AM Markets: Grains Tick Higher, But ‘Explosion’ Not Seen Yet

(Agrimoney) – How high can grains go?

There was talk around early in the week, as Agrimoney.com reported, of grains being vulnerable to a “powerful rally”, given the potential for weather setbacks to prompted an about-turn by speculators who have been betting big time on price weakness.

Should funds be prompted to exit their, record, net short position on grains en masse, the result would indeed likely be a surge in prices.

The Minneapolis spring wheat market, meanwhile, the epicentre of recent strength – thanks to hot and dry weather which has sapped the condition of the US crop to the second lowest on record for the time of year – has not quite realised yet the “potentially explosive” tag it was given.

‘Not offering much relief’

Sure, Minneapolis spring wheat futures for July, amid expectations of further dryness in the northern US Plains, gained a further 0.5% in early deals on Wednesday, to reach $6.01 ½ a bushel as of 09:05 UK time (03:05 Chicago time), to take above 13% its gains over the past month, on a spot contract basis.

“Spring wheat regions in the US and Canada remain dry. Weather forecasters are not offering much by way of relief,” said Tobin Gorey at Commonwealth Bank of Australia.

However, the contract has been measured in its gains, this session, as in the last, wary of setting a new high for the move, and able so far only to match the intraday high of Tuesday.

And Thursday’s price is well short of potential, with Richard Feltes at RJ O’Brien highlighting that Minneapolis wheat is “one of the most inelastic of ag markets” – ie there is little alternative for users of high protein wheat, unlike in, say, feed markets, where many consumers can alternate between [lower quality] wheat and other grains.

“Recall the $11.20 a bushel in late June of 2011,” Mr Feltes said, with the all-time high for Minneapolis wheat at $24.25 a bushel, set in February 2008.

Data ahead

One reason for caution in grain markets is that a slew of key crop data are due later this week, which act as a distraction for a market which has been focused on weather.

On Thursday, Conab will release estimates for Brazilian crops, while on Friday, the US Department of Agriculture unveils its monthly Wasde crop report, which are expected to make little change to estimates for world and US crop inventories as of the close of 2017-18.

The data thus look like acting as a reminder of ample world grain supplies, even if, if has to be said, the extent of global stocks of high quality wheat is less transparent.

Mr Feltes calculates that a 10% hit to US hard red spring wheat yields could feed through into domestic inventories of the class at 108m bushels, equivalent to “a mere” 20% of use, compared with 33% expected at the close of this season, and an average of 36%.

‘Bulls cannot get too excited’

Still, looking at winter wheat, Terry Reilly at Futures International said that “we all know that wheat has a massive speculator short in the market,

“But the wheat bull cannot get too excited about a short-covering rally because of the large stockpiles going into wheat harvest.

“We should test resistance at $4.50 a bushel for Chicago July futures, and possibly get to $4.55 a bushel, if corn is able to break $3.80 a bushel for the July contract.

“But reality will set in and so will the speculative short. This type of price action should keep wheat rangebound with a negative bias.”

‘Issues can be resolved’

Then there is the fact that it is still pretty early in the northern hemisphere growing season (and southern hemisphere winter crops are still being seeded), giving crops time to recover should weather turn better.

CBA’s Tobin Gorey, flagging dryness setbacks in Australia and Ukraine as well as in the US, said that “all three issues can be resolved with a few rain showers so the market is not yet dealing with actual crop problems”.

In corn, Futures International’s Terry Reilly said that “the weather bid in the market is due to worries over the hot and dry weather in the norther Plains spreading into the western Corn Belt.

Traders have” ignored the better-than-expected crop ratings for corn and are focusing on the tumble in the spring wheat conditions.

“These rallies will be short-lived unless the weather story has legs because the farmer will be there to sell and the spec short keeps resetting on spikes.”

Open interest signal

If that looks a more complex picture than the mere short covering which has been grabbing headlines, then that looks reflected in data on open interest, ie the number of live contracts.

Preliminary statistics on open interest in Chicago corn futures show a substantial rise in the last session, of 15,176 lots – not the notable decline that would be expected if only short-covering was in play.

For soybeans, open interest gained 2,878 lots.

And while the figure did decline for Chicago soft red winter wheat, it was by a modest 3,750 contracts, while gaining 2,818 contracts for Kansas City hard red winter wheat.

Key chart point

In fact, while corn futures did gain in early deals on Wednesday, adding 0.5% to $3.79 a bushel for July, the contract has yet to manage a break above the $3.80-a-bushel point which represents a key technical point, representing the top of a trading range which has held for nearly four months.

“July corn is going to have to trade above the $3.80-a-bushel level, probably on Wednesday, but certainly this week,” said Benson Quinn Commodities.

“If it can’t, I look for corn to drift back to the low side of the range.”

Soybeans added a modest 0.2% to$9.25 ¾ a bushel for July, with gains continuing to be curbed by expectations that US sowings will come in even higher than initial expectations, and by worries over Chinese demand.

Three-day event?

Chicago winter wheat fared better, adding 0.8% to $4.39 a bushel for July delivery, feeling the pull from Minneapolis futures, whose premium has gone to elevated levels.

“The technicals in the winter wheat markets are going to need some help, but it feels like there is potential to force more short covering in Chicago,” said Benson Quinn Commodities.

“I would argue that we haven’t seen price action that points to a top being in the market.”

The broker also flagged ideas that changes in money flow come in three-day patterns, implying that winter wheat markets, which have been lagging Minneapolis quite substantially, could see further gains ahead.

“If you believe money flow is a three day event, we have one day down,” the broker said.

Tuesday “was day one in Chicago and Kansas City” winter wheat markets.

‘Might trigger selling’

In New York, cotton futures showed smaller gains, adding 0.2% to 76.15 cent a pound for July, and 0.1% to 72.60 cents a pound for the new crop December contract.

However, even small gains would be welcome for bulls given that, as Ecom noted, “for the last 14 sessions July cotton has close down in 10”.

Prices have been weighed by ideas of strong US production ahead, which gained credence when the US on Monday said that 61% of the domestic crop was in good or excellent condition, up from 47% a year before.

And, unlike in grains, in cotton, hedge funds have a large net long position – an exit from which would put downward pressure on prices.

“We still think that a modest fall from current levels might trigger a good deal more selling,” CBA’s Tobin Gorey said.

“Investors remain heavily long. We suspect the rationale for that trade is waning.”