PRINTABLE VERSION   EMAIL TO A FRIEND   RSS FEEDS 09:15 GMT, Friday, 14th Jul 2017, by Mike Verdin
AM markets: grains revive, amid ideas US crop woes not over

Often, the prospect of a weekend, and two days without being able to trade, prompts a bit of profit-taking, and a change of market direction.

So it appeared this Friday, as grains staged a rebound, after two sessions of heavy losses prompted by a double whammy of larger-than-expected supply estimates from the US Department of Agriculture, and an improvement in the US Corn Belt weather outlook, at an important time for the corn crop.

The declines have prompted hefty paper profits for funds which sold an estimated 56,000 corn lots over the two session, 42,500 soybean contracts and 28,500 wheat lots.

'Much more comforting'

And there has certainly been cause for selling, with Benson Quinn Commodities flagging the "hangover" from the US Department of Agriculture's upbeat crop supply estimates on Wednesday, and "pop-up [Midwest] showers that continue to provide relief, though the coverage usually isn't very good".

Then there is the "slightly more favourable shift in the weather pattern once we get through the next 6 to 7 days of relatively dry and hot conditions".

At Commonwealth Bank of Australia, Tobin Gorey said that "weather forecasters now have a much more comforting outlook for US corn at a sensitive stage in crop development", with pollination in progress.

"Their outlook is a little wetter and substantially cooler so the threat has dissipated."

Bullish sentiment to return?

Still, there is cause too to believe that investors have removed enough premium from futures for now, with Benson Quinn Commodities noting also that "markets having corrected overbought conditions, the recent buyers are closer to getting completely out of their problem position and markets are getting closer to finding demand".

The broker's more bullish take on the weather outlook is that the "forecast has shown slight improvements, but it lacks an organised rain event that offers good coverage of measurable totals".

In corn, "the trade wanted to trade closer to a 166 bushels-per-acre yield before the Wasde.

"Pretty soon they will want to again, probably if the forecast heats up, or Monday's condition reports don't show improvement," a reference to weekly US Department of Agriculture crop condition data released on Mondays after the markets' close.

'Highly dangerous'

"The latest wrinkle in the forecast could be positive for 2017 crops, but corn's pollination will still likely stretch to August," making hot weather "highly dangerous to all crops", said Jerry Gidel at Price Futures group.

Corn prices could rebound to $4.10 a bushel, and soybeans to $10.35 a bushel, "if the [heat] ridge returns".

Indeed, there are plenty of ideas that although the USDA did not in the latest Wasde cut its forecast for the US corn yield, such a move looks likely in next month's report.

Mike Zuzolo at Global Commodity Analytics noted that "9% of the Corn Belt is in drought versus 6% last year at this time and 1% in 2015-16.

"In addition, the corn is rated 65% good excellent - that's down 11 points from last year, and 4 points lower than 2015-16—when we had a 168.4 bushels-per-acre yield".

Corn futures for December gained 0.8% to $3.86 a bushel.

Canada dry

Spring wheat futures, the epicentre of the grains rally, thanks to drought in the northern US Plains, fared even better, rebounding 1.8% to $7.63 a bushel in Minneapolis for September delivery.

Data overnight from ag officials in Saskatchewan, the top Canadian spring wheat growing province, showed a further decline of 2 points to 68% over the past fortnight in the proportion of the crop in "good" or "excellent" condition, although that still remains far better than average readings in the US.

Durum wheat actually fared worse, with 43% of the Saskatchewan crop rated good or excellent, down 6 points over the fortnight.

"Crop conditions vary greatly across the province and have deteriorated over the past few weeks due to hot temperatures and a lack of rain," the report said.

Spring vs winter

Furthermore, on some analysis, spring wheat futures warrant ore premium over winter wheat.

"A closer look at the by-class balance sheet leads on to believe inter-market relationships have a good deal further to go," said Tregg Cronin at Halo Commodity Company.

Wednesday's Wasde showed US hard red spring wheat stocks as a percentage of all-wheat stocks at the close of 2017-18 "at just 12.99% versus the previous record low of 19.84% set last year.

In 2007-08, when grain prices soared, "that ratio was 22.2%," Mr Cronin added.

"These ratios of course could get tighter still if production estimates slip further, or demand can't rationed at current price levels. 

"There would appear to be plenty of ammunition left for spring wheat [appreciation] whether on a flat price or inter-market basis."

Winter wheat futures indeed recovered less markedly, by 1.1% to $5.17 ¼ a bushel in Chicago for September delivery.

'Dropped off sharply'

Meanwhile, soybean futures for November added 0.4% to $9.91 ½ a bushel, rebounding less markedly, with some concerns remaining over a Chinese import figure for June of 7.69m tonnes.

"Chinese soybean imports dropped off sharply from last month by nearly 2m tonnes," said CHS Hedging.

The figure was "well below expectations and hints that weak Chinese crush margins may have slowed the pace down".

Still, Terry Reilly at Futures International noted that the figure was still "up 1.7% from 7.56m tonnes in June last year.

"Port congestion was an issue last month. Also many silos were already filled and delays in customs were noted."

Furthermore, he highlighted the cut in China's VAT rate on soybean imports to 11%, from 13%, as of the start of this month, a factor which may have encouraged some buyers to delay purchases from June.

'Trying to find new lows'

In New York, cotton felt the love too, adding 0.4% to 66.60 cents a pound for December delivery, recovering from a 10-month closing low.

And this despite some bearish comment around, with CBA's Tobin Gorey saying that "we continue to think that some of the long cycle momentum calculations will prompt momentum investors to sell.

"The market has no significant weather angst either so fundamentalists are bearing bearish too," he added, noting a reported forecast from Informa of cotton prices retreat to 55 cents a pound.

Ecom traders, assessing from the last session that "it seems the market is trying to find new lows", added that "if we can close below 66.00 cents a pound, then we would be looking at new lows around 65.00 cents a pound or lower.

"The market has the momentum and isn't looking oversold yet so specs will continue to initiate short positions until they can't take it anymore."

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