(Agrimoney) – Can hard wheat futures continue its claw back their, unusual, discount?
Futures, as measured by the Kansas City hard red winter wheat, actually had something of a bravura session last time.
OK, it might not look that way, in that the March contract lost 0.2%, to finish at $4.53 ¼ a bushel.
But compared to the 1.4% drop in Chicago soft red winter wheat for March, it represented significant outperformance.
It meant that Kansas City wheat chopped one-third off its, atypical, discount to its Chicago peer, cutting it to $0.09 a bushel. (Usually, hard wheat, having extra protein, is at a premium.)
El Nino to La Nina
“Chicago’s larger fall mean its premium to Kansas narrowed quite sharply,” said Tobin Gorey at Commonwealth Bank of Australia, terming the shift “something to keep an eye on”.
Nor is he the only one taking a close view of the spread, which reflects a turn drier in prospects for the US Plains – the major growing area for hard red winter wheat.
(Soft red winter wheat is grown mainly in the Midwest.)
“Weather is increasingly becoming important, especially with the upcoming shift from El Nino to La Nina,” said Terry Reilly at Futures International.
“Our focus is on the southern US Great Plains, where persistent dry weather could dominate the area through the spring.
The southern Plains in particular “should be closely monitored over the next several months as the longer term weather outlooks show drier and warmer conditions”, Mr Reilly said adding that even in the short-term, “Texas and Oklahoma will be warm over the next week, with little precipitation expected”.
‘Very warm for this point’
It should be noted at this point that the official US Department of Agriculture drought monitor is nowhere near flashing alarm bells for Plains moisture levels, with unduly dry conditions absent from the vast majority of the area.
However, a slighter of drought has re-emerged in Texas, covering 3.6% of the state compared with 0% last week, according to the latest monitor, released on Thursday.
In Oklahoma, 3.0% of the state was rated as “abnormally dry”, compared with 0% last week.
“It is very warm for this point in the year,” Benson Quinn Commodities noted, adding that the “very warm and drier weather profile for the southern Plains has also gotten a fair amount of attention” in the market.
“Whether or not these conditions are detrimental to the crop depends on the weather going forward.”
Hedge fund moves
Another factor to remember in this spread is the position of hedge funds, which were, as of last week, holding a record net short in Kansas City wheat, while holding a substantial, but not historically huge, net short in Chicago wheat.
“I expect the better performance in Kansas City [in the last session] is a reflection of the funds holding record shorts,” Benson Quinn Commodities said, if pondering whether for grains in general a spell of short-covering which had supported prices earlier in the week has “come to an end”.
Still, wheat market does have other factors to worry about too, on a day when trade looks like being a bit of a theme, and not just because of the weekly US export sales data later.
(For wheat, these are expected at 200,000-400,000 tonnes, 2015-16 and 2016-17 years combined, compared with a total of some 30,000 tonnes last time.)
Gasc is back
The other trade item for wheat is the return of Egypt’s Gasc to tender, for the sixth time in the past three weeks.
Four of the previous five, of course, have been cancelled after receiving no offers, or offers at prices deemed unacceptable by Gasc, containing a rich premium after Egypt rejected a cargo of French wheat amid what appeared to be a new zero tolerance regime on contamination with ergot.
Ergot, a fungus which can cause hallucinations if eaten in sufficient quantities, was previously allowed at 0.05% levels – and will continue to be, according to an Egyptian document released this week.
But with Egypt rejecting further supplies too, from Canada, and four cargos of North American soybeans, the picture has raised fears of at best confusion.
‘Premiums on offers will grow’
“After the reassuring words from agriculture minister [on ergot specifications], it will be interesting to follow the new tender today to see if operators are maintaining a risk premium,” Paris-based analysis group Agritel said.
Benson Quinn Commodities said: “I suspect the premiums on offers will grow based on recent rejections and more mixed signals from Egyptian government officials.”
Results will be released later, but the potential for another difficult tender by the world’s top wheat importer failed to cheer markets.
As of 09:55 UK time (03:55 Chicago time), Chicago wheat, the world benchmark, was 0.3% lower at $4.60 ¾ a bushel for March delivery, with Kansas City wheat eroding a touch more of its discount, dropping 0.3% to $4.52 a bushel for March.
Macro weakness
In fairness, many risk assets made a weak start, as the return of macroeconomic worries offered a slight a “risk off” feel to early trading, with shares falling in Asia, while showing marginal gains in London in early deals.
Brent crude was a bit on the back foot, down 0.4% at $34.16 a barrel, while the dollar added 0.2% against a basket of currencies, making dollar-denominated exports, such as many ags, that much less affordable.
Corn, of which a large amount is used in making ethanol, eased by 0.1% to $3.65 ¼ a bushel in Chicago for March delivery, with the fall in fellow grain wheat little help.
Still, the Buenos Aires grain exchange, in estimating the Argentine corn crop at 25m tonnes, underlined the questions over the USDA’s 27.0m-tonne estimate.
Options expiry
Soybeans for March added 0.25 cents to $8.80 a bushel, something of a sensitive level for the contract, given the expiry of options today.
Benson Quinn Commodities noted that in the last session “all the trading volume seemed to be centred on this [March] contract”, which “churned around the targeted $8.80-a-bushel option strike”.
Futures International’s Terry Reilly, meanwhile, noted that US producer selling in soybeans had “stalled, after seeing a pick-up on Wednesday”.
USDA soybean export sales data later are expected to come in at 400,000-700,000 tonnes, current and next crop years combined, compared with an aggregate 600,000 tonnes last time.
For corn, export sales are expected at 600,000-1.0m tonnes, compared with a combined 345,000 tonnes or so last time.
