When will the selling in grain and oilseed futures stop?
The negative sentiment which has notably driven Chicago wheat futures back in time, taking them to their lowest level in the last session since June 2010, showed no sign of easing up on Wednesday.
It was certainly no help that external markets were in poor form too, with Brent crude down 1.3% at $32.84 a barrel as of 09:00 UK time (03:00 Chicago time) extending its reversal on comments by Saudi Arabia raising doubts about world oil production cuts.
Shares were mainly lower too, with Tokyo stocks shedding 0.9% and Sydney ones 2.1%,
China import standards
Nor was the flow of crop specific news overnight exactly ideal for bulls in canola, with China announcing that it will toughen standards on the amount of foreign material allowed in with shipments of the oilseed from Canada.
Winnipeg canola futures for May, which lost more than 2% in the last session (possibly on early leakage of the news, which was referred to Canada on Tuesday) to touch their lowest level in nearly two months eased 0.2% to Can$460.60 a tonne in early trade.
It is also a setback for the oilseed – which, unlike soybeans, is particularly heavy in oil rather than meal, in terms of the two main processing products – thatpalm oil prices extended their retreat, falling by 1.1% to 2,522 ringgit a tonne in Kuala Lumpur.
Trading lower for fifth successive negative session was encouraged by continued comment over data on Tuesday from the Southern Palm Oil Millers’ Association that showed output up 2.6% for the first 20 days of the month, compared with the same period in January.
‘Another round of bearish data’
Still, one focus for grain investors is news yet to come, from the US Department of Agriculture outlook forum on Thursday and Friday, which will give forecasts for domestic crop balance sheets for 2016-17 deemed much more reliable than the so-called Baseline data released earlier.
However, market expectations for the data hardly look too supportive for prices either, with the 2.9m-acre release of area from winter wheat (as revealed by the USDA last month) seen allowing higher sowings of other crops.
US corn sowings are seen being pegged at 89.7m acres, up from 88.0m acres last year, with production seen at 13.719bn bushels, allowing stocks to grow a further 160m bushels over 2016-17 to 1.891bn bushels, according to the market consensus.
Soybean plantings for this year are seen coming in at 83.345m acres, up from 82.7m acres last year, and enough to allow a crop of 3.821bn bushels, and lift carryout inventories by 56m bushels year on year to 516m bushels.
For wheat, the USDA estimate for area (including spring plantings) is forecast at 52.4m, down some 2.2m acres year on year, giving a harvest of 2.0bn bushels, and dragging year-end stocks up 39m bushels to a little over 1.0bn bushels.
“The trade is expecting another round of bearish data,” Benson Quinn Commodities said.
‘Harvest and port delays’
And certainly, crop futures struggled in early deals in Chicago too, with soybeans, for instance, adding 0.2% to $8.71 ¼ a bushel for May delivery.
CHS Hedging flagged other pressures on the market, with “talk of poor crush margins and just enough farmer pricing”, ie producer sales of the crop.
Furthermore, soybean bids by US exporters “were noted lower” on Tuesday, with “some basis trades at lower levels reported”.
OK, the weather outlook has turned a little less benign for South America.
“Weather forecasters are looking with concern at some wetter weather developing in Brazil,” said Tobin Gorey at Commonwealth bank of Australia.
“Harvest and port delays look somewhat more likely.”
However, he raised doubts over the weather providing more than temporary support for prices, with Brazil’s soybean harvest, after all, now running ahead of last year’s pace, according to data from Imea and Safras.
‘The question in wheat’
Corn futures, meanwhile, fell by 0.1% to $3.66 ¼ a bushel for May delivery, undermined by the weakness in oil, too which it is linked through its role in making ethanol, besides the weakness in rival grain wheat too.
Indeed, Chicago wheat futures for May dropped 0.2% to $4.54 ¾ a bushel, with the March contract earlier hitting $4.46 a bushel, a fresh low for a spot contract since 2010.
“The question in US wheat futures is whether or not the funds are too short,” said Benson Quinn Commodities, adding that the selling on Tuesday “would indicate they are not”.
While the wheat market is “approaching oversold conditions, the new contract low and close near the low side of the daily range” were negative harbingers for futures at least early in the current session.
‘No threatening cold’
Kansas City hard red winter wheat for May, meanwhile, shed a more significant 0.5% to $4.54 ¼ a bushel, returning to a discount against Chicago soft red winter wheat.
Kansas City contracts were protected somewhat in the last session by technical factors, being less liquid, and so less traded by speculators, and with charts not being so negative, with prices for instance still remaining a bit above six-year lows.
Still, from a fundamental perspective, rains in the southern US Plains, a big hard red winter wheat growing area, are not beneficial for prices, easing dryness concerns.
“Moderate rainfall was noted from southern Oklahoma out through the Texas panhandle on Tuesday, which will benefit hard red winter wheat areas,” CHS Hedging said.
And looking ahead, Terry Reilly at Futures International said that “another US storm may impact the central and south eastern US Plains, Delta, south eastern states and Ohio River Valley during midweek next week.
“No threatening cold or warm weather is expected in US crop areas over the next two weeks should trigger additional selling.”
‘Least worst option?’
In New York, cotton fell too, by 0.2% to 57.87 cents a pound for May delivery, after in the last session hitting their lowest since 2009, on a nearest-but-one-contract basis.
CBA’s Tobin Gorey said: “Analysts are in consensus that US cotton plantings will rise in 2016,” more on which will be revealed at the USDA outlook forum.
“Whether prices are now low enough to discourage farmers from planting more cotton is unclear,” he added.
“Unfortunately, with alternative crop prices also very low, cotton might still be the ‘least worst option’.”
That said, Rabobank was not so certain of a rise in cotton sowings, in a report which cut forecasts for cotton prices, but to levels above the futures curve.
‘Farmers can earn returns’
Returning to the original question of when the fall in futures prices will stop, Richard Feltes issued a somewhat discomforting message, in pointing out that values were still above production costs, if considering only variable costs such as seed, fertilizers and sprays.
Mr Feltes said: “Economists note that prevailing corn and soy prices are offering returns above 2016 variable cost of production,” which he quoted at $317 an acre for corn and $166 an acre for soybeans.
“Assuming corn and soybean yields of 187 bushels per acre and 55 bushels per acre respectively, variable cost of production per bushel are $1.70 and $3.02 respectively.”
This is “well below current cash prices—a signal that farmers can earn returns over variable costs”.
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