(Agrimoney) – There is nothing like a bit of bullish chatter to put a hex on strength in agricultural commodities. “The investment community is talking about funds moving back into commodities as confidence grows about an interest rate hike later in the year,” prompting them to “exit equities”, said Tregg Cronin at Halo Commodity Company earlier on Thursday.
But by late deals, such upbeat talk was looking ill-founded, with the CRB commodities index standing a touch lower, with many ags, including grains and sugar, closing with substantial losses.
‘Confluence of export activity’
The losers included the winter wheat contracts, which had started the day at a sprightly pace, extended gains from the last session, amid improved demand hopes.
“The strength in wheat yesterday seemed to stem from the confluence of export activity which popped up following the early week losses,” Mr Cronin said.
Morocco has purchased from the US this week, with Egypt buying from Russia, and there are expectations of Algeria, the third of the big North African importers, returning to the market soon.
But a caution by the United Nations of weak price prospects ahead for wheat did little to help sentiment.
And weekly US export sales data removed further polish, coming in at 377,000 tonnes for last week, below expectations of at least 400,000 tonnes.
‘Export sales were pretty low’
“Wheat export sales were pretty low,” said Joe Lardy at CHS Hedging, while Benson Quinn Commodities termed the shipments “disappointing”.
In fact, US export sales of hard red winter wheat, as traded in Kansas City, tumbled by more than 70% week on week to 95.2m tonnes.
Those of soft red winter wheat, as traded in Chicago, did improve, but so far in 2016-17 remain well below the pace typically seen in recent years.
Where the data were better were for, you guessed it, hard red spring wheat – more than doubling week on week to 147,000 tonnes.
“With Canadian harvest worries escalating, and production ideas in Australia seemingly topped out, global importers are starting to take stock of where they can source high protein/high quality wheat for milling in 2016-17,” Halo’s Tregg Cronin noted.
Spread recovers
The divergence was reflected in a recovery in Minneapolis-traded spring wheat futures which, having lagged in early deals, managed to close just 0.1% lower at $5.23 ¾ a bushel for December delivery.
That compared with a 2.3% tumble in Chicago wheat for December to $3.95 ¾ a bushel, back below its 10-day and 20-day moving averages, besides the psychologically important $4.00-a-bushel mark.
And Kansas City wheat for December dropped 2.2% to $4.05 ¾ a bushel.
In short, the Minneapolis-Chicago spread regained $0.08 a bushel, to close at as contract high, December basis, of $1.28 a bushel.
(London wheat also fared relatively well, as described here.)
Back to the future?
It was also little help to the winter wheat contracts, which are fighting for feed use to erode huge supplies, that rival corn had a weak day too.
December corn futures ended 1.9% lower at $3.40 ½ a bushel.
Again, the decline followed bullish talk, with Mr Cronin noting that “traders also remain impressed with the performance of corn after pushing above two months’ worth of resistance this week.
“Lots of upside targets being drawn anywhere from $3.60-4.00 a bushel as well as analogue years being tossed about as well.”
He flagged the similarities that some investors are drawing between this year and 2009, which also saw a record harvest, but where futures found their autumn low early on, in September, as they may have done this time too.
“One year which has a nice fit would be 2009 as prices that year bottomed around September 4 before rallying during September and October to hit a seasonal high above $4.00 a bushel.”
‘Bevy of sources’
But while history may rhyme, actually repeating itself is another matter.
“One thing worth noting, hog prices slumped to the lowest spot price yesterday since October 28, 2002, while Chicago feeding spreads are at the lowest values since November 5 2012,” Mr Cronin said.
And while cattle feeding margins are higher year on year, “broiler crush margins are at 12-month lows”, undermining US demand prospects for feed.
“Profitability from the feed sector will be a major theme this year with the bevy of available… sources.”
‘Weather leans negative’
Meanwhile, the weather for the US Midwest harvest is improving, with MDA saying that while “showers in north western areas are slowing drydown and early harvesting, drier weather this weekend will improve conditions”.
At Chicago broker RJ O’Brien, Richard Feltes said: “Weather leans negative [for prices], with mostly open Midwest weather the next two weeks following the passage of rains the next 1.5 days.”
And while the US export sales number for last week was chunky, at 2.06m tonnes, one-half came from a purchase by Mexico which was already known.
As an extra pressure, Conab, in its first estimate of the season, pegged its forecast for Brazil’s corn output in 2016-17 at 82.3m-83.9m tonnes, likely beating the 82.5m tonnes that the US Department of Agriculture has forecast.
‘Amazingly strong’
The soybean export number was elevated too, at 2.18m tonnes, albeit with some pre-announced sales too.
Still, “soybean sales were amazingly strong,” said CHS Hedging’s Joe Lardy, adding that “this is the highest sales total going all the way back to September of 2015”.
And as an extra boost, the USDA, through its daily alerts system, on Thursday unveiled the sale of a further 258,000 tonnes of US soybeans to an unknown import destination.
“Trade will increasingly monitor demand indicators as market focus shifts from supply to the offtake rate,” said RJ O’Brien’s Richard Feltes.
And soybean futures for November actually closed 0.3% higher at $9.58 ½ a bushel, bucking the weakness in grains, and gaining support from soyoil for December, which soared 1.4% to 33.30 cents a pound, rising back above its 40-day moving average.
‘Always a worry’
The gains were not echoed among soft commodities, with New Yorkcotton for December ending 0.6% lower at 67.50 cents a pound, despite a 73% rebound to 158,900 running bales in US export sales of upland cotton last week.
However, on the negative side for prices, Louis Rose at the Rose Report flagged the “less threatening arrival” in the US than some investors had expected of Hurricane Mathew, which now looks like causing less damage to the cotton belt than some had imagined.
Meanwhile, New York raw sugar tumbled 2.9% from the last session’s four-year closing high to end at 23.11 cents a pound for March delivery.
Sucden Financial’s Nick Penney earlier flagged “two factors which may temper bullish impulses” – the first of which harked back to the idea of unduly bullish sentiment.
“We have not encountered anyone as yet who is bearish, everyone is expecting higher values,” he said.
“This is always a worry.”
White sugar signal
Secondly, he noted that the premium of white sugar futures contact “has been shrinking substantially with December/March losing some $10 a tonne in less than a week”, and actually returning to a discount.
This is an issue as white sugar, in being available for immediate consumption, is considered a key demand indicator.
“Refined sugar demand tends to lead prices as it is the final product and can enter the demand pipeline quickly which is reflected in futures.”
White sugar for December actually closed down 2.3% at $590.50 a tonne – although managing to cut its discount in the process to the March lot, which shed 2.4% to $594.00 a tonne.
As an extra setback for the sugar market, USDA staff in Beijing slashed expectations for Chinese imports of the sweetener in 2016-17.
