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Evening markets: 2014 begins on sour note for ag commodities

The new year began where 2013 left off.

Remnants of festive spirit were torn from agricultural commodity investors in a session which witnessed slumps of more than 2% in cocoa and in Chicago soymeal futures, and of more than 4% in London-traded robusta coffee.

"It is a new year but the story hasn't changed," broker US Commodities said.

Agricultural commodities after all lost 7.7%, in simple average terms, last year, which headed to a close with the longest unbroken run on record of bearish positioning by hedge funds.

Cocoa cools

OK, some weakness was to be expected with the dollar gaining 0.5% amid growing ideas that the Federal Reserve will steadily reduce its monthly asset purchases this year,

A stronger dollar undermines prices of dollar-denominated commodities by making them less affordable to buyers in other currencies.

But it was a surprise that even cocoa was caught in the cross fire, being tipped by many brokers as the agricultural commodity most likely to gain this year, with the likes of Rabobank already forecasting a third successive season of production deficit in 2014-15.

Cocoa futures for March tumbled 2.7% to $2,363 a tonne in New York, closing below its 200-day moving average for the first time since July.

It was the same for London's May lot in ending down 2.8% at 1,678 a tonne.

Producer deliveries soar

Indeed, technical factors were part of the issue for cocoa, in encouraging profit-taking after a relatively strong performance last year, with price gains of 21% on both sides of the Atlantic.

But strong arrivals of beans at ports in Ivory Coast, the top producing country, also played their role. As of December 29, arrivals since the start of 2013-14 in October had reached 868,000 tonnes, up 40% year on year.

Not that all observers believe that this trend will continue, with Phillip Futures forecasting that volumes will "decline significantly after a robust start.

"The slowing down of cocoa bean deliveries will be due to the harvested main crop being adversely affected by previous hot and dry conditions in the Ivory Coast as well as the Harmattan," a dry regional wind, the broker said.

Robusta tumble

For robusta coffee, a decline in prices had been more widely expected, given that values appear to have been supported by an artificially imposed supply squeeze by producers in Vietnam, the top producing country.

Eventually, a record harvest, estimated by some as high as 30m bags, will need to make it to market.

London robusta for March slumped 4.1% to close at $1,614 a tonne, after earlier bouncing off its 50-day moving average at 1,606 a tonne.

'Market is in free-fall'

The risk of a tumble in soymeal prices had also been highlighted to readers after China rejected some volumes of US distillers' grains on grounds of containing some of the unapproved genetically modified corn variety which has prompted some grain rejections too.

Distillers' grains, or DDGs, a byproduct of corn ethanol manufacture, are an alternative source of protein to soymeal for livestock feeders. So a failure by DDGs to reach China implies more competition for soymeal in the US market.

With DDG export prices falling sharply over the past week U.S. soymeal consumption could see reductions due to increased domestic DDG feedings.

"The US DDG market is in free-fall following China's rejection of 2,000 tons of US DDGs," Richard Feltes at broker RJ O'Brien said, although it has to be said that other brokers report higher figures.

While this represented  "a small fraction of China's 2.8m tonnes of 2013 DDG imports, there is mounting concern that further rejections would back up DDGs and in so doing temper US soymeal demand".

'We expect more downside'

At Country Futures, Darrell Holaday said: "DDG values have dropped $27 per ton in the last week. We expect more downside in that market."

US Commodities said: "With DDG export prices falling sharply over the past week U.S. soymeal consumption could see reductions due to increased domestic DDG feedings.

At Jefferies Bache, Anne Frick said: "DDG prices declined sharply after China rejected at least two, but probably more, cargoes last week and there are thoughts that some DDGs could work back into the domestic market competing with soymeal."

Chicago soymeal for March closed down 2.6% at $406.30 a short ton, ending below its 100-day moving average for the first time since November.

'Need to extract weather premium'

That weighed on soybeans, as did the decreasing concerns over Argentine weather, now that wetter weather has replaced a hot and dry spell.

"Conditions in South America continue to get better and the market needs to extract weather premium out of this market," Country Futures' Mr Holaday said.

Still, he attributed most of a price decline of 1.7% to $12.70 a bushel, in Chicago's March contract, to technical factors, after futures fell in the last session below critical support levels.

"That set the stage for another major sell off today, and that has happened."

Spreading support

In fact, the soybean sell-off was in part a positive for corn, in being fuelled by the unwinding of long soybean-short corn spreads.

That implies upward pressure on prices of the grain, which spent much of the day in positive territory before ending down a relatively small 0.4% at $4.20 a bushel for March if enough to hand the contract its weakest close ever.

Strong prices of ethanol, which added 1.4% to $1.819 a gallon, also helped, in boosting margins for producers of the biofuel.

Wheat prices falls

Indeed, corn did far better than wheat, which dropped 1.4% to $5.97 a bushel in Chicago for March delivery the first close by a spot contract below $6 a bushel since May last year.

Paris wheat for March fell 1.0% to E202.50 a tonne.

There was some bullish news around, with Taiwan Flour Milling tendering for 54,800 tonnes of milling wheat for shipment February 21-March 7, and Algeria tendering for optional origin wheat for March shipment.

(Egypt's Gasc grain authority issued a tender too, but after the close of markets.)

However, on the bearish side was a report by China's agriculture ministry that the country's winter wheat crop had managed its best growth, so far, in eight years.

That signalled the potential for a drop in imports in 2014-15 from a country whose recent purchases have been a major prop for prices.

'Protected by insulating snow'

Meanwhile, India raised its offering of wheat from state inventories, and looks on track for an ample harvest this year too, with sowings expected at a record high.

And concerns seem to be waning over the threat of cold weather to US winter wheat seedlings.

Sure, temperatures of minus 30 Fahrenheit were reported this morning in northern Minnesota, according to Gail Martell at Martell Crop Projections.

"But winter wheat in the US breadbasket is deep in dormancy and not subject to winter kill.

"Most of Kansas wheat is protected by insulating snow. Where fields are bare, west Texas and Oklahoma, near-zero Fahrenheit temperatures are not a threat to wheat that has achieved maximum hardiness."

Russia threat

That said, she highlighted the potential threat to Russian wheat from a cold snap, after unusually warm weather thinned the snow blanket over winter crops.

"The jet stream has built up a warm ridge over European Russia, where temperatures have been 10- 14 Fahrenheit above normal this winter," Ms Martell said. 

"Conditions in Europe also have been uncharacteristically mild in December, but not warm enough to stimulate strong growth in winter wheat.

"Has wheat lost hardiness? If so, a sudden shift in the weather toward bitter cold, should it occur, may cause winterkill in Russia and Ukraine."

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