PRINTABLE VERSION   EMAIL TO A FRIEND   RSS FEEDS 09:33 GMT, Tuesday, 29th Jul 2014, by
AM markets: have ag investors removed too much risk premium?

Have investors been too quick to remove risk premium from grain and oilseed prices?

The likes of ABN Amro and Australia & New Zealand Bank have offered some reassurance to bulls.

And Darrel Good, at the University of Illinois, has his concerns too.

The fall in December corn futures, which hit contract lows below $3.65 a bushel last week, shows that the market "appears to be expecting an average corn yield above 170 bushels per acre, with a lot of forecasts pushing into the mid-170s".

'Expectations appear justified'

However, while "those expectations appear justified based on crop condition ratings, the growing season still has a ways to go", and already US weather has provided some setbacks, even if they are not so apparent yet.

"July precipitation will likely end up well below average, which is not characteristic of previous very high yielding year," Professor Good said.

"If dry conditions persist in August, the US average yield will likely still be very high, but perhaps fall short of some of the current lofty projections," meaning that "prices would increase modestly going into harvest".

And after harvest, there is the potential for prices to "move modestly higher in a typical large-crop pattern".

He concluded: "While there is still risk of lower prices, a little patience in pricing additional quantities of the 2014 corn crop appears warranted."

Different tack

It has to be said that some other commentators have a different twist.

At broker Country Futures, Darrell Holaday, while concurring with a consensus yield expectation of 170-171 bushels per acre, said that had yet to be fully baked into prices, which would fall towards harvest.

"We feel a final yield of 170 bushels per acre would mean a harvest low in the $3.40-a-bushel area," he said.

Still, corn futures so far managed to hold on to most of their gains of the last session, easing 0.3% to $3.75 a bushel for December delivery as of 09:30 UK time (03:30 Chicago time), staying just ahead of their 10-day moving average, and avoiding too much of a "turnaround Tuesday" - the idea that a trend in Chicago on the first day of the week is reversed in the second.

Rating declines

It helped that US Department of Agriculture data overnight showed the condition of US corn deteriorating in the week to Sunday, by 1 point in the combined "good" and "excellent" categories.

At 75%, the rating is still unusually high, the best for a decade for the time of year, and corn often begins to deteriorate after pollination.

Still, it was a modest disappointment to a market which had been expecting a stable if not better figure, and reminded that ratings can go down as well as up.

As an extra support, there is talk from Brazil, led by farmers group Aprosoja, of genetically modified corn seeds no longer providing protection against insect pests.

'Declining trend'

For soybeans, the US crop rating fell by 2 points to 71% rated good or excellent - still the best figure in the past 20 years, but less convincingly so.

And there are growing concerns about further deterioration, given a turn drier in the weather at a sensitive time for the crop.

"Some traders fret about dry weather for beans as we enter the critical pod-filling month of August," CHS Hedging said.

At RJ O'Brien, Richard Feltes flagged concerns "about the declining trend in Midwest summer precipitation".

He urged against short soybean-long corn spreads "until we know more about the August rainfall pattern".

'Modest risk premium'

Kim Rugel at Benson Quinn Commodities noted that "weekend rains were disappointing and the outlook is dry for the next 10 days.

"Weather concerns add a modest risk premium to prices", although she added that the "outlook for ample 2014-15 ending stocks on record-large US planted acreage caps gains".

In fact, November soybeans were 0.4% higher at $11.12 a bushel in Chicago.

Ukraine upgrade

As for wheat, it extended its modest declines of the last session, easing by 0.2% to $5.33 a bushel.

The USDA crop progress showed the US spring wheat crop remaining stable at 70% rated good or excellent.

And while there are concerns around over the quality of the European Union harvest, and the dryness in eastern Australia, crop prospects in neighbouring areas, ie the former Soviet Union and Western Australia respectively, are strong.

The Ukraine wheat crop was upgraded on Tuesday by UkrAgroConsult by 500,000 tonnes to 21.0m tonnes.

As for Russia, the latest upgrade, by Ikar, in the wheat harvest forecast to 57.5m tonnes "could allow exports to rise to 22m-23m tonnes, from current estimates of 19m-20m tonnes", Benson Quinn Commodities said.

Contrary cotton

Among soft commodities, cotton fell 0.4% to 65.63 cents a pound in New York for December delivery.

The fibre maintained its contrary trend in respect of crop ratings ie rising in the latest week, by 2 points to 54% good or excellent.

The warmer and drier weather pressing on corn and soybeans is good news for yield prospects for cotton, which requires that kind of weather to reach its potential.

Meanwhile, London robusta coffee edged 0.2% higher to $2,031 a tonne for September delivery.

Vicofa, the Vietnam coffee industry association, estimated the 2014-15 harvest at 23m bags, down a touch from the 23.3m bags produced last time, citing dry weather during the flowering period,

Vietnam is the top producer of robusta beans.

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