Is funds’ short-covering spree in ags running out of steam?
Certainly, grain futures have lost the buoyancy they had even earlier this week, when soybeans, for instance, recorded their ninth successive session without a negative close.
Corn and wheat too managed to cross back above key moving averages helped by concerns that hedge funds’ record short position, as revealed by regulatory data two weeks ago, was unsustainable given some weather concerns and the prospect of northern hemisphere spring sowings.
The planting period typically seems some risk premium injected into prices to account for the risk of weather threats such as excessive rain which can delay, or prevent, sowing.
And plantings come into particular focus at the end of this month, when the US Department of Agriculture unveils the results of a survey of US farmers’ spring planting intentions, which offer the first insight from the field of what growers are thinking.
‘Short-covering losing momentum’
Still, in early deals on Wednesday, a gentle retreat was in vogue among grain contracts, amid talk of contracts becoming “overbought”, and of funds having achieved a stack of the position-closing needed to make their short betting look less overcooked.
“I expect the market to drift off recent highs with further short-covering losing momentum,” said Nick Sax at Minneapolis-based broker Benson Quinn Commodities, an analysis which chimed with the market mood.
At Halo Commodity Company, Tregg Cronin flagged the negative too to prices of farmer selling encouraged by higher prices, at a time when growers need funds to pay for spring sowing programmes, and when the need to empty silos ahead of the next harvest is present, if not urgent.
“Any rallies are likely to be capped by a well-supplied US farmers, so upside targets need to be practical,” Mr Cronin said.
(The dollar was a touch higher too, up 0.3% against a basket of currencies, so undermining values of dollar-denominated exports in making them less competitive, although direction later will depend on comments from the Federal Reserve (due at 18:00 UK time, 13:00 Chicago time) after its latest monetary policy meeting.)
‘Cold enough for frost’
Still, bulls were not without some hope, with concerns remaining over the weather in the US Plains, hard red winter wheat country, where dryness looks like continuing to present some challenge to winter crops, and cold is a threat too.
“Not much rain will fall in the high Plains region for the next two weeks,” said Terry Reilly at Chicago broker Futures International.
On temperatures, he said that “early morning lows through Sunday will be cold enough for frost and light freezes in several hard red winter wheat production areas, especially for the high Plains region.
“Lows will be coldest Saturday,” and in the 20 degrees Fahrenheit in some regions.
‘Wouldn’t want to be much colder’
There was some debate over how much of a threat that poses to crops.
At Commonwealth Bank of Australia, Tobin Gorey said that while the freeze was “unlikely to do much damage to the crop… you never can tell with cold snaps, as they can sometimes take a nasty turn.
“The market will remain wary until it passes.”
Benson Quinn Commodities said that “you wouldn’t want to be much colder” than low 20s Fahrenheit “for very long”, if wishing to avoid crop damage.
“Expecting some vegetation to be burnt back in a few areas probably isn’t out of line.”
This, combined with the fact that funds do retain a notable net short in wheat, “is probably enough to keep the sellers from being very aggressive”.
Six-month high
And certainly, that was the case for Kansas City-traded hard red winter wheat futures for May, which edged 0.1% higher to $4.89 ¼ a bushel as of 09:00 UK time (04:00 Chicago time), among its highest levels of the past three months.
However, Chicago soft red winter wheat was out of favour, dropping 0.5% to $4.75 a bushel, a disparity compared with hard wheat that raised suspicions of spread trades between the two varieties.
The premium of Kansas City futures to Chicago futures, May basis, touched $0.14 a bushel earlier for the first time in six months – and representing a marked turnaround from the $0.12-a-bushel discount that hard wheat stood at a month ago.
One extra factor for wheat investors to consider later are the results of the latest tender by Egypt’s Gasc grain authority, and what insight they give into relative pricing on the physical market, and indeed how keen merchants are to trade with the north African country, amid some continued worries over a zero tolerance policy on a fungal contamination in cargos.
A report from the USDA’s Cairo office overnight pegged Egyptian imports at 10.6m tonnes in 2015-16, 900,000 tonnes below the official USDA forecast, because of “disruption” caused by this policy, and by “foreign exchange rationing” too.
‘Shortage of storage space’
Row crops also fell, with corn for May down 0.4% at $3.67 a bushel – back below its 40-day moving average – undermined in part by ideas of improved sowing weather in the Mississippi Delta region, an early planting area, where heavy rains have prevented fieldwork.
“US weather for planting progress will gradually improve by this time next week,” said Futures International’s Terry Reilly.
Meanwhile, CHS Hedging flagged some pressure on ethanol producers, with record stocks of the biofuel “reportedly causing a shortage of storage space for the fuel”.
A cutback in output would reduce demand from a sector which is a big user of corn, and clues to any slowdown will be revealed later in weekly US ethanol production and stocks data.
Industry data
Soybean futures for May were 0.5% down at $8.87 ¼ a bushel, although remaining above a bunch of key moving average lines.
There was some disappointment among investors that the contract closed lower on Tuesday, for the first time in 10 sessions, despite some apparently bullish industry data on US soybean crush volumes for February, of 146.2m bushels.
The figure was “7.4m bushels greater than expectations”, Mr Reilly said, adding that this had cut the chance of a further downgrade to USDA expectations for US soybean crush for 2015-16.
“Look for USDA to leave its US soybean crush estimate unchanged at 1.870bn bushels in its April supply and demand update,” ie Wasde report.
Big soyoil stocks
Still, on the downside for the soy complex, the data also showed US soyoil stocks 241m bushels above expectations at 1.792bn pounds.
CHS Hedging said: “Soyoil stocks were well above the estimate”, and showing “the largest increase in over three years”.
Indeed, it could be argued that, with soyoil stocks high, and imports of Canadian canola meal record large too so curbing the need for soymeal, dynamics bode ill for soybean crushers for now.
Meanwhile, Brazil’s harvest continues apace, with “more than half of the soybean crop” in the barn, said Mr Reilly, adding that “regardless of slow producer selling, many of the soybeans are finding their way to crush plants and ports” to compete with US exports on the international market.
Palm oil vs soyoil
As an extra factor for vegetable oil investors to consider, Malaysia on Tuesday revealed that it is to raise its crude palm oil export tax to 5%, from the zero rate which has applied since May last year.
The tax is dependent on market prices, kicking in when a reference price tops 2,250 ringgit a tonne, and varying from 4.5-8.5%, depending by how large the gap to the reference level is.
Palm oil itself dropped 0.5% to 2,598 ringgit a tonne in Kuala Lumpur.
Chicago soyoil for May was 0.4% down at 32.35 cents a pound, having gained in the last session – with ideas that Malaysia’s tax will boost the competitiveness of alternatives to palm oil offsetting disappointment at the US inventory data.
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