Grains suffer as Santa Rally loses its skis

December 9th, 2014

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Category: Grains, Oilseeds

Wheats-and-Cereals450x299(Agrimoney) – Have investors stopped believing in Father Christmas?

Often markets enjoy a so-called “Santa Rally” in December, enjoying price gains attributed to factors ranging from a feel good factor among investors to anticipation of the new year bringing in new money (and causing the so-called “January effect”).

On Tuesday, however, the festive fillip – which has, for instance, seen Wall Street shares hit a record high, besides taking Shanghai stocks up 25% in four weeks – ran out of Christmas cheer.

Saint Nicholas’s sleigh hit speed bumps, amid disappointment over Japanese economic growth data, and Chinese trade statistics

“Yesterday’s disappointing Japan gross domestic product and China trade balance set off the global growth alarm bells once again,” said Stan Shamu, strategist at IG.

Oil falls again

After a 0.6% dip in the Dow Jones Industrial Average overnight, shares – eventually – tumbled in Asian markets, if only after setting a four-year high in the case of Shanghai stocks.

They subsequently tumbled, with the key index unable to hold the turf above 3,000 points, and closed down 5.3%.

Meanwhile, Brent crude kept commodity markets on edge by falling a further 0.8% to $65.68 a barrel, and earlier hitting a fresh five-year low of $65.93 a barrel.

It bodes ill for the CRB commodities index, which came within an ace of a five-year low in the last session, and this time looks certain to achieve that aim.

‘Contemplating big decisions’

Indeed, Tobin Gorey at Commonwealth Bank of Australia highlighted the broader negative impact of lower oil prices on commodities.

“Investors with commodity allocations in their portfolios in particular are contemplating big decisions,” he said.

“The nature of many of those commodity allocations means that crude oil and downstream products are the dominant determinant of commodity return performance.”

And with gains in some other commodities (gold did make some headway on Tuesday) unable to make up for losses in oil “should investors decide to reduce the share of commodities in their portfolios, they will sell all commodities, not just crude”, Mr Gorey said.

Dollar eases

Certainly, grains were not doing much to warrant a reassessment of negative thinking, posting losses despite a fall in dollar, which dropped 0.3% against a basket of currencies, failing to set a five-year high (yet) for the first time in seven sessions.

A weaker dollar improves the affordability of dollar-denominated exports, such as many agricultural commodities, for buyers in other currencies.

In classic “turnaround Tuesday” fashion – the idea in Chicago that grain futures in the second session of the week reverse the trend of the first – wheat for March fell 1.2% to $5.91 a bushel, with investors dubious over whether it has the credentials to mount a sustained return above $6 a bushel.

At least, not without a return of the fears of a squeeze on Russian exports, or more tangible signs of winterkill thanks to dry and cold weather.

‘Hard to get too excited’

“World supplies aren’t ample enough to completely ignore potential export restrictions out of the Black Sea,” said Jonathan Watters at Benson Quinn Commodities.

“But it is hard to get too excited so far ahead this far away from spring,” when any crop damage from poor conditions in parts of the former Soviet Union could be confirmed.

Another big factor on the agenda is the prospect on Wednesday of the US Department of Agriculture’s monthly Wasde crop report, which is expected to lift by 10m bushels to 654m bushels the forecast for US wheat stocks at the close of 2014-15, reflecting a soft export performance.

There are expected to be alterations to estimates for some foreign crops too, with Richard Feltes at RJ O’Brien noting talk of downgrades to Argentine and Australian harvests.

Still, estimates for Canadian and former Soviet Union crops will “likely post additional gains”, he added.

Wheat for March stood 1.1% lower at $5.91 ¼ a bushel at 09:20 UK time (03:20 Chicago time).

‘Supplies far from short’

For corn, the Wasde is expected to see an upgrade to the estimate for US stocks too, by 19m bushels to 2.027bn bushels.

Mr Feltes said: “Corn supplies are adequate, in the US and globally, and will be far from short even after a 2m-3m acre cut in 2015 US corn area”, as many analysts expect.

And the soft US export performance, as revealed on Monday in weekly US cargo inspection data, continued to attract comment.

“US corn offers have gotten more competitive, but still don’t really have the edge over other originations,” Benson Quinn Commodities said.

‘Can’t see a demand driven rally’

Another US broker said: “Our corn price remains relatively high on the world market and we should not look to exports for a corn rally this year.

“In fact, we can’t see a demand driven rally for 2014-15 corn period.

“Corn used for ethanol has already been projected at 5.15bn bushels,” questioning the scope for any upgrade, “and we don’t see any growth in feed usage given the low animal numbers”.

And, from a technical perspective, with an early attempt to hit $4 a bushel failing, corn for March stood down 0.6% at $3.87 ¾ a bushel.

China deal?

Soybeans fared better, in easing a modest 0.3% to $10.41 a bushel, having already, last week, secured their psychologically-important price point, of $10 a bushel.

Furthermore, the Wasde is expected to trim the estimate for US soybean stocks, by 23m bushels to 427m bushels – albeit still being a figure that represents ample supplies.

And there is plenty of talk too about reports that Chinese soybean buyers will on December 16, in Chicago, sign agreements to buy a large amount of US soybeans.

Such announcements are viewed as largely ceremonial, but as potentially leading to a short-term rush in sales announcements.

Slow South American selling

Terry Reilly at Futures International noted that Chinese buyers “held a similar ceremony in Milwaukee earlier this year where they contracted for 4.8m tonnes of US soybeans.

Nonetheless, “only about 2m tonnes showed up in the export sales report shortly following the event”.

Indeed, as to whether such announcements have momentum, “the Chinese have been known to front-load their US bean purchases ahead of any weather events that may arise in South America only to abruptly cut off new purchases by spring”, one US broker said.

Meanwhile, on the South America front, AgRural revived concerns about the slow pace of forward selling by Brazilian farmers of their crop, saying they have hedged 26% of the forecast 2014-15 harvest, below the average of 39%.

Delayed selling now means more selling ahead.

‘Accumulating cobwebs’

Among soft commodities, cotton for March added 0.1% to 59.38 cents a pound, proving, again, reluctant to stray far from 59-60 cents a pound.

“Futures traders must be accumulating cobwebs in these conditions,” CBA’s Tobin Gorey said.

The Wasde is expected to lift estimates Indian and US output, but trim ideas on Chinese supplies.

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