Sugar extends revival. But other ags struggle

(Agrimoney) – Can cotton and sugar maintain their rally?

The two soft commodities were notable in the last session for posting gains even as grains fell, in part under pressure from a stronger dollar.

(A firmer greenback weighs on prices of dollar-denominated assets by making them less affordable for buyers in other currencies.)

This time, the dollar opened weaker, a positive sign for ag bulls.

For cotton, a slow start to US sowing has raised concerns, thanks to wet weather in Southern areas which has also hampered plantings of corn, although the area is of more importance for the fibre than the grain.

“Planting delays in the US are becoming a concern,” Tobin Gorey at Commonwealth Bank of Australia noted.

“Planting is a little behind schedule now but that has the potential to grow as the US Delta and Southeast regions will remain soggy until mid-April at least. ”

Chinese subsidies

There was some fundamental news on Tuesday from China, which reduced the target price for cotton in Xinjiang, the country’s top growing area, to 19,100 yuan a tonne, from 19,800 yuan last year.

The cut represented the latest step in subsidy reforms which have cost the country its position as the top cotton producer, and begun the work needed to erode its huge inventories of the fibre,

Zhengzhou futures for September gained 0.2% to 12,965 yuan a tonne, hitting 13,085 yuan a tonne earlier, after a decline of some 6% since the end of February.

But was that a sign that the market considered the target price generous?

Whatever, New York futures struggled for gains, up 0.02 cents at 66.44 cents a pound for May delivery as of 10:00 UK time (04:00 Chicago time), also facing the uncertainty inherent in a US Department of Agriculture Wasde crop report on Thursday.

‘Odd state of affairs’

Raw sugar, however, fared better, adding 1.0% to 12.90 cents a pound for May delivery, extending nearly to 8% the contract’s gains in a week.

That resolved a little one conundrum – why May sugar has been trading flat with the July lot, when the market noted for its large supplies should be encouraging producers to store and buyers to purchase now – ie depress spot prices.

“Traders are unambiguously not being paid to carry sugar – an odd state of affairs for a market that supposedly has surplus sugar,” CBA’s Tobin Gorey said.

However, Wednesday’s gain exacerbated another riddle, why front sugar futures are outperforming when index funds are supposed to be starting a process of swapping near-term contracts (which will soon expire) in favour of longer-term ones.

“Experienced market watchers are wondering why [the last session’s] buying spree came on the eve of the index fund roll, when there will be large trades going the other direction,” Mr Gorey said.

‘We can see substantial rallies’

Index funds have a large net long in raw sugar, of some 261,429 lots as of last week, according to regulatory data.

That said hedge funds have a huge net short in raw sugar, of 115,737 lots, a near-record high, of which exposure to the May lot will need closing before the contract, which expires on April 30, takes on physical responsibilities.

“We can see substantial rallies as that [hedge fund] position is bought back that need have nothing to do with any fundamental swing,” Mr Gorey said.

‘Decent harvest pace’

Grain markets were higher too, a little, amid some reluctance to press prices too much lower ahead of Thursday’s Wasde report.

That said, there wasn’t a huge appetite for buying either, even in the likes of soybeans, in which hedge funds, as in sugar, have an unusually large net short position.

The Wasde is expected too to cut the estimate for US soybean stocks at the end of 2014-15 by 15m bushels to 370m bushels.

However, on the negative side, the Argentine soybean harvest is seen in line for a 1.2m-tonne upgrade, to 57.2m tonnes.

“Argentina is expected to be dry for the next 2-3 weeks so their harvest progress can go at a fairly decent pace,” CHS Hedging said.

“Reports of good yields encourage ideas of increased production.”

Soybeans for May stood up 0.2% at $9.72 ½ a bushel, but still down nearly 5% so far this week.

‘Not good for producers’

Corn for May posted a 0.2% gain to $3.83 ¾ a bushel, amid some concerns over US plantings, in the Midwest as well as parts of the South.

“The two week outlook is wet for the Midwest, all the way through Tuesday of next week,” said Terry Reilly at Futures International.

“This is not good for producers across the Ohio River Valley where rains already saturated the soils, delaying planting progress.”

Export concerns

That said, on the negative side for prices, the Wasde is expected to lift the estimate for US corn stocks at the close of 2014-15, by 77m bushels to 1.85bn bushels.

And there are concerns over the US export pace too.

“Reports have Brazil and Argentina offering corn into the deferred months at steep discounts to domestic offers,” said Brian Henry at Benson Quinn Commodities.

Futures International cut its forecast for US exports in 2014-15 by 25m bushels to 1.75bn bushels, its second downgrade in two weeks, taking the forecast 50m bushels below the USDA estimate.

The day will later bring weekly US ethanol production statistics, which could affect trading later on.

Rain relief?

Wheat, meanwhile, added 0.2% to $5.27 a bushel in Chicago for May, as the urge by hedge funds to close some of their net shorts, after losses so far this week, was tempered by some signs of rain for the drought-pressed US central and southern Plains, a major winter wheat area.

“The current pattern over the southern Plains hints at turning more favourable with rains offered through the weekend,” Mr Henry said, noting that futures in the last session “traded like there is some confidence this event alleviate some stress.

However, he added that “the current model runs are not in very good agreement.

“Additionally, the best chance for moisture is currently slated for areas east of the key hard red winter wheat growing regions,” where rains are needed most.