Wheat rally doused by fresh macro-market storms

January 26th, 2016

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Category: Grains, Oilseeds

Wheat_Future_Dreams450x299(Agrimoney) – Not all bears are hibernating, posing a challenge for investors hoping that wheat futures’ rise in the last session will be the start of something big.

Financial market bears were well in evidence on Tuesday, as Brent crude fell back below the psychologically important $30-a-barrel mark, amid continued talk over the excess supplies due from Iran as sanctions are raised, and stood at $29.70 a barrel, a drop of 2.6%, as of 09:00 UK time (03:00 Chicago time).

Oil prices are being viewed as a proxy for the Chinese economy, hence being seen as a negative rather than positive (cost reducing) factor, although the country provided a more direct reason for concern in a 6.4% slump in Shanghai shares, to a 13-month low.

Other Asian stock markets were lower too, with Tokyo shares down 2.4% and Seoul ones shedding 1.3%. London stocks opened 1.5% down.

While all this reduces even further the chance of the Federal Reserve raising interest rates at this week’s monetary policy meeting, that appears to have had little effect in pulling back the dollar, which at 99.27 remains less than 1.5% short of 12-year highs.

(A weaker dollar, in boosting the competitiveness of dollar-denominated assets, would be a bit of a positive to values of many agricultural commodities.)

‘Strong uncertainty’

While many ags have managed of late to keep somewhat above the fray in external markets, downward moves were the order of early deals, even in wheat, which managed a spurt in the last session on ideas that Russia may put something more substantial in the way of grain exports than the current tax.

As Agritel related, “once again, there is a strong uncertainty about the decision of Russian authorities on export tax applied to wheat sales.

“Last week, rumours were circulating about a possible cut or even cancellation of the tax,

“The agriculture minister is now saying that restrictive measures are under study,” a move which would take out of the market a hugely competitive wheat exporter, which has been helped to raise shipment volumes by the slump in the rouble.

Protein sector struggles

And such a measure would hardly looks outlandishly improbable, given Russia’s history of market interference, and its tendency too in the past to prioritise the interests of the livestock industry, ie a grain consumer, and meet a strategic aim of curbing meat imports of which it has, historically, taken in huge amounts.

The protein sector, “mainly pork and poultry, is struggling to raise prices to reflect higher costs of feeding,” Agritel said.

The argument against an export squeeze, however, is that Russia needs the foreign earnings, to replace those lost to the tumbling oil price.

Certainly, Chicago wheat futures for March were 0.7% lower at $4.78 a bushel, falling back below their 50-day moving average, which they closed above in the last session for the first time in two months.

Indeed, the recovery above it in the last session had “triggered a light round of fund buying”, Benson Quinn Commodities said.

‘Fears about late frosts’

Still, all wheat’s chart appeal has not been lost.

“As long as the Chicago market continues to hold the uptrend line that has been developing since the first week of January,” which it is, “there is potential for additional short-covering,” Benson Quinn Commodities said.

As for weather, there is some potential for worries over Europe, where a report from the European Union’s Mars unit on Monday flagged the lack of winter hardiness of crops, because of mild weather, making them vulnerable should a cold snap occur.

“In Western Europe, temperatures are back over normal conditions and are raising fears about late frosts during spring,” Agritel said.

The Paris-based analysis group added that “hard frosts on a large part of Russia, during last weekend, should have a limited impact on crop potential, thanks to a proper snow cover”.

‘Argentina’s weather a concern’

The soybean market is concerned over some weather aspects too, in South America, where there are some easing in worries over excessive rains in central Brazil, where harvesting has begun, and too little in the south, where crops need moisture.

“Dry areas of the south will start to see an increase in precipitation and the wetter areas of the north will start to see drier weather,” said Terry Reilly at Chicago-based Futures International.

However, for Argentina worries are growing over a lack of rainfall.

“Argentina’s weather pattern is a concern,” said Mr Reilly, noting a forecast that “net drying will continue from Buenos Aires into southern Santa Fe and southern Entre Rios, and also parts of Cordoba”.

This after a weekend when “it was hot again in central Argentina, accelerating net drying”.

Vegetable oils divergence

Still, soybean futures for March stood down 0.5% at $8.76 ¼ a bushel, dropping back below their 40-day moving average, and getting little help from soyoil, which dropped 0.6% for March to 30.25 cents a pound.

Soyoil’s drop contrasted with a 0.7% increase to 2,476 ringgit a tonne in April futures in rival vegetable oilpalm oil in Kuala Lumpur.

But that divergence tallied with Chinese import data for December, which showed soyoil imports tumbling by 62% to 15,735 tonnes, to take to 28% their decline for 2015.

Palm oil imports were up 9.3% year on year in December, at 667,739 tonnes. They rose over 2015 by 11.0% to 5.91m tonnes.

China import doubts

For corn, the much-watched Chinese import figure fordistillers’ grains, a feed ingredient derived from corn, came in at 419,896 tonnes last month, from de minimis levels a year before.

For 2015 as a whole imports hit 6.82m tonnes, an increase of 26%.

For ethanol too, imports (mainly from the US, where the biofuel is made from corn) surged to 180,984 cubic metres last month, and to 686,904 cubic metres for 2015.

For 2014, imports were 26,717 cubic metres.

Still, there are doubts that the surge in distillers’ grains buy-ins in particular will continue, with China having opened an investigating into alleged dumping of the commodity by the US, and attempting too to reform its corn subsidies to encourage more demand for domestic supplies.

This was underlined on Monday with talk of a Chinese move towards market-oriented pricing.

Chicago corn futures for March dropped 0.6% to $3.67 ½ a bushel.

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