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AM markets: will black swans fly to the aid of ag bulls?

Are black swans flying to the rescue of agricultural commodity bulls?

The melanistic fowl – in financial markets, code for unexpected events which can send prices swinging - were put on the agenda by Barclays, which listed 13 potential "black swan" events, ranging from North Korea nuclear tests to riots after elections in Chile to, of course, populism which could impact markets.

Most, although not all, were viewed as bullish for commodity markets.

"As the new year begins, certain indices show investors anticipate more tail risks in 2017, with geopolitical concerns front and centre," the bank said.

"In particular, the new politics of populism and protectionist trade policies have the potential to disrupt global supply and demand assumptions for various commodities."

'Upside tailwind'

It has to be noted, of course, that Black Swan events, by their very nature, are difficult to predict – ie there are plenty of other surprises out there not assessed by Barclays or indeed other investors.

And Barclays, which went soft on soft commodity markets a few years ago, was thinking mainly of metals and energy.

Still, the report has caught the imagination too of some agricultural commodity investors, such as Richard Feltes at RJ O'Brien, who put the case of some optimism over prices of the likes of grains too, of commodities indices such as the CRB gain support.

"The bottom line here is that the CRB upside tailwind will likely provide underlying support for ag commodities," he said.

While the world is furnished with large inventories of the likes of wheat, "the overwhelmingly bearish supply news on large US and global stocks is largely discounted".

Blow-out lesson

And this at a time when hedge funds, net short on grains, may already be rethinking such a stance with the uncertainty of the northern hemisphere harvests ahead.

"Managed funds, mindful of massive blow-out of shorts last spring, are likely to trim bearish corn and wheat positions in advance of the 2017 northern hemisphere growing season," Mr Feltes said.

"Risks of a sell-off, similar to late November, appear to be muted in a new year where 'black swans', 're-inflation' and a more optimistic outlook for China and crude oil dominate the conversation."

China is of course key for ag markets as a huge buyer of the likes of soybean and sugar, while oil is important given the importance of the likes of corn and palm oil as raw materials for biofuel plants.

'Front-running of index buying, technical buying…'

Whether it is actually such thinking has been the key driver of the decent performance by grain futures so far in 2017, well, it is tricky to judge.

Other factors cited for spurring buying include the prospect next Thursday of a slew of key US Department of Agriculture data, which some see as provoking position covering (ie short closing in grains), besides the strong buying expected by index funds next week in their annual reweighting process.

And the upswing in prices has brought technical improvements too. Chicago and Kansas City wheat futures for March closed the last session above their 100-day moving averages for the first time in six months.

And this before getting to some of the upbeat supply and demand news – eg record US ethanol production last week, implying bumper use of ethanol.

 "It remains a bit difficult to separate front-running of index buying from technical buying from actual fundamental demand for our space," said Tregg Cronin at Halo Commodity Company.

'Winterkilling cold temperatures'

But buying continued in Kansas City hard red winter wheat at least in early deals on Thursday, with the March lot adding 0.6% to $4.37 a bushel as of 09:00 UK time (03:00 Chicago time).

Chicago soft red winter wheat for March failed to keep up, easing 0.1% to $4.26 a bushel. But then it is the hard red winter wheat crop which is at risk in the US, as winter cold hits a Plains region where dryness has already sapped the condition of seedlings.

USDA reports earlier this week for Plains states, showing a drop in winter wheat condition rates, "cited dryness as reasons for the decline", Mr Cronin said.

And this "is important as the winterkilling cold temperatures weren't really addressed and could make an impact with the end of January conditions.

"The majority of Kansas, all of Oklahoma and Texas and much of Colorado have little-to-no snow cover as protection against this week's cold."

'Snow cover is thin'

As an extra support to wheat markets too, there are worries over cold damage to crops elsewhere in the world, but particularly in Ukraine, which could see temperatures fall to -20 Celsius this week, at a time of less than generous snow cover to protect seedlings.

"The current level of snow cover is insufficient for reliable protection of winter crops against frosts harsher than minus 15 degrees lasting for five days," Kiev-based consultancy UkrAgroConsult said.

"Survival of the upcoming frost by winter crops will entirely depend on the amount of snowfall in this period."

Agritel said that" this cold weather is worrying some producers because the snow cover is thin in areas where temperatures will be at lowest level".

And the Paris-based group cautioned over frost in Europe too, saying that "operators will closely monitor the evolution of cold weather in many parts of European production areas.

"The drop in temperatures is of course a risk factor at this period of the year and adds uncertainties to the issue of the next campaign."

'Supportive for corn futures'

Corn, like Chicago wheat, was a little slow out of the blocks too, in easing 0.1% to $3.61 a bushel for March delivery.

That said, it has already chalked up a five-session winning spree, helped most lately by the strong ethanol data, which showed US output last week up 15,000 barrels a day at a record to 1.043m barrels a day – and stocks falling all the same, by 5,000 barrels week on week to 18.678m barrels.

"We were looking for production to decline and stocks to be near unchanged," said Terry Reilly at Futures International, terming the data "supportive for corn futures".

"The implied annual use of corn would end up at 5.7bn bushels" over 2016-17, depending on what grain-ethanol conversion factor you use, he added.

The USDA is using a figure of 5.3bn bushels.

Chart factor

However, the contract faces a key chart test to build on its rally.

"Technical support remains positive but strong resistance levels are just below $3.65 a bushel," said Benson Quinn Commodities.

"Continued strong export demand will be needed to push March corn through $3.65," the broker said, referring to weekly US export sales data later, expected to come in at 650,000-950,000 tonnes for corn.

Halo's Tregg Cronin said: "Corn would do itself a real favour if it could manage to take out the mid-December high at $3.64, which would in turn break the string of lower highs dating back to October."

Soybeans retreat

Soybeans, meanwhile, are proving somewhat less popular – if only because funds already have a net long, meaning position closing ahead of next week's UYSDA data would put pressure on prices.

"Soybeans are now down six out of the last eight sessions," said Benson Quinn Commodities.

While there are worries over Argentine production, thanks to heavy rains in the central soybean belt (although it was dryness which prompted the Buenos Aires grains exchange late on Thursday to cut 300,000 hectares from its Argentine soy sowings estimate), further precipitation is expected largely to hit areas further north.

Soybean futures for March fell by 0.5% to $10.07 a bushel.

Export sales data later may determine whether they remain down, with the figure expected at 800,000-1.2m tonnes.

"Weekly export sales should be 'light' relative to recent sales due to holidays but also as trade shifts to South America," Benson Quinn Commodities said.

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