PRINTABLE VERSION   EMAIL TO A FRIEND   RSS FEEDS 09:07 GMT, Tuesday, 16th May 2017, by Mike Verdin
AM markets: cotton rally frays. But soybean prices hold firm

The previous time, before Monday that is, that spot cotton futures set a record high for trading volumes augured poorly for prices.

That was in November 2010, when volumes hit 101,516 contracts (which stood as the highest until the last session's 109,542 lots).

And it was "set on a day in which the market traded up the 600-point limit, then traded limit down and closed at 145.65 cents a pound, almost limit down", said Herman Kohlmeyer, Jr at broker MJ Nugent & Co.

"Volume that day was swelled by the build-up of Goldman roll activity that could not be executed the previous two sessions, and that record volume came one day after the contract high," he added.

'Seemed to scare the market'

This time, the spot July contract is now in its third session since it started setting contract highs, which were exceeded again on Monday as prices leapt further to a fresh near-three-year top.

And a certain amount of vertigo looks to be setting in, with the contract standing down 1.1% at 84.38 cents a pound in New York as of 09:00 UK time (03:00 Chicago time).

That said, of course, the lot temporarily fell well back in the last session from its highs (albeit not into negative territory) only to recover ground.

Then, as traders at Ecom said, "heavier selling activity seemed to scare the market which saw the July contract sell off 400+ points over the hour and make new session lows at 82.52 cents a pound.

"However, the buyers stepped in and bought the market out of the lows back up to the middle of the session's range."

'Continued flow of new money'

Whether cotton futures - which have soared since better-than-expected US export data on Thursday spurred ideas of supply tightness - can revive again may depend in part on how many short positions investors still have to close.

The limit-up session on Friday prevented many of these being covered, although there was more scope in the last session.

"Short-covering may have contributed to a larger share of the business on Monday, since traders were able to operate with futures except for the 100 minutes or so in which the market was locked limit-up," said Mr Kohlmeyer.

"But the market certainly enjoyed a continued flow of new money by those compelled to play out a winning hand."

Old crop vs new

That said, fundamental news overnight was not that helpful, particularly for new crop cotton contracts, in showing decent progress on US cotton sowings in the week to Sunday, of 12 points to reach 33% completion.

That remained behind the typical pace, but by a modest 4 points.

Missouri growers got 32% of their cotton crop seeded in a week, while Tennessee farmers planted 28%.

Sowing progress looks "on track", said Tobin Gorey at Commonwealth Bank of Australia, adding that while "the market has some worries about the new US crop some dryness in around the border shared by Florida and Georgia - these  are minor for now".

While "seeing logic" in ideas that prices for further ahead contract might benefit as a spillover from the July's gains, which "suggest the new crop will be eagerly bought when it becomes available", he added that it had "a qualm" about that thinking, in that the US is not the only cotton supplier.

New crop December cotton futures, despite having severely lagged the July contract in the price climb, dawdled too in the retreat, shedding 0.4% to 74.79 cents a pound.

Greenback eases

In Chicago, grains were lower too, and this despite a weaker dollar, which dropped 0.4% to toy with fresh six-month lows against a basket of currencies, so making dollar-denominated exports such as many commodities that much more affordable.

Corn was hardly helped by the US Department of Agriculture crop progress report overnight which showed US sowings of the grain at 71% - up 24 points week on week, 3 points ahead of trade expectations, and marginally ahead of the average pace for the time of year too.

Growers in Iowa, the top corn-producing state, planted 49% of their crop in a week to reach 84% completion, 14 points ahead of the typical pace.

'Planting will be able quicken'

The data was deemed "negative" to prices by Richard Feltes at broker RJ O'Brien.

And there is the prospect of benign weather ahead to factor in too, with CBA's Tobin Gorey saying that "weather forecasters expect drier and drying conditions to persist this week in the US Midwest.

"Corn planting will be able quicken as the week progresses."

Benson Quinn Commodities said that "the 6-10 day weather forecast is calling for below-normal temperatures and above-normal precipitation".

That said, noting that the "average for planting progress next Monday is 85% and 55% emerged", the broker said that "these averages should be attainable".

Conab vs USDA

Other factors being monitored by corn investors include a move by Brazil to impose tougher barriers on imports of US ethanol, which soared five-fold to a record 720m litres in the January-to-March quarter.

The measures involve imposing on importers a limit applied to domestic ethanol producers that they must have at least 8% of total annual sales of the biofuel in stock as of March 31, a measure aimed at ensuring supplies between cane crushing seasons (which see lowball processing volumes early in the calendar year).

Furthermore, the Brazilian safrinha harvest is in focus too, with harvest near.

"Trade will be closely monitoring Mato Grosso yields relative to expectations," said RJ O'Brien's Richard Feltes - highlighting that Brazil's own Conab bureau, "with a poor track record on safrinha corn production forecasts", is pegging overall corn output in 2016-17 at 92.8m tonnes, compared with the USDA's 96m-tonne figure.

 Real strength

Brazil is being seen as a particularly strong influence on the soybean market at the moment although a positive one for prices, with a recovery in the Brazilian real seen deterring producer sales.

"Farmer selling in Brazil has been really slow this season," said Joe Lardy at CHS Hedging.

"We did see a bit of a pick-up in selling when the exchange rate weakened to the R$3.20 mark to $1.

"However, the central bank of Brazil has been very involved and the currency has quickly strengthened to R$3.1067 which should once again freeze the producer."

A stronger real cuts the value in local terms of assets, such as soybeans, traded internationally in dollars.

Benson Quinn Commodities flagged, in the last session, a dearth of producer sales, with "Brazilians absent on two-month high in the real currency, while the US farmer has little of 2016-17 crop left to market and is waiting for June/July rally to sell any remaining bits".

Soybean futures for July in fact nudged 0.25 cents higher to $9.65 a bushel.

'Market will be down again'

Wheat futures for July showed modest losses, of 0.2% to $4.22 a bushel, with little unease over USDA data showing 2 point reduction week on week, to 51%, in the proportion of US winter wheat rated "good" or "excellent".

The figure was still far better than might have been expected a couple of weeks ago, when cold, snows and wind raised fears for large-scale crop deterioration.

"There is a lot of potential for this hard red winter wheat crop despite the acreage reduction and weather events of early May," said Benson Quinn Commodities.

"When I combine respectable ratings, good planting progress, weak technicals the funds having room to add shorts or liquidate length and the blah fundamental picture, I have to believe the market will be down again on Tuesday."

'Favourable to crops'

Improved weather in the European Union, the top wheat producer, is undermining bullish feeling too.

"In France, the rise of temperatures added to perspective of rains from tomorrow are favourable to the crops," said Agritel.

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