This week looks like being altogether more significant to
agricultural commodity markets than the last one.
Not only will it bring the annual rebalancing exercise by
index funds, which are expected to buy large amounts of corn and wheat futures
to rejig their portfolio weightings to the levels dictated by the index
followed, but it will witness a slew of important US Department of Agriculture
As if the USDA's monthly Wasde crop supply and demand report,
a key part anyway of the agricultural commodities calendar, was not enough for
investors, Thursday will also see the publication of quarterly data on US grain
stocks, briefings with a particular history of causing price movements.
On top, there will be data too on US winter wheat sowings –
which could show area at its lowest in a century, if low prices deterred
plantings as much as most investors believe.
And this before factoring in the market factors we saw last
week too, such as the idea that investors are more ready to buy commodities
"The commodity indexes are leaning friendly," said Water
Street Solutions, with the CRB index, for instance, up 8% from a low set two
"While more confirmation is needed, as 2017 progresses we
may well see a stronger commodity environment."
On a more negative tone, there was the hangover from Friday's
poor US export sales data, for corn, soybeans and wheat, which hurt prices in
the last session, to factor in.
Furthermore, were the weekly Commodity Futures Trading
Commission data on hedge fund positions to consider, showing more buying in
some ag contracts than had been expected (which can be taken as a negative
signal, in meaning that much buying pressure has already been realised).
'Look for a firmer
All in all, Richard Feltes at RJ O'Brien advised investors
to "look for a firmer tone" to trading in early deals on Monday, factoring in "Friday's
row crop sell-off, Monday's kick-off of the index fund rebalancing, and the lower-than-expected
managed fund corn short".
And that was just about the way things started, with grains
in particular firm, marrying with ideas of substantial index fund buying ahead.
"Index fund rebalancing starting January 9 reportedly will
trigger 60,000-100,000 new corn long contracts and 30,000-50,000 new wheat
longs," Mr Feltes said.
At CHS Hedging, Joe Lardy also flagged a figure of 60,000-100,000
contracts for index fund corn buying, but put wheat at 40,000-60,000 contracts.
"That market is much thinner than corn so the chatter is
that the buying impact will be more influential," he said.
"There should be significant buying of wheat futures in
order to get the wheat allocation back in line."
Still, in soybeans
"the rebalance is less than 10,000 contracts so it shouldn't be a market moving
'Support should fade'
Benson Quinn Commodities went with the idea that index funds
are "needing to buy an estimated 35,000 Chicago wheat contracts, 15,000 Kansas City
wheat, 63,000 corn and a nominal 6,600 soybeans".
Still, the broker urged caution over expecting too much of a
boost to prices.
"Any support from rebalance should fade about midweek with
corn and wheat overbought and trade squaring for USDA reports that should show
record large US corn and bean stocks and record global supplies."
Furthermore, there is the idea that other investors, noting the
buying that index funds will make this week, have front-run it – ie buying corn
and wheat ahead, and potentially selling into the index fund purchasing wave.
(Hedge funds cut their net short in corn by more than 17,000
lots in the week to last Tuesday, although the buying in Chicago wheat, at
5,334 lots, was more muted, latest CFTC data show.)
Still, as of 09:30 UK time (03:30 Chicago time), Chicago wheat futures were 0.5% higher at $4.25
½ a bushel, remaining above their 100-day moving average, gained last week for
the first time in six months.
Cold weather is also in focus, presenting a potential threat
of frost damage to crops in many geographies, including the US, where according
to MDA, "some spotty winterkill was noted in western and central Nebraska.
That said, "milder temperatures will return this week," the
weather service added.
Agritel flagged temperatures in Russia too, where also in the
south of the country (important for wheat exports) "weather is mild, near
Moscow temperatures fell to -25 degrees Celsius".
Still, snow cover "looks good enough to protect the crops
where temperatures are the lowest, limiting the risk of winter killing".
More price gains to
On the bullish side, there is the prospect of Thursday's
USDA winter wheat acreage data, expected to come in at 34.35m acres, according
to a Bloomberg survey, down from 36.14m acres last year.
And then there is the idea that after more than four years
of falling wheat prices, the bear market in the grain may be over, a factor
which some technical signals are indicating.
"We've been waiting for wheat to break above resistance on
the chart and it looks like a new year is what it needed," said Water Street Solutions.
"A 'bull run' is unlikely to be sustained in the wheat
market with the ample global supplies. But in the short term wheat can always
demonstrate illogical behaviour.
"Watch Chicago opportunities at $4.45 a bushel and if
possible, $4.90 a bushel."
'Margins have dropped
off very sharply'
Wheat's headway helped corn
too, a key rival in the feed grain market.
Chicago's March corn contract was up 0.3% at $3.59 ¼ a
Still, its discount, at more than $0.66 a bushel, is
substantially higher than in early December, when it touched $0.42 a bushel
(March basis), as strong signs from Argentine and Australian harvests added to
ideas of huge world wheat supplies.
Although corn has gained support from strong demand from
ethanol plants, this dynamic could fade, given declining output margins.
"Margins have dropped off very sharply from 50 cents just 3
weeks ago to the current level of 8 cents," CHS Hedging said.
Corn outpaced soybeans,
which added 0.1% to $9.95 ½ a bushel for March delivery, in line with what would
be expected from assessments of what the index fund rebalance has in store.
Also on the negative side for prices is continued talk over the
poor USDA export sales data unveiled on Friday of just 87,500 tonnes – down 91%
week on week.
Still, are investors being too glum?
"It should be noted importers have already booked 86% of
USDA's export projection" for 2016-17, said Terry Reilly at Futures
"We would not be surprised if USDA lifted their soybean
export figure for the US on January 12" in the Wasde report.
Also on the more positive side for values is what MDA said
was a slightly wetter outlook for weather in Argentina than thought on Friday.
"Rains in southern crop areas will result in some minor
improvements in moisture," the weather service said.
"However, rains in central areas will increase wetness
concerns," with the extent of moisture provoking worries over whether seeding
will be completed.
Elsewhere in the oilseeds complex, palm oil was strong too, adding 1.2% to 3,113 ringgit a tonne in
Kuala Lumpur, although the firmness did not translate to rival vegetable oil soyoil which gained 0.3% to 35.07 cents
a pound in Chicago.