PRINTABLE VERSION   EMAIL TO A FRIEND   RSS FEEDS 09:35 GMT, Tuesday, 10th Jan 2017, by Mike Verdin
AM markets: grains ease, despite ideas of index fund buying

If index funds are meant to be buying this week, why are grain prices struggling?

This week's rebalancing process - an annual event in which index funds rejig commodity allocations in their portfolios back to the weightings of the index followed was billed as bringing significant buying to grains.

Yet corn and wheat futures posted only modest gains in the last session, and started Tuesday on a weak note.

"The big impact was supposed to be in the corn and wheat markets, but those were the commodities that brought up the rear" on Monday, said Joe Lardy at CHS Hedging, terming the index fund rebalancing as "overhyped".

'Late buying'

In fact, there were signs in the last session of buying by index funds, which are reputed for purchasing late in the day.

Both corn and wheat did see late price revivals, which pulled them up from negative territory.

Broker Benson Quinn Commodities, for instance, said that "corn futures traded firmer near the end of the session that was supported by late session index fund rebalance.

And in wheat, "the late buying in Chicago and Kansas City may have been related to the index fund annual rebalance that continues for the rest of the week."

'Aggressive offers tough to find'

Besides, the rebalancing process, in being long telegraphed, is anticipated by many other investors, who sell into index fund buying meaning the actual positive effect of the process may have already been instilled.

Furthermore, there are other plenty of other factors for investors to consider too at the moment, including the prospect on Thursday of a series of key US Department of Agriculture data, including the monthly Wasde crop report, grain stocks data, and an estimate too of winter wheat sowings.

The latter are expected to be sharply lower, with a poll by Reuters showing that investors expect a figure of 34.14m acres down 2.0m acres year on year and a figure which would mean the smallest area of plantings since 1913.

"Aggressive offers of wheat may be tough to find until Thursday's report comes out, as the trade expects sharply lower acreage numbers," said Benson Quinn Commodities.

'Not threatening?'

Still, March wheat futures eased back a touch in Chicago in early deals, standing 0.1% lower at $4.26 a bushel as of 09:45 UK time (03:45 Chicago time), although remaining above their 100-day moving average, which was regained last week.

The USDA data are also expected to reconfirm record world stocks of wheat at the close of 2016-17, pegged coming in at 252.0m tonnes, a marginal downgrade on the previous estimate.

And cold weather worries for wheat, which helped prices rise early last week, are not gaining momentum at the moment.

In the US, for instance, "pockets of winter wheat with lack of snow coverage from Kansas to Illinois were exposed to cold temperatures over the weekend, but we don't think it was threatening," said Terry Reilly at Chicago broker Futures International.

And while freezing temperatures have been a concern in the former Soviet Union too, where the Black Sea has reportedly frozen for the first time in five years, "the impact of extreme cold, especially in Russia, should be reduced thanks to the presence of snow protection", said Agritel.

Producer selling

Still, wheat was, despite easing, able to gain ground on corn, which dropped 0.6% to $3.58 a bushel in Chicago for March delivery.

The wheat-corn spread, which has been depressed by the need for wheat to buy more feed demand and erode its record inventories, is now up more than $0.12 a bushel March basis so far in 2017.

While the Wasde is expected to trim estimates for US and world corn stocks, prices are feeling pressure from the somewhat improved weather outlook for South America.

There is also talk of increased selling by US farmers in a new tax year, and at prices which remain higher so far in 2017, so offsetting the positive impact too of decent US export data, as measured by cargo inspections, out on Monday.

"USDA export inspections of 877,000 tons were above a range of trade expectations, and up from 638,000 tons from the previous week," Futures International's Terry Reilly said.

So far in 2016-17, "inspections for corn of 17.936m tonnes, or 706.1m bushels, are running 78.4% above a year-ago level".

'Trifecta of forces'

Soybeans fell too, by 0.6% to $9.99 a bushel for March delivery, losing many of their gains of the last session, when they were the surprise winner (in not being seen as a major beneficiary of index fund buying).

"Oversold technicals, a tumble to two-month lows last week and positive crush margins for China was the trifecta of forces that had beans rallying" on Monday, Benson Quinn Commodities said.

In fact, there is plenty of talk of Chinese interest in US soybeans, with the Brazilian harvest not progressed enough to see its new crop supplies at port at yet.

Terry Reilly flagged "talk China was back in, pricing soybeans".

'Unusual activity'

China may have been behind what CHS Hedging's Joe Lardy termed a "surprise" sale for export of 120,000 tonnes of US spring wheat, announced on Monday.

"We didn't see any spring wheat announcements in 2016 so this is unusual activity," Mr Lardy said.

"Most analysts are thinking this could be business to China as they have been taking a variety of wheats from the US in recent weeks"

Palm data

This may all have been a reaction to the stronger renminbi, whose spike higher late last week (now largely reversed) was the talk of markets.

But ideas of strong demand were not supported by prices in China itself, where Dalian soybeans for May, the best-traded contract, settled down 1.0% at 4,185 yuan a tonne.

Nor, elsewhere in the oilseeds complex, was Malaysian palm oil data ostensibly helpful in showing the country's stocks of the vegetable oil last month at 1.665m tonnes rising marginally month on month, rather than showing the drop to 1.607m tonnes that investors had expected.

Still, palm oil futures stood in positive territory nonetheless, up 0.1% at 3,116 ringgit a tonne, helped by data from cargo surveyor ITS showing a strong start to 2017 for Malaysian exports, with volumes up 8.1% month on month so far.

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