(Agrimoney) – What did the Federal Reserve’s decision not to raise US interest rates mean for agricultural commodities?
Richard Feltes at Chicago grain broker RJ O’Brien looked to a part in the Fed statement that “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term”.
That “is not the call to arms hoped for by commodity bulls,” Mr Feltes said.
Dollar eases
Still, one positive factor is the dollar is heading south again, falling by 0.5% against a basket of currencies, after a 0.8% drop in the last session, making dollar-denominated exports, such as many ags, more competitive.
After all, there was not just Wednesday’s decision itself to hold with ultra-low US rates to factor in, but a revised assessment of the chance of an increase in borrowing costs later in the year.
In fact, four members of the Fed’s Open Market Committee pushed back to 2016 the time when they expect a rate rise, a factor which appears to be taken seriously by investors.
Futures markets, which were ahead of the Fed decision estimating at 44% the chance of a rate rise next month, are now putting the probability at just 18%, according to Bloomberg.
For December, the chances of a rate rise have fallen to 44%, from 64%, with a lower chance of a rise in borrowing costs implying less support for the dollar.
‘Export sales were good’
The falling dollar certainly gave one reason for investors to turn a bit more upbeat on grains.
The day of the week offered another, with Fridays sometimes tempting investors to take profits and close positions, causing some reversal in the prevailing trend (which has been downward for corn and wheat this week, but more positive for soybeans).
And for soybeans at least, there is some greater optimism over exports, with a Chinese official visit to the US expected to unveil a large so-called “frame” order, pegged by ADM Investor Services at potentially 110m bushels, while latest weekly US export sales data were well received too.
“Export sales were good last week, at 912,000 tonnes,” said CHS Hedging, adding that with a further 298,000 tonnes of business unveiled through the US Department of Agriculture’s daily alerts system, “next week’s sales should also be good”.
‘Producer sales starting to increase’
Still, soybean futures actually underperformed, in easing 0.1% to $8.84 a bushel in Chicago for November delivery as of 09:45 UK time (03:45 Chicago time).
And there is cause for bears to feel that this might continue, with Brazilian growers at the start of a sowing season which is expected to see area rise by 3-5%, and the US harvest ramping up, implying pressure on values as supplies surge and the last vestiges of weather premium are removed.
“US producer new-crop sales are starting to increase across the lower US,” said Terry Reilly at Chicago-based Futures International, noting that for soybeans “spot basis weakened at selected and processor locations”.
It has to be said that basis is not falling, yet, everywhere, with Steve Freed at ADM Investor Services saying that “cash barge basis has firmed as new crop boats arrive at the US Gulf [ports] with Soybean pipeline still tight”.
Still, he added that “most traders look for soybean prices to drift lower into the end of the year unless there is a weather problem in South America”.
Slow exports
But is there nothing like a bearish consensus to send prices rising?
There were plenty of downbeat talk over corn andwheat futures too, especially after soft US export data for last week released on Thursday.
“New crop US corn sales of 9.34m tonnes are 3.70m tonnes behind last year—a 28% lag,” said RJ O’Brien’s Richard Feltes.
That gap “will likely widen in coming weeks amid hand-to-mouth importer buying, prospects for a gain in US corn area, and the repeated failures of corn rallies since mid-July”, undermining a sense of urgency among buyers.
‘Fund long liquidation’
CHS Hedging said that the pace of US corn export sales “early in the marketing year continues to be less than needed to meet USDA projections” for the whole of 2015-16.
“World values do not support a major increase in US corn exports.”
ADM Investor Services’ Steve Freed said that the “approaching US harvest and slow export demand pace may be triggering fund long liquidation.
“US cash barge export basis has dropped on fears of increase harvest pressure and slow export demand.”
Yield ideas
Sticking to the harvest theme, at Futures International, Terry Reilly said that “US weather is favourable for harvesting efforts, and if the weather holds this way, corn prices could continue to decline back to early September levels on seasonal pressure”.
That said, there is still some talk of US corn yields coming in below expectations, although it has to be highlighted that such ideas are not universal.
“It’s still very early in the Midwest harvest yield story but so far, one cannot make a strong case that USDA has grossly overstated yields,” said RJ O’Brien’s Richard Feltes.
Nonetheless, corn futures for December gained 0.6% to $3.82 a bushel.
‘Prices continue to slide’
Wheat futures fared even better, gaining 1.0% to $4.86 ¼ a bushel for December delivery.
There is of course the boost to demand sentiment from a further tender by Gasc, the Egyptian grain authority.
That said, US wheat looks unlikely to win an order, even if it is tendered.
Steve Freed highlighted that “European Union and Russia wheat prices continue to slide” as they continue to try to offload wheat after bumper harvests.
And with mixed success. Official data on Thursday showed the European Union exporting 525,000 tonnes of soft wheat, taking the total this season to some 4.2m tonnes, down from 5.8m tonnes as of the same period of 2014-15.
Terry Reilly said that “the lagging soft wheat export commitments and weekly marketing year high soft wheat import licences added to the negative undertone in EU wheat futures” in the last session, when the December contract eased 0.7% to E167.00 a tonne.
‘Potential to raise crop worries’
Still, there are some weather niggles regarding wheat sowings ahead of the 2016 harvest.
In the US, “weather forecasters expect hard red winter wheat regions to receive rainfall through the weekend,” said Tobin Gorey at Commonwealth Bank of Australia.
“Famers though will have to contend with a drier bias thereafter that has the potential to raise crop worries.”
For Russia, Terry Reilly noted that “Speedwell Weather mentioned wheat areas saw 33%-below-normal rainfall since August and dry pattern will continue to last over the next two weeks”.
‘Well short’
Elsewhere, cotton for December eased 0.3% to 62.24 cents a pound in New York, undermined by soft US export sales, at a total of 101,000 running bales.
Louis Rose at the Rose report said that “demand for US stocks for export continues to increase week on week, although net sales again fell well short of the weekly pace required” to meet the USDA’s target of 10.2m bales for 2015-16, needing more like 150,000 running bales a week.
Kuala Lumpur palm oil dropped 0.6% to 2,116 ringgit a tonne as profit-taking continued, encouraged by a stronger ringgit, which gained 1.1% against the dollar, making Malaysian exports less competitive.
