PRINTABLE VERSION   EMAIL TO A FRIEND   RSS FEEDS 10:10 GMT, Thursday, 13th Jul 2017, by Mike Verdin
AM markets: bears win the battle. But what about the war?

The bears who returned to prominence in the last session, on more-generous-than-expected supply data issued by the US Department of Agriculture, remained in control on Thursday.

Prices of all three major Chicago contracts corn, soybeans and wheat stood lower in early deals.

That said, futures stood above opening-session lows, particularly for wheat, with Minneapolis spring wheat futures for September down just 0.2% at $7.81 a bushel as of 10:00 UK time (04:00 Chicago time), above an intraday nadir (so far) of $7.70 a bushel.

Battle vs war

The reluctance to press home further the outcomes of Wednesday's USDA Wasde report which estimated world stocks of all three crops above market expectations, with US inventory figures above forecasts for corn and wheat too was perhaps in part a reflection that it is still early in the trading day.

Futures tend to show less volatility in early trading hours than later, when the big US trading volumes come onstream.

But there was also an idea that while bears may have won the battle, in terms of getting favourable outcomes from the Wasde, they have not yet won the war, with plenty of time yet to go before most northern hemisphere crops are in the bar, and we see how close the forecasts end up being to reality.

Downgrade delayed?

Take the USDA's decision to stick with a 170.7 bushels-per-acre corn yield, rather than downgrading it 1.1 bushels per acre, as the trade on average had expected.

"Analysts were looking for a downward revision in the 170.7 bushels-per-acre US yield due to unfavourable weather," said Terry Reilly at Futures International, with heat and dryness besetting crops in parts of the western Corn Belt and northern Plains.

Still, this does not mean that the yield figure will not be downgraded further ahead.

As some observers pointed out ahead of the Wasde, the USDA is reluctant to lower yield estimates so early in the growing season, with the key pollination period still in its early stages.

'Just isn't very common'

"Given the subpar corn ratings, I could understand wanting to trade lower yields," said Benson Quinn Commodities.

"However, seeing production shifts in July just isn't very common for the row crop markets."

Mr Reilly said: "In reality the US corn good or excellent condition ratings this past month were not as low as other unfavourable years, such as 2012."

However, "we look for a sub-170.7 bushels-per-acre yield when USDA issues its first survey on the US crop", with the August Wasde, he added.

'Still looms large'

Of course, such ideas depend on how the weather turns out too with Tuesday-night rains in Illinois and Iowa in fact a contributory factor to the price losses of the last session.

"US Corn Belt weather still looms large for the market," said Tobin Gorey at Commonwealth Bank of Australia.

"Look for consolidation and funds to rethink what's next with each new weather model prior to the weekend," said Benson Quinn Commodities.

Corn Belt forecasts "continue to hold steady, hot and dry in the west with cooler wetter conditions in the east". 

Futures fall

Rabobank said that the Midwest outlook "for the rest of the month is not very beneficial calling for hot and mainly dry weather, while night temperatures are expected to stay unfavourably high".

Against this backdrop, corn futures for December fell by 0.9% to $3.95 a bushel, consolidating a sub-$4.00-a-bushel price, but staying ahead of most major moving averages, bar the 10-day.

Soybean futures for November stood down 1.6% at $10.08 a bushel, reversing a bit of their resilience of the last session, when lower-than-expected US inventory estimates offered some resistance to downward movement.

One worry for investors is that the USDA may yet cut its expectations for soyoil use for 2017-18, given the relatively low mandate levels for biodiesel use next year, as unveiled last week. (Biodiesel is made from vegetable oils.)

Futures International's Terry Reilly said that while "we applaud USDA for lowering US soyoil for biodiesel use in 2016-17 given the shortfall in use expectations during the October-through-May period", holding the figure for 2017-18 looked less supportable.

"USDA failed to lower new-crop soybean oil for biodiesel, and left it at 6.45bn, despite the EPA's recommendation for a small reduction in advanced biofuel blending rates for 2018."

'Downgrades ahead'

As for wheat, there are broad expectations that the market has not seen the lowest USDA estimate yet for the drought-tested domestic spring wheat crop.

"The spring wheat [stocks estimate] was projected to fall to a 15-year low, and we expect it to be revised lower in the August update," Mr Reilly said.

Benson Quinn Commodities, for instance, said that on the production side the USDA's South Dakota yield estimate of 34 bushels per acre "is very likely too high"

While the broker "can't argue with Montana at 26 bushels per acre, there will be more abandonment than the 5% they are using today. That could get to 10% pretty easily".

"USDA could cut 35m-50m bushels off this production number."

'Technical structure is negative'

For winter wheat, however, the bullish case was less vocal, although Rabobank did take issue with the 3.0m-tonne upgrade to a near-record 72.0m tonnes in the Wasde estimate for the Russian all-wheat crop, terming it "optimistic".

"We remain cautious that this might not materialise," the bank said, also highlighting weakened expectations for crops in the likes of the EU and Ukraine, and saying that it expected "further cuts in the USDA's global wheat production number later this year".

Still, on a more bearish note, Benson Quinn Commodities flagged that the fund short-covering wave in winter wheat futures and options had created scope for fresh selling, should speculators be so minded.

"The technical structure is negative, and the funds have more room than they want to sell the winter wheat classes after having covered shorts in Chicago and building of length in Kansas City."

Chicago soft red winter wheat, the world benchmark, stood down 1.8% at $5.27 a bushel for September delivery.

'Begun turning more bearish'

Cotton fared better, adding 0.5% to 67.59 cents a pound in New York for December delivery, despite a Wasde report for the fibre deemed "slightly bearish" by Rabobank, in cutting the US stocks estimate for the close of 2017-18 by less than investors had expected.

Traders at Ecom were also somewhat cautious on price prospects, saying that "technically, the market has begun turning more bearish on the longer term charts.

"The market has been in a range trading theme for the last few weeks, but the over the last few days we have seen the 200-day exponential moving average (EMA) cross above the 50-day and 60-day EMA.

"The charts are looking more bearish each day and if we can get down through 66.50 and 66.15 then we may be looking for 65.00 cents a pound or lower."

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