(Agrimoney) – Tuesday is a big day in the agricultural commodities calendar.
It will bring the end of the month, a period when funds are often seen as closing positions and taking profits to withdraw a bit of cash to pay off clients. Especially when it is quarter-end too.
It will also bring much-anticipated US Department of Agriculture data on domestic crop sowings prospects for 2015, and on grain stocks as of the start of the month – reports which typically cause large swings in grain prices.
Grain markets showed some cautious resilience in early deals on Monday, despite the prospect of such factors.
‘Fund short looks uncomfortable’
But then, perhaps that may not be so unexpected, given the hedge funds are heading towards Tuesday with a large net short position in ags.
Data late on Friday showed managed money, a proxy for speculators, reducing its net short position from the record high the previous week, but by less than 24,000 contracts. Ie it remains unusually large, the second biggest on records going back to 2006.
True, the net short is particularly large in soft commodities, still a record in fact, but which, bar cotton, are not so affected by Tuesday’s USDA reports.
But in grains too, hedge funds were positioned unusually strongly for price falls – a factor which may prompt some to reduce their negative exposure, given the prospect for a large price spike if USDA data come in bullish and spark a wave of short-covering.
In wheat, for instance, “the fund short looks uncomfortable”, said Brian Henry at Benson Quinn Commodities.
Positions closed en-masse
In fact, many short positions may have already been closed.
The positioning data were accurate as of Tuesday last week. And exchange statistics showed a rash of position-closing, likely largely short-covering, on Friday, for instance.
In Chicago corn futures and options, open interest, ie the number of live contracts, fell by 79,000 contracts, and in wheat the decline was more than 42,000 lots.
Soybean open interest tumbled by 98,000 contracts.
‘Moisture shortages to build’
Still, newsflow brought cause to cover more contracts in wheat, with forecasts for further dry weather for the US southern Plains hard red winter wheat area, where a dearth of moisture is a higher profile issue with crops coming out of dormancy.
MDA said that the Plains, where “mostly dry weather prevailed” at the weekend, were due some moisture this week.
However, showers will be “isolated”, and the “limited shower activity will allow moisture shortages to build further,” the weather service said.
Furthermore, looking ahead, the six-to-10 day outlook is “warmer and drier versus Friday’s forecast”, MDA added.
‘Remains at risk’
At Commonwealth Bank of Australia, Tobin Gorey said: “Weekend rain in US hard red winter wheat regions had been sparse.
“Moreover, weather forecasters do not expect much rainfall near term. Weather models are projecting a rainfall event in the middle of next week but forecasters remain sceptical it will be realised.
“US hard red winter wheat remains at risk despite the retreat in prices.”
OK, the weather news was not all bad, with rains expected for the former Soviet Union, where dryness was earlier this month a worry too.
Still, Jordan added extra muscle to bulls’ case by tendering for 100,000 tonnes of hard wheat, plus the same of barley, giving some support to demand ideas at prices cut by last week’s correction.
Chicago wheat for May rose 0.7% to $5.11 ½ a bushel as of 08:55 UK time (02:55 Chicago time).
‘Increase wetness concerns’
That allowed wheat to regain some of its premium against corn, which had a more modest start, adding 0.1% to $3.91 ¼ a bushel for May delivery.
Not that there was easing in the weather concern over corn – of too much rain in some areas east of the Plains where farmers are trying to plant, or will soon be attempting to do so.
Showers in south eastern areas of the Midwest this week “will stall fieldwork and increase wetness concerns”, MDA said, and the outlook is wetter in the Mississippi Delta area, where sowings are already notably behind.
(Some USDA data on planting progress will be out late today.)
Brazil prospects
Still, with the plantings starting pistol yet to sound in the Corn Belt areas which really matter when determining sowings prospects, there is less urgency yet about planting progress.
Furthermore, ideas are increasing for Brazilian corn production, after rains, while hampering harvesting, boosted prospects for second crop corn.
Safras e Mercado, for instance, last week raised its forecast for Brazil’s corn output by 1.2m tonnes to 75.9m tonnes, leapfrogging the USDA’s 75m-tonne bet.
And, on investor positioning, hedge funds in the week to Tuesday eliminated their net short position in corn, albeit only just, but reducing ammunition for short-covering for now.
There have also been ideas of investors closing short wheat-long corn spreads.
China action?
Soybeans fared a little bit better, adding 0.2% to $9.69 ½ a bushel for May.
Hedge funds as of Tuesday retained a decent net short in the oilseed, of more than 38,000 lots.
Furthermore, there was some bright macroeconomic news, with growing ideas that China, the top importer of soybeans and other ags including cotton and rubber, may act to spur growth.
Zhou Xiaochuan, governor of China’s central bank, said on Sunday that Chinese policymakers had to be “vigilant” against the risk of disinflation, adding that the country “can have room to act”.
Shanghai shares soared 2.6%, with positive ripples spreading to other Asian stockmarkets too.
‘Weather delays’
Still, overhanging the soybean market is the idea that the USDA will, on Tuesday, unveil a forecast for hefty US sowings of the oilseed this year, largely at the expense of corn.
That thought has only been enhanced by the wetness hampering early US corn sowings, provoking idea of a switch in some areas to soybeans, which have a later planting window.
“Weather delays in the southern US raise concern over less acres going to corn and perhaps even more going to beans,” CHS Hedging said.
‘Cotton price floor’
CHS added that “cotton acres are already expected to be down sharply due to high stocks and low prices”.
Indeed, CBA’s Tobin Gorey flagged expectations that US growers, who sowed 11.04m acres with cotton last year, will cut plantings to about 9.5m acres this year.
“The lowest forecast is a full 2m acres less than last year.”
The impact on New York-traded futures “seems to be that the market seems to have developed a near term floor just below 63 cents a pound,” he added.
While the May contract eased a touch in early deals, by 0.1%, it remained comfortably above that level, at 63.51 cents a pound.
Still, given prices “have added 3-4 cents since the analyst surveys [on cotton area] have been emerging”, the sowings figure from Tuesday’s USDA report “will have to be around that lower number to give the market immediate impetus higher”.
