(Agrimoney) – There is still no shortage of sellers in the oil market
Brent crude hit a fresh five-year low of $45.23 a barrel before paring losses a little to stand at $45.75 a barrel as of 09:45 UK time (03:45 Chicago time), down 3.5% on the day.
“The market is concerned that oil will stay lower for longer,” said Citigroup, highlighting forecasts that “crude will stay close to $40 a barrel for the first half of 2015”.
Goldman Sachs, for instance, has cut its estimate for Brent crude prices, on a three-month horizon, to $42 a barrel, from $80.
Ethanol debate
However, that may not be such a bad thing for some agricultural commodity prices after all, despite their link to oil through their use in making biofuels.
Biofuel mandates offer protection. As Morgan Stanley noted yesterday, higher demand for gasoline in the US, encouraged by lower motoring costs, will lift use of ethanol, which is mandated to account for a 10% blend.
And the US Department of Agriculture obligingly raised its estimate for US use of corn in making ethanol in 2014-15 by 25m bushels to 5.18bn bushels.
Not that this revision was supported by all commentators, being termed, for instance, “unwarranted” by Chicago-based broker Futures International, which highlighted the slide in producer profit margins (which Morgan Stanley itself highlighted).
“We look for second half of the crop year corn for ethanol usage to decline from a year ago,” Futures International’s Terry Reilly said.
“Over the past month, we lowered our corn for ethanol usage twice, based on eroding ethanol producer profit margins from expensive corn and sharply lower mineral oil prices.”
Corn production
Indeed, the slew of USDA data on Monday – including the monthly Wasde world crops report, quarterly statistics on US grain stocks and an annual briefing on domestic winter wheat seedings – continued to prove a talking point.
Estimates which have provoked particular discussion include the downgrade to the estimate for the 2014 US corn yield, and accompanying cut in the estimate for production.
“The main thing to point out is that corn yields were down to 171 bushels per acre compared to the average guess of 173.3,” one broker said, although of course 171 bushels per acre is still a record.
At RJ O’Brien, Richard Feltes said that the USDA’s downgrade of 191m bushels in its estimate for the domestic corn crop “is the largest in our database”.
“Much of the yield loss was associated with the northern US Midwestern states, where test weights were lower than expected,” said Futures International’s Terry Reilly, noting particular downgrades for Iowa, Kansas, Minnesota, South Dakota, Michigan, and Wisconsin results.
‘Perhaps this is the moment…’
Another discussion point was the upgrade to estimates for both Brazilian and US soybean output, and upgrade of some 900,000 tonnes to the world stocks figure.
Tobin Gorey at Commonwealth Bank of Australia, for instance, highlighted that “the USDA increased soybean production forecasts for the two biggest producers, the US and Brazil, by the best part of 2m tonnes.
“Fundamentalists have been bearish for some time” thanks to the prospect of rising inventories.
“Perhaps this is the moment when the weight of impending supply finally penetrates the markets psyche.”
South American forecasts
It wasn’t in early deals, when soybeans for March gained 0.6% to $10.22 ½ a bushel in Chicago.
That might in part be down to profit-taking on short positions, after the fall in the last session.
However, South American weather worries remain a topic too, with some areas getting too much rain, and some too little
While Mr Gorey said that “weather forecasters continue to expect South American weather to largely remain very supportive of crop development”, not all observers had such a benign interpretation.
Archer Daniels Midland Investment Services, for instance, says that “some below-average rainfall will continue in Brazil into next month”.
That said, “crops will perform relatively favourably because of timeliness of precipitation”, even though rainfall will be “a little light”.
China record
Soybeans also gained support on the demand side from data showing that China, the top importer of the oilseed, bought in 8.53m tonnes of soybeans last month – a record high, beating the previous record, set in December 2013, by 16.8%.
It was also up 42% month on month, and above a forecast of 7.3m tonnes from China’s ministry of commerce.
Chinese imports of vegetable oils, meanwhile, soared 48% month on month in December to 590,000 tonnes.
Chicago soyoil for March rebounded 0.8% to 32.85 cents a pound.
Grains gain
As for grains, corn found strength in USDA data which cut the estimate for US stocks at the close of 2014-15 by more than expected, thanks to the lower harvest figure and raised estimate for use in ethanol, offset in part by a weaker projection for feed demand.
“These numbers should be viewed as justification for corn market trading well off early-fall lows,” said Brian Henry at Benson Quinn Commodities, if adding that the data “don’t offer the type of support would need to make major gains in the near term”.
Corn for March added 0.6% to $4.04 ¼ a bushel.
And this time wheat managed headway too, rising 0.8% to $5.60 a bushel in Chicago for March delivery, as data showing a 2m-acre deficit in US winter wheat sowings, compared with market expectations, attracted positive comment.
“The wheat acreage shortfall will increase the sensitivity of the wheat market to spring moisture, frost threats and new crop yield reports,” said RJ O’Brien’s Richard Feltes.
And, after all, the condition of the crop has already deteriorated sharply, as highlighted by official data last week.
‘Bearish for cotton’
However, the turnaround Tuesday feel did not extend to cotton futures, which eased a further 0.1% to 59.67 cents a pound in New York for March delivery, continuing to feel, pressure from a USDA upgrade to its estimate for last year’s domestic production.
“The Wasde was bearish for cotton as there was a nearly 3% increase in 2014-15 US yields as all areas, except the south east of the US, saw higher yields,” said Chris Narayanan at Societe Generale.
“US export demand remains muted as the slowdown in China and the EU is curbing demand,” offering “additional downside risk” to the bank’s pricing expectations.
