(Agrimoney) – If there was one worry that traditionalist investors may have had during the rally in most ags in the last session, it was that oats signally failed to join in.
In fact, the best-traded July contract tumbled 2.6% in Chicago, while the spot May lot dropped 2.9% to $2.51 ¼ a bushel, the weakest close for a front contract in nearly five years.
The cause of the slump was easy enough to work out, after Statistics Canada estimated sowings of the grain in Canada, the top exporter, at 3.65m acres this year, well above the 2.80m acres last year.
“Oats futures were on the defensive as a result, and July oats reached contract lows,” said Terry Reilly at Chicago-based broker Futures International.
The issue was whether there will be an effect, in that oats have a reputation as something of a leading indicator for other grains.
“Oats knows,” goes the Chicago adage.
Nasdaq record
And certainly grains were lower in early deals on Friday, when oats themselves shed a further 1.5% for July delivery to stand at $2.51 ¾ a bushel as of 09:45 UK time (03:45 Chicago time), well below Christmas-time highs above $4.50 a bushel.
The losses came despite as further decline in the dollar, which lost 0.5% against a basket of currencies, so improving the affordability of dollar-denominated exports such as many commodities.
A series of soft economic data, including Thursday’s news of a sharp fall in home sales during March, has prompted investors to push back expectations for the timing for when the Federal Reserve may start raising US interest rates.
Share price rises are back in the spotlight too, after the Nasdaq Composite closed the last session 0.4% higher at 5,056.1, finally beating its closing peak of 5,049 set in March 2000, marking the height of the tech boom.
That said, rising shares can be a mixed blessing for commodity markets, in potentially pulling money away.
‘Comfortably short’
But as to whether the downside for grains will be significant, there are reasons to suspect that, for now, price falls may be limited, given the extent of short positions that hedge funds already have.
(As of Tuesday last week, speculators were record short on US-traded agricultural commodities. Updated data will be available later on Friday, after the market close.)
The extent of the shorts runs against a seasonal pattern of hedge funds building long positions during the spring, injecting risk premium to account for (inevitable) weather scares.
However, “against a backdrop of ample global wheat, corn and soybean supplies—managed funds have remained comfortably short into late April,” said Richard Feltes at broker RJ O’Brien.
One for all
Comfortably, or uncomfortably?
The negative positioning “could change by mid to late May if growing conditions are perceived as unfavourable,” Mr Feltes added, noting as potential trigger points threats such as wetness in the US South and south eastern Corn Belt, or support to US cash prices from a reluctance of farmers to sell up.
Any persistent dryness in the former Soviet Union could prove a spur, or a further lack of rain in the northern US, including the spring wheat belt, where the lack of moisture is speeding sowings but raising concerns over germination.
Mr Feltes added: “It is important to note that ag markets don’t need across-the-board adversity in all three crops [corn, soybeans and wheat] to trigger short covering.
“Perceived stress on one crop could trigger short covering in all ag markets.”
Sowings speed-up
The main grains followed oats lower in early deals, but not so enthusiastically, with corn faring worst of Chicago’s big three with a drop of a modest 0.3% to $3.75 ¾ a bushel for July delivery.
That said, the contract earlier, in touching $3.74 ¼ a bushel, reached its lowest in six months.
The grain is being undermined by expectations of a mass pick-up in US sowings this week from a rain delayed start, with drier and warmer conditions in many areas allowing farmers to get cracking.
Market expectations are that US Department of Agriculture data on Monday will show US corn sowings 21-25% completed – still behind the average of 28% by then, but well up from the 9% a week before.
‘Planting risk is receding’
“Weather forecasters continue to forecast improving conditions for fieldwork over most of the Midwest but they are now expecting the soggy areas of the eastern Midwest to shrink,” said Tobin Gorey at Commonwealth Bank of Australia.
“Planting risk is receding in the US’s major corn growing region.”
Furthermore, world production prospects received a boost on Thursday, when the International Grains Council lifted its forecast for world corn output in 2015-16 by 10.7m tonnes to 951.4m tonnes.
The upgrade was thanks in the main to improved expectations for output in China, Europe and Mexico, with the US estimate held at 331.0m tonnes.
‘Heavy rains and hailstorms’
On wheat, the IGC was less upbeat, cutting its forecast for world production by 4.0m tonnes to 704.8m tonnes, reflecting largely reduced expectations for China and, in particular, India, where damage from heavy rains is attracting increasing comment.
“After heavy rains and hailstorms ravaged wheat farms in India, thoughts of production could tumble by the most in 12 years,” CHS Hedging said, noting an industry estimate of an 8.0m-tonne drop to 87.9m tonnes in output.
Futures International’s Terry Reilly said: “Quality problems for the wholesale wheat within India are creating concerns for end users, and recent rain has slowed new-crop deliveries.”
Winter wheat futures still fell, under pressure from ideas of rain for dryness-hit US southern Plains areas.
But Chicago wheat for July was down a modest 0.1% at $5.00 ¾ a bushel, remaining above the psychologically important $5.00-a-bushel mark, besides ahead of its 10-day and 20-day moving averages.
Minneapolis spring wheat nudged 0.1% higher to $5.55 ¾ a bushel after underperforming in the last session, hit by higher-than-expected Canadian wheat sowings data.
Chinese dynamics
Chicago soybeans were lower, but only by 0.25 cents to $9.79 ¾ a bushel for July delivery, offered some support, ironically, by the improved prospects for US spring seedings.
This reduces the threat of farmers switching from corn to soybeans, which can be later planted.
Furthermore, the renewed rally in soybean futures on the Dalian exchange in China, the top soybean importing country, continued, with the September lot gaining 1.0% to 4,191 yuan a tonne, and taking to 4.6% gains since Monday’s close.
Chinese futures prices are being underpinned by thoughts of weak sowings, with analysts seeing a drop of at least 10% in the country’s soybean plantings this year, with farmers switching to corn, which offers better returns prospects.
