(Agrimoney) – Will it be third time luck for wheat bulls?
The previous two times (Monday, and last month) that Chicago soft red winter wheat futures managed to close above their 100-day moving average, they fell back again the next session.
Can the benchmark December contract, which finished back above the 100-day moving average in the last session, manage a longer sojurn there this time?
The lot was lower in early deals, but not by much, easing 0.4% to $5.24 a bushel, which kept it well above the 100-day line, at $5.17 ½ a bushel as of 09:20 UK time (03:20 Chicago time).
In fact, the contract remained just above its 200-day moving average, at a little under $5.24 a bushel, which it had not finished above for more than three months until the last session.
Millers’ quest
The very factor of the contract retaking these lines was viewed as one reason behind the grain’s strong rise in the last session, with such factors fuelling further short-covering by funds, which retain a sizeable net short in Chicago wheat.
“Trade above the 100-day and eventually the 200-day moving averages in Chicago wheat was a significant factor in Wednesday’s trade,” said Benson Quinn Commodities.
But there are other issues seen as fuelling the rally too, including signs that the poor quality of this year’s harvest (with the 2014 crop hardly a banner crop either) is feeding through in earnest into a squeeze on supplies for end users.
“Millers are becoming increasingly concerned about sourcing sufficient amount of quality soft red winter wheat supplies during the remainder of the 2015-16 US marketing year,” said Richard Feltes at Chicago broker RJ O’Brien.
He also flagged market focus on a “cancellation of Chicago wheat receipts” – ie, a retreat on ideas of physical selling through the market, and potentially a sign of higher prices in the cash market, or of buyers simply feeling they can gain higher prices from sitting on their hands.
‘Quality issues’
There remain weather concerns in many producing areas too, with some talk of a drier outlook in the southern Plains, while in Australia “winter wheat quality issues remain a concern across New South Wales due to additional rain later this week and next week,” said Terry Reilly at Futures International.
“Parts of New South Wales, will see nearly 4 inches of rain over Wednesday and Thursday,” not ideal for a crop in, or approaching, harvest.
“Ukraine’s winter grain crops, and a few southern Russia locations, have not had a good chance to develop prior to dormancy,” Mr Reilly added.
‘Last seen in the 1970s’
Still, the question for many producers is whether the strength in Chicago wheat, the world benchmark, in being fuelled at least in part by idiosyncratic factors, is really applicable to contracts in other markets too.
The answer appears to a large extent to be “no”.
A case in point is Kansas City hard red winter wheat, which thanks to its higher protein usually trades at a premium to its Chicago peer – but has now opened up a substantial discount.
Indeed, at the end of the last session, this discount hit a rarely-seen $0.33 ½ a bushel, December basis.
“A premium of that size, this close to expiry, was last seen in the 1970s,” said Tobin Gorey at Commonwealth Bank of Australia.
‘Low quality’
And the premium only widened on Thursday, as the Kansas City December contract fell by 0.8% to $4.89 a bushel.
At Country Futures, Darrell Holaday underlined the importance on relative pricing of a soft red winter wheat crop which was “low quality, and disappointing in terms of quantity.
“There are many domestic mills in the east that need soft red winter wheat for their grind as they grind flour for products that do not desire high protein wheat – crackers and cakes for instance.
“In addition, hard red winter wheat would cost them more than the soft red winter wheat by the time transportation costs from the Plains [where hard red winter wheat is grown] are factored into the values.”
‘Cannot justify higher prices’
Still, absolute, and relative, pricing of wheat could be influenced later by weekly US Department of Agriculture data on US export sales, expected to come in at 300,000-500,000 tonnes for the grain, behind the 550,287 tonnes the week before.
A smaller export sales result is expected for soybeanstoo, at 1.40m-1.80m tonnes, down from the 2.09m tonnes the previous week.
While exports have managed to beat expectations the past three weeks, traders were not so optimistic this time, with soybean futures for January easing 0.2% to $8.82 ½ a bushel.
There are other reasons too to sell the oilseed, with Mr Feltes saying that “fundamentally, we cannot justify higher soy prices given backdrop of favourable South American weather, record global soybean stocks, and slowing year-on-year growth in Chinese soybean import demand”.
There is also the potential for an increase in the official estimate for this year’s US soybean yield when the USDA’s benchmark Wasde crop is released next week.
Linn Group on Wednesday forecast a 48.0-bushels-per-acre figure, which would be comfortably a record, and push production up to 3.942bn bushels, 54m bushels above the USDA estimate.
‘Stocks are declining’
Still, one dynamic which has been supporting oilseeds is firmness in palm oil, prices of which have been helped in recent days by ideas that Indonesia’s drive to boost use of biodiesel (made from vegetable oils) might be bearing fruit after all.
Pertamina, the Indonesian state energy firm, said it does not expect to import any gas oil in 2016, citing government rules to encourage the use of biodiesel, and the government has published a list of groups which have won quota to supply biofuels to the company.
The statement has boosted hopes for results from an increase from 10% to 15% in the mandated blend level of biodiesel into transport diesel this year, with a further rise to 20% in 2016.
Oil World believes the move could boost palm oil use by some 270,000 tonnes a month during the November-April period.
“Regardless, Indonesia palm stocks are declining,” said Terry Reilly at Futures International.
Palm oil futures, have gained strongly in the last session, edged a further 0.4% higher to 2,369 ringgit a tonne in Kuala Lumpur.
Rival vegetable oil soyoil for December was 0.5% higher at 28.65 cents a pound in Chicago.
‘Baby steps’
Staying in Chicago, corn futures for December fell by 0.5% to $3.78 ½ a bushel, following wheat lower.
“Corn continues to take baby steps, whether up or down, on queue from wheat,” said CHS Hedging.
“Overall, this market is the definition of rangebound and is likely to remain that way until next week’s USDA report.”
US export sales data later is expected to come in at 450,000-650,000 tonnes for last week, down from 708,827 tonnes the week before, extending a somewhat soft export pace.
“We last heard Brazil corn was priced $10-15 a tonne below US Gulf offers,” Mr Reilly said.
“Brazil’s mammoth October corn exports should spill over to November, further undercutting US export demand.”
