding of some technical support was one small positive for the soy sector, there was another in data overnight showing a surprisingly large drop in the condition of the US soybean crop.
The US Department of Agriculture cut by 2 points its estimate of the proportion of US soybeans rated “good” or “excellent”, more than the 1-point drop the market had expected. (That said, at 70%, the proportion of the US soybean crop in good or excellent health is hardly a big worry, and up 7 points year on year.)
Meanwhile, the demand side of the picture could come up roses too, with Benson Quinn Commodities forecasting the USDA will later report “big daily export sales” of the oilseeds, based on strong cash markets bids on Tuesday afternoon”.
Indeed, the broker blamed the extent of the drop in soybeans in the last session in part on demand disappointment. “I think market was looking for big export sales under daily reporting on Tuesday morning and were blanked, probably due to holiday – not that there weren’t any with rumours last week that several cargoes were sold to China.”
‘More rain forecast’
Nonetheless, Chicago’s benchmark November soybean contract stood 0.6% lower at $10.70 ¾ a bushel in early deals, surrendering indeed its 50-day moving average, which it had managed to crawl back above by the last session’s close. Much comment was made of the improved US growing conditions.
“Rain has fallen in many of the driest areas in the lower Midwest, with more forecast for this week too,” said Tobin Gorey at Commonwealth Bank of Australia.
Meteorologists say crop conditions, which were already in good shape, will benefit considerably.”
And while the near-term weather is perhaps more important for corn, which is undergoing its sensitive pollination process, the outlook has improved for soybeans’ vulnerable month of August too.
Richard Feltes at RJ O’Brien flagged that Commodity Weather Group had, in its outlook, “reduced dryness across the north west Midwest for August in addition to noting the risk that August temperatures in the north west Midwest may not be as hot”.
‘Uphill battle’
The market narrative will likely trigger “additional row crop fund liquidation into late July as long as temperature forecasts continue to be stable to lower”, Mr Feltes added. “Bulls are fighting an uphill battle against underwater managed fund row crop longs and the absence, as yet, of any serious threat to US corn and soybean yield potential.”
In fact, corn, with its “improving prospects for favourable pollination and large managed fund long is most vulnerable to further liquidation, amid the increasing odds of 2.2bn-2.3bn bushel US corn stocks” at the close of 2016-17. Ideas of inventories at that level “will keep end-users sidelined”, and give them more time to see how Ukraine’s crop turns out too.
Sterling slides again. The broader market story was also supportive of fund liquidation, with Brexit fears reviving to send sterling to a 31-year low against the dollar, and fostering declines in Asian stock markets too. (London’s FTSE 100 share index itself posted only nominal losses in early deals, although the weakness of sterling is providing support for sterling-denominated shares in its many multinational companies.)
The safe haven of gold hit a two-year high. That said, not all risk assets were depressed, and oil managed small gains, with Brent crude gaining 0.3% to $48.08 a barrel.
Spreads unwound
Back in Chicago, corn for December was 0.5% lower at $3.56 ¼ a bushel. And nor did wheat stage much resistance to selling this time, after in the last session managing a strong bounce from 10-year lows – to end in positive territory.
Was this rebound down just to a technical factor, and grain liquidation see-saw? “US wheat finished higher as traders unwound long corn-wheat and long soybean-wheat spreads,” noted Terry Reilly at Futures International, noting that funds bought an estimated 2,000 Chicago wheat contracts
‘Correction needed’
In fact, the weakness in corn poses a negative for wheat too in increasing the price competition for use as livestock feed, a demand both grains need to avoid large inventory build-ups. “The wheat‑corn spread has now pushed away from recent lows,” CBA’s Tobin Gorey said. “Kansas City futures will need to price themselves to move against corn in order to channel more wheat into feed rations.”
That said, there were other interpretations, with Benson Quinn Commodities saying that the “correction” in corn’s unusually low discount to wheat “was needed”. “I wouldn’t be surprised to see this spread continue to correct as wheat has an advantage in the feed ration.”
‘Finding some demand?’
Furthermore, export news has provided some positive demand news for wheat, with the US shipping more than 560,000 tonnes of the grain last week. “This was the third week in a row that wheat inspections topped 500,000 tonnes,” said Joe Lardy at CHS Hedging. “All of last year [2015-16] wheat topped 500,000 tonnes only nine times. But five weeks into this marketing year it has already happened 3 times. “Maybe the falling wheat prices are finding some demand.”
Whatever, Kansas City wheat for September was down 0.4% at $4.14 ¾ a bushel, while Chicago soft red winter wheat, the world benchmark, traded for September 0.4% lower at $4.31 ¾ a bushel
