Evening markets: ag commodities thrive while shares struggle

Are investors switching back to commodities from shares?

OK, commodities overall didn't fare that well on Monday, with the CRB index up 0.1%.

But that was, nonetheless, better than shares managed, standing 2.0% down in Wall Street in late deals, after closing down 0.7% in London, by 1.4% in Paris and 1.8% in Frankfurt, after a disappointing survey of US manufacturing activity from the Institute of Supply Management followed weak data from China reported earlier.

The ISM's headline index dropped to an eight-month low of 51.3 in January, from 56.5 in December, while the new orders sub-index plunged from 64.4 to 51.2, the biggest monthly decline since 1980.

Hot coffee

And many agricultural commodities fared far better still notably arabica coffee, which soared 8.5% to close at 135.95 cent a pound in New York for March delivery, the highest finish for a spot contract in eight months and the best one-day gain in years.

The gains reflected concerns over dryness and heat in Brazil reported elsewhere on, including a caution that it is not just the 2014 crop that stands to be affected by the conditions, but next year's harvest too, with the vegetation needed for flowering come September off to a poor start.

It helped that hedge funds were caught leaning the wrong way, in market parlance, having raised their net short position to 5,454 lots as of last Tuesday, with gross shorts requiring buying coffee to close - at more than 43,000 lots.

In London, robusta coffee got a lift too, adding 3.4% to $1,839 a tonne for May delivery, a five-month closing high for a nearest-but-one contract.

Sweeter sugar

On another day, raw sugar might have been expected to post strong gains too, with Brazil's cane growing Centre South region also being at the epicentre of dryness concerns, as MDA pointed out.

Furthermore, hedge funds are even more bearishly positioned in raw sugar than in arabica coffee, with a net short of more than 58,000 contracts

And there are some other reasons to be bullish on the sweetener, as Marex Spectron revealed.

Still, cane is viewed as a resilient plant, and arguably more of the Sao Paulo crop is irrigated than the coffee plantations in neighbouring Minas Gerais.

Raw sugar for March managed gains, but not such explosive ones, ending 1.2% higher at 15.74 cents a pound, with a fresh decline in Brazil's real, down 1.1% against the dollar, also adding some pressure.

"The correlation between sugar and the Brazilian real had been uncanny" until recently, Marex said.

Good news

But will Brazil's dryness prove negative for soybeans too, of which the country is the top exporter, and potentially biggest producer as well?

Opinion is mixed on that one. For some, the dryness will actually only help farmers, by allowing a speedy harvest.

"It has turned warm and dry in Brazil, but it is primarily in the areas that are already harvesting," Darrell Holaday at Country Futures said.

"Remember, Brazilian soybean harvest fought rain last year during harvest."

Farm research group Imea said that while the harvest in Mato Grosso, Brazil's top producing state, is 10.6% complete, down from 11.4% a year ago, that reflects a bigger crop.

or bad news?

However, consultancy AgRural was not so certain, saying that dryness might prompt it to cut its forecast for Brazil's soybean harvest.

And, as an extra support to prices, yet again the dog of Chinese cancellations of US orders, in favour of South American ones, didn't bark.

Sure weekly US exports, as measured by cargo inspections, were well down last week from the previous week's 74.0m bushels.

But the 45.5m bushels reported is "still a decent number", Mr Holaday said.

Furthermore, the soy complex received some support from a strong performance by soymeal, which for March delivery soared 1.9% to $434.00 a short ton in Chicago, lifted by the impact of cold weather in hampering US deliveries of the feed ingredient.

Soybeans themselves for March ended 0.8% higher at $12.92 a bushel, falling back after earlier coming 0.25 cents from the important $13.00-a-bushel market, but at least retaking its 20-day, 75-day and 100-day moving averages.

EPA delay?

For corn, the weekly US export inspection data was less impressive, at 21.6m bushels, down from 29.0m bushels the week before.

US cattle herd data out late on Friday was a little negative too, showing the herd at a 63-year low of 87.73m head, down 2% year on year, down more than the 1.4% investors had expected, and implying lesser demand for livestock feed from this quarter.

However, it benefitted from talk that the Environmental Protection Agency may delay until summer revisions to the US ethanol mandate which have been seen as working against output, and thereby demand for corn.

Ethanol itself for March gained 0.8% to $1.839 a gallon.

Struggle for supplies

And then there was the US cold to factor in here too, with fresh cold and snow forecast for this week.

 "The winter weather in the US has grain movement extremely limited and is supporting nearby prices," CHS Hedging said.

Darrell Holaday said: "Cash markets are struggling to get their hands on physical product because of weather conditions in the Plains and Midwest.

"Of course, that situation is going to deteriorate through the week with two systems moving through those areas this week."

Corn for March added 0.4% to $4.35 a bushel.

'Snow cover has begun to build'

Wheat did even better, gaining 1.4% to $5.63 a bushel in Chicago for March delivery, even though the cold might not be such bad news as it might appear.

"Snow cover has begun to build across the north central and southern Plains and Midwest, and should build further across the central Plains and central Midwest this week," MDA said.

"The increase in snow cover will continue to build winterkill protection for wheat as temperatures remain cold."

Furthermore, it will boost soil moisture too, "and will be most beneficial in the Plains", the weather service said.

'Plenty of demand surfacing'

CHS issued a somewhat neutral view of wheat too.

"There seems to be plenty of world demand surfacing for wheat, and US values remain competitive," the broker said.

"On the other hand, world wheat stocks are also plentiful at this time."

However, there was an idea that hedge funds, having already been caught out in coffee, were keen to take profits on their lofty net short position in Chicago wheat while it was still there.

There were some positive signs to encourage short-covering , with Benson Quinn Commodities noting that "basis levels remain firm in the wheat markets and recent price action in the spreads has also been a positive input".

In London, wheat for May closed up 0.9% at £152.75 a tonne, but Paris wheat for March closed 0.3% down at E192.00 a tonne.

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