(Agrimoney) – Two arguments have been key to the drop in wheat prices so far this year.
One is that there is limited evidence of a further decline in winter wheat condition, after the poor autumn for Russian seedlings and some evidence of dryness in the US.
US Department of Agriculture data overnight on US winter wheat condition produced ammunition for both bulls and bears, with crop ratings falling for many big producing states, such as Kansas and Oklahoma, but rising in Nebraska, and rebounding strongly in Illinois.
Demand factor
The second is that the drop in prices, of some 15% in Chicago last month, has failed to eke out much in the way of demand.
That might be changing in the feed sector, with Chicago soft red winter wheat’s premium over corn looking more squeezed. But evidence of that will not become clear for some months. Nor is the trend likely to be that substantial.
But on exports, on which the market has readily available data, there has been a slight lack of high profile tenders, and what business has been done has been have tended to go to origins other than the US.
Data on US exports last week, unveiled yesterday, showed US wheat exports performing better, at 394,029 tonnes compared with 318,163 tonnes the week before, and meeting expectations but still lagging for the marketing year as a whole.
The US has exported 15.1m tonnes so far in 2014-15, compared with 22.1m tonnes at the same stage of last season.
“This is a market that continues to struggle to find a level that will cause international buyers to want to secure US wheat,” one US broker said.
Spree of tenders
But on the demand side, the passing of Chicago wheat down below $5 a bushel in the last session, for the first time in four months, does seem to have changed something, in luring out buyers.
Saudi Arabia’s tender, at which it brought 690,000 tonnes on Monday, is beginning to look like a harbinger for other orders, with Japan offering to buy 112,920 tonnes of milling wheat at tender, and Iraq in the market for a minimum of 50,000 tonnes (and likely to be a multiple of that).
Meanwhile, Jordan has tendered for 100,000 tonnes of hard wheat, and 100,000 tonnes of barley, while Gasc, the grain authority for Egypt, the top wheat importing country, has invited offers too.
The results of Gasc’s tender will be unveiled later.
There are doubts that US wheat will win much of a showing – given the higher costs of shipping to Egypt across the Atlantic than from France, which has shown unexpectedly deep reserves of OK-quality milling wheat (if not of the high-end stuff required by the likes of Algeria).
But the signs of demand did foster buying, especially coming at a time when farmers appear unenthusiastic about selling at lower values.
“There is very little producer selling noted in these markets,” said Brian Henry at Benson Quinn Commodities, if highlighting the renewed enthusiasm among hedge funds for short positions in Chicago wheat futures and options.
“Funds remain the primary sellers.”
‘Key issue’
Furthermore, there is a growing idea that low prices, coupled with inclement conditions in some areas, may discourage spring sowings of wheat, in the US in particular.
“With the dryness that has been experienced out west and throughout the Plains, it would not surprise us to see some wheat acres get switched over to corn or in some cases soybeans,” one US broker said.
Chicago wheat for March stood 0.7% higher at $4.96 a bushel as of 09:30 UK time (03:30 Chicago time), with Kansas City hard red winter wheat up 0.5% at $5.37 ¼ a bushel.
A “key issue” for the wheat market ahead “is the scarcity of those willing to press March Chicago wheat futures below the $5.00-a-bushel threshold”, Richard Feltes at broker RJ O’Brien said.
‘Bear news getting stale’
Indeed, if the case for grain bulls is hardly overwhelming, Mr Feltes flagged some softness in the arguments for further price falls too, given the extent that values have already fallen.
“Bear news may be getting stale,” he said, although the “flip side is that positive fundamental catalysts are lacking until the US planting season approaches in early April”.
Overall, “traders are discerning whether the majority of negative news is largely discounted or if the potential for further dollar gains and new lows in crude oil prices will continue to dislodge managed funds from their remaining longs in corn and soy products”.
Crude prices bounce
In fact, the dollar was stable against a basket of currencies, and crude oil extended its recent recovery, with Brent crude up 3.6% at $56.71 a barrel – more than $10 a barrel above its mid-January low.
The revival in crude prices has been a support to ags used in making biofuels, such as soyoil, (which sank in Chicago last week to near-six-year lows on ideas of a rash of Argentine biodiesel exports to the US).
Terry Reilly at Futures International noted that in the last session “soyoil recovered after crude oil futures soared”.
Soyoil extended its recovery, adding 0.8% to 30.65 cents a pound for March delivery.
‘Farm selling is drying up’
And soymeal, the other main soybean processing product, gained too, adding 0.9% to $330.80 a short ton for March delivery.
The rise came amid firm demand for US supplies, while those from Argentina, the top exporter of soymeal, will not see their seasonal ramp up for a while, until potentially late April when harvest supplies of soybeans build.
Soybeans themselves gained 0.9% to $9.68 a bushel in Chicago for March, helped also by ideas of a reluctance by US growers to sell at these prices.
“US farm selling of soybeans is drying up,” Mr Feltes said, while Benson Quinn Commodities said that a spurt of Brazilian producer sales on Friday had fizzled out too.
‘Stopped the bleeding’
Indeed, “the market looks to be forming a bottom here as it seems to lack sellers,” the broker said, adding that one of Chicago’s famed Turnaround Tuesdays –the idea that futures reverse on the second session of the week a strong price trend on the first – “looks to be on the cards”.
That Turnaround Tuesday theme worked for corn too, which added 0.7% to $3.72 ½ a bushel for March delivery, also helped by the revival in crude oil prices, with ethanol production a big source for demand for the grain.
Benson Quinn Commodities said: “Corn seems to have momentarily stopped the bleeding.
“Nearby US country basis levels are firming and poor weekend weather should be supportive to basis.”
‘A life of its own’
Among soft commodities, cotton extended its recovery, adding 0.4% to 60.13 cents a pound in New York for March delivery, amid ideas that recent price falls may have gone too far.
“The reversal of recent weakness might be taking on a life of its own,” said Tobin Gorey at Commonwealth Bank of Australia.
“Investors are heavily short. Some among them may have decided the falls have come to an end and may be buying futures back.”
The International Cotton Advisory Committee overnight cut its forecast for cotton prices in 2014-15.
However, it also highlighted potential for a drop in world production next season – particularly in China, where output was forecast falling to a 12-year low.
