(Agrimoney) – Now it’s getting biblical.
The southern US Plains, after in the last few years having suffered drought and floods, are witnessing wildfire.
Kansas firefighters are, hopefully, close to extinguishing what is the biggest ever brush fire in the top US wheat-growing state, claiming 400,000 acres of land in an area including Oklahoma too.
OK, the damage from the blaze to potential wheat production is not huge. Commodity Weather Group estimated that only about 20,000 acres of hard red winter wheat (the type grown in the southern Plains, and traded in Kansas City) was hit.
At Chicago broker Futures International, Terry Reilly said: “Most of the area is pasture land,” although on the demand side, he advised investors to “look for animal unit producers to increase feed grain use for that region” thanks to lost fodder/grass potential.
El Nino vs La Nina
Still, the fire provided dramatic evidence of the dryness affecting the southern Plains – and which is expected to continue, threatening a crop which has been tested too by untimely frost, in terms of striking a crop which had emerged from dormancy, and lost freeze resistance, relatively early.
In fact, a “second round this season of cold temperatures from Saturday night into Sunday” has had had “some worried about additional freeze damage”, said Joe Lardy at broker CHS Hedging.
And the “extended forecasts for the western parts of Kansas also remain pretty dry”.
Indeed, the conditions have provoked ideas that the El Nino, which is actually positive for US grains production (if not for eg South East Asian palm oil output) is now “fading more quickly than previously expected and if the trend continues could lead to La Nina this summer,” said Benson Quinn Commodities.
“If transition to La Nina takes place during the summer growing season, it could mean warmer and drier summer for the western plains of the US and Canada.”
‘Additional risk premium’
In terms of wheat prices, it is “still too early in growing season and develop of this weakening El Nino pattern to be considered market bullish”, Benson Quinn Commodities said.
“But this change could be enough that the funds do not want to add to short positions,” the broker added, following weekly regulatory data on Friday which, unexpectedly, showed hedge funds adding to their net short in Chicago soft red winter wheat futures and options (the world benchmark).
The data showed an increase of 14,331 lots 81,837 contracts in their net short – a historically high level.
(In Kansas City hard red winter wheat itself, they cut their net short by 3,423 contracts to 10,457 lots.)
CHS Hedging’s Joe Lardy talked of the weather worries meaning “additional risk premium is going back into the market”.
Cash market signal
But how much risk premium to put back in?
For all the talk of Plains dryness and cold, the damage to wheat crops appears limited, to judge by US Department of Agriculture data overnight, which showed the Kansas crop rated 56% “good” or “excellent”, down only 1 point week on week.
The Oklahoma rating stayed steady at 63%, while in Texas, the crop improved by 2 point to 48% seen as in good or excellent condition.
And on the demand side, it is not clear that buyers are willing to pay up, with Tregg Cronin at Halo Commodity Company looking to weakness in the US cash market as evidence of “just how oversupplied our market is and how much of a production hit it will take to support prices.
“Basis in several key hard red winter wheat markets hit multi-month and marketing-year lows this past week as farmer selling overwhelms the miniscule demand for US hard red winter wheat which actually exists.”
‘Most negative fundamentals’
At Chicago-based RJ O’Brien, Richard Feltes advised investors to “remember that the wheat market harbours the most negative fundamentals” of the big three grains (the others being corn and soybeans), “with record world stocks, prospects for further gains in 2016-17 US stocks, hand-to-mouth importers”.
In fact, there was a bit more evidence of demand around, with Iraq tendering for 50,000 tonnes of wheat, and often buying a multiple of that.
Still, Chicago soft red winter wheat added a modest 0.1% to $4.71 ½ a bushel as of 09:50 Uk time (03:50 Chicago time), if putting a little more of a cushion between it and its 50-day moving average, regained in the last session.
Kansas City hard red winter wheat, the laggard in the last session, performed better this time, adding 0.4% to $4.78 ¾ a bushel, narrowly regaining its 100-day moving average.
Chinese price low
Such gains, while modest, were more than corn could manage, with futures for May down 0.1% at $3.70 a bushel, again shying away from a lasting break above their 100-day moving average, as a moist, but not too moist, forecast for the US Corn Belt boded well for early sowings progress.
“If the current forecast holds, conditions will improve to the point of increased planting activity through the second week of April,” said Benson Quinn Commodities said.
This as the market is heading towards much-anticipated data on Thursday on corn sowings, which are expected to come in only just short of the 90.0m acres the USDA has pencilled in, and well up year on year.
Weakness in Chinese corn prices, which reportedly hit a six-year low ahead of talk of the looming release of details on state subsidy reforms, also hurt sentiment.
Best-traded January corn futures on China’s Dalian exchange set a contract closing low of 1,427 renminbi per tonne on Tuesday, down 1.9% on the day.
Palm up
Asian markets made a better fist of offering support Chicago soybeans too, with Kuala Lumpur palm oil for June rising 0.8% to 2,785 ringgit a tonne, a fresh two-year high for a benchmark contract, helped by the longstanding concerns over South East Asian dryness, blamed on El Nino.
“Crop damage from the strong El Nino weather pattern is the reason for the price rise,” Joe Lardy said.
Indonesia’s palm oil exports were up 9% month on month to 2.3m tonnes, industry group Gapki said, evidence of demand, if for supplies from Malaysia’s biggest trade rival.
He reminded that, given that palm oil can be substituted with soyoil in many uses, palm’s gains “could be supportive to US soy crush as elevated [soyoil] values will provide incentive to keep up the crush pace”.
Soyoil indeed added 0.7% to 33.88 cents a pound in Chicago.
‘Beans are overbought’
Still, soy investors have other and more bearish fish to fry, with the USDA sowings data expected to show domestic soybean plantings this year of 83.06m acres, above the 82.5m acres the department forecast at its Outlook forum last month.
Furthermore, many technical signals have turned red, or at least amber, for the oilseed, including the building by funds of a net long position of more than 53,000 lots in Chicago soybean futures and options, the highest in seven months, and undermining ideas of support to prices from further short-covering.
Benson Quinn Commodities added that “cash markets and the calendar spread trade have weakened… as the producer has sold into the rally.
“Beans are overbought. With market making new intraday highs for the move on Monday, I would look for lower trade Tuesday.”
While Chicago soybean futures spent most of very early hours in negative territory, the recovery in palm oil prices saw the May contract recover to $9.09 ¾ a bushel, a gain of 0.1% on the day.
