PRINTABLE VERSION   EMAIL TO A FRIEND   RSS FEEDS 08:16 GMT, Wednesday, 4th Jan 2017, by Mike Verdin
AM markets: US winter crop deterioration lifts wheat futures

Just how big is the US soybean area going to be this year?

Record high is the consensus, beating even the all-time high of 83.7m acres planted last year.

Informa Economics, for instance, last month pegged the figure at 88.9m acres just 1.3m acres below the sowings expected for corn, the default choice for US farmers in spring sowings programmes.

However, one of the assumptions behind high hopes, of markedly higher soybean prices (as measured by Chicago's new crop November 2017 futures contract) relative to corn ones (as measured by the December 2017 lot) is beginning to ease back.

'Very large correction'

This was particularly evident in the last session when, as Joe Lardy at CHS Hedging noted, "we did see a large amount of corn-bean spreading".

That is long corn-short soybean spreading, encouraging higher corn prices and lower values of the oilseed.

As Terry Reilly at Futures International said, "corn futures appreciated on short covering by money managers and spreading against soybeans".

Mr Lardy added: "The corn market looks like it is trying to slowly claw back some acres perhaps. We have seen a very large correction in the corn/bean ratio over the past five weeks."

Corn vs soybeans

On a November 2017 soybean: December 2017 contract basis, the ratio has actually fallen from 2.69 to 2.57 over the past month, a significant shift, although one that still leaves it comfortably within territory giving soybeans advantage versus corn in terms of the financial appeal of planting the oilseed.

"The ratio is still arguing for more soybean acres," said Tregg Cronin at Halo Commodity Company, adding that this "should ensure ample supplies during the next marketing year, with normal weather".

But another push or two would make that assessment less certain. (Many see a "neutral" soybean: corn ratio as 2.25, although that is not a universal belief.)

And there are those which have questioned ideas of a large rise in soybean area, with insurance giant MetLife, for instance, saying that "we believe US farmers could cut 3.7%, or 3.5m acres, of corn in 2017 while soybean acres are likely to remain flat".

Enough rain, or too much?

In fact, neither corn nor soybean futures were keen to make the running in early deals on Wednesday.

Chicago corn futures for March added 0.1% to $3.56 a bushel as of 08:10 UK time (02:10 Chicago time), while March soybeans gained 0.2% to $9.96 a bushel.

On a new crop basis, similarly, the December corn lot gained 0.1% to $3.84 a bushel, while November soybeans added 0.2% to $9.85 a bushel.

Still, after its strong performance of the last session, that still leaves corn the winner for 2017 so far, in part thanks, it would seem, to it being hit more by South American weather concerns (such as they are).

"Argentina is experiencing too much rain with concern of reduced [corn] planted area versus expectations," said Benson Quinn Commodities.

Meanwhile, the "bean market was shedding weather risk premium as rains last week and weekend in Argentina have reduced area of dryness that had offered support into ending days of December".

Furthermore, demand from China, the top soybean importer, "has already shifted to South America, with January needs covered and market looking to post Lunar New Year demand coming from Brazil starting in February".

Lighthizer worries

At RJ O'Brien, Richard Feltes too flagged the dent to soybean price prospects from "improving Brazilian rain prospects", besides "concern of Trump's selection as US trade representative".

The latter comment referred to the appointment by Donald Trump, US president-elect, of Robert Lighthizer as his chief trade negotiator, a move seen boding ill for Sino-US relations, and potentially thus for US exports of soybeans to China.

Mr Lighthizer, a veteran trade lawyer, is a long-term critic of China, which he has accused of failing to meet its commitment to the World Trade Organisation.

Fund shifts

And then there are fund moves to take into account, which favour grains over soybeans for two reasons.

The first is simply that soybeans are, relatively, expensive already, at a time when, as Benson Quinn Commodities noted, the "world economic outlook improving and talk of inflation are sending fund buying into the raw commodity sector.

"Beans also are not attracting the same fund buying as the grains as they are higher priced versus last year while corn and wheat are trading near multi-year lows."

And then there is the prospect of buying by index funds, in the annual portfolio rebalancing process, which is expected to see substantial purchases of corn and wheat contracts, but not soybeans.

RJ O'Brien's Richard Feltes flagged "reports of pending index fund rebalancing that may trigger 50,000-112,000 contracts of new corn buying".

Hard vs soft

Index funds are expected to buy wheat too, and in particular Kansas City hard red winter wheat, in relation to the size of the market.

That observation may have been at work in an outperformance of Kansas City wheat in early deals, with the March contract gaining 0.7% to $4.17 a bushel, and taking nearly back to $0.10 a bushel its premium over Chicago soft red winter wheat.

The Chicago March contract added a more modest 0.2% to $4.07 a bushel.

Condition decline

But there was fundamental cause to favour hard red winter wheat too, with crop ratings falling in states where it is grown.

US Department of Agriculture data overnight showed just 25% of the winter wheat crop in Oklahoma in "good" or "excellent" condition down from 53% a month before.

In Kansas, the top wheat growing state, condition declined too, although by a more modest 8 points month on month to 44% rated good or excellent.

A worry for farmers has been the spreading dryness crops established in during the autumn, potentially increasing the vulnerability of seedlings to winter cold.

Cold snap

In Oklahoma, topsoil in 70% of the state was rated by the USDA as short of moisture, compared with 1% a year ago, when 77% of the winter wheat crop was viewed as "good" or "excellent".

This in a state which "experienced cold and dry weather for the month of December," USDA scouts said.

"On December 16, a front brought the coldest weather since February 2011, dropping temperatures 60 degrees [in Fahrenheit terms] in a 24-hour period."

By contrast, for Illinois, a soft red winter wheat state, the condition rating fell by only 1 point month on month to 59% of the crop rated good or excellent.

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