AM Markets: Corn Leads Grains Higher as US Crops Deteriorate

July 18th, 2017

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Category: Grains

(Agrimoney) –  The market volatility that many traders have been missing, and was mentioned most lately by Cargill as a setback to profitability prospects, remains back in the markets.

This time, it was the turn of the bulls to take control, after a previous session when bears had the best of it, helped by worries over huge hedge fund long bets spelling selling ahead, and somewhat by more benign US weather ideas.

The hedge fund selling appeared to have a reduced influence this time, at least in early deals, although there was still some evidence of investors reacting to it.

Protein premium

…as in wheat, for instance.

The woes of the US spring wheat crop – underlined by a further drop of 1 point to 34% in the proportion rated “good” or “excellent” by the US Department of Agriculture, in a weekly condition report overnight – would appear to dictate a strong premium for protein.

(Spring wheat has a higher protein level than Kansas City hard red winter wheat which in turn has a higher level than Chicago-traded soft red winter wheat.)

And indeed, Minneapolis spring wheat for September, in gaining 2.8% to $7.81 a bushel as of 09:55 UK time (03:45 Chicago time), pressed home its advantage of Chicago winter wheat, which added a more modest 1.2% to $5.12 ¼ a bushel.

The Minneapolis premium of nearly $2.70 a bushel is well below levels around $1.00 a bushel or below which reigned until three months ago, when worries over dryness in the US northern Plains perked up.

‘Too long’

However, Chicago wheat in turn performed better than Kansas City wheat, which added 1.0% to $5.11 ¾ a bushel – so falling into a discount despite a higher protein profile.

This shift appeared a reflection of the fact that funds had built a record net long position in Kansas City wheat futures and options as of last week, compared with “just” a three-year high net long in Chicago.

Benson Quinn Commodities mulled whether funds were “too long in Kansas City”, although it did also mull whether shorts in Chicago may be increased too.

Winter wheat futures were offered some support by a return by Egypt’s Gasc to tender, and the likelihood of Tuesday seeing a continuation of the country’s strong start to 2017-18 for wheat purchases.

‘Very accident prone’

As for the US weather outlook, traders have tempered early week optimism at prospects, as forecasts have added back some heat and removed from rains from key areas.

“The weather remains too hot in many parts of the US Midwest that have corn crops with very modest moisture available to them,” said Tobin Gorey at Commonwealth Bank of Australia, adding that “that is a very accident prone combination.

“We expect there will be yield losses from this but whether these are within normal tolerances or larger is an open question.”

Benson Quinn Commodities flagged that a heat “ridge is expected to limit precipitation in the Plains and southern Midwest into the weekend.

“Expect any rains in western areas to have limited coverage.

“Temperatures are expected to be average to well above average for the next couple of weeks.”

Yield concerns

And this when the US corn crop is already going gently backwards, rated overnight by the USDA at 64% good or excellent, down 1 point week on week and the lowest figure for the time of year in a decade, bar the drought year of 2012.

Dr Mark Welch at Texas A&M University, in something of an understatement, flagged “some question as to whether the US crop will average 170.7 bushels per acre this year, the current USDA estimate, which is about 3 bushels per acre above trend”.

Chicago-based Futures International, for instance, lowered its yield estimate by 1.3 bushels per acre to 168.1 bushels per acre because of the data which, signally, showed a large decline – of 6 points to 71% – in the good or excellent reading for top producing state Iowa.

Ratings for Illinois and Indiana – the other so-called “I” states – fell by 1 point, with 12 of the reported states seeing declines, compared with only 5 seeing an increased reading, and actually provoking some question as to why the national reading did not show a bigger fall than 1 point.

Corn futures for December jumped 2.2% to $3.96 ½ a bushel.

‘Very poor’

Soybean futures gained too, but less so, by 1.0% to $10.07 a bushel for November delivery.

The USDA crop reading for the oilseed eased too by 1 point, to 61% rated good or excellent.

However, the rating is less crucial, given that for soybeans August is the key yield-determining month, bringing pod-setting, rather than July, as for corn.

Furthermore, the oilseed has suffered a couple of demand setbacks, with Monday revealing soft US export data for last week, and a below-forecast US crush reading for June in data from industry group Nopa.

At 138.074m bushels, the soybean crush reading represented “a 7% drop from last month, a 5% drop from last year, and the lowest total since September”, said CHS Hedging, while rating the US export figure as “very poor”.

‘High winds and hail’

In New York, cotton futures for December recorded smaller gains, adding 0.4% to 68.03 cents a pound.

The fibre also saw a 1-point drop in the US crop condition reading, to 60% (although this remains well above average levels for the time of year).

Still, the fibre had already in the last session factored in a bit of premium to account for US crop damage, after producers’  group Plains Cotton Growers, based in Texas the top cotton-growing state, cautioned over abandonment levels.

“Mother Nature hasn’t exactly been cooperative this season, as some good rains have been accompanied by high winds and hail,” the group said.

“We’ve heard various reports from all over our 41-county service area about potential abandonment, and although damage and loss still are being assessed, we likely will wind up around our overall average of 18-20%, perhaps a bit higher.”

CBA’s Tobin Gorey also flagged talk of flooding in Gujarat, a big cotton growing state in India.

“Good monsoon rains are required each year but the weekend accumulations were too much, too quickly,” he said.

 

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