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Evening markets: corn, wheat futures toil despite fund rejig

Tuesday headed towards a difficult close in grain and oilseed markets, with futures struggling to maintain their positive momentum of the past two sessions.

"It is Turnaround Tuesday for the grains," US Commodities said, a reference to the Chicago traders' adage that the second session of the week reverses the trend of the first.

Grains declined despite the prospect of a swathe of US Department of Agriculture data on Friday, which, in creating uncertainty and encouraging investors to close positions, might be expected to support corn and wheat prices.

Data overnight showed that speculators have a near-record net short position in wheat and large net short in corn too, implying that closing positions means upward pressure on prices.

Fund rejig

Also to factor in to the mix was the prospect of the rebalancing exercise by index funds, in which the return portfolios to mandated weights, meaning selling 2013's winners and buying the losers, a group which includes wheat, down 22% in Chicago last year, and corn, down 40%.

"It is speculated that fund will need to purchase 90,000 corn contracts this week to balance, perhaps by Wednesday, giving corn a bounce," US Commodities said.

Rival broker Allendale said: "Traders are estimating the index funds will be covering approximately 90,000 corn contracts and nearly 20,000 soybean contracts before they are done."

'In danger of winterkill'

And this before factoring in some fundamental reasons for support, such as the cold threatening winter wheat seedlings in parts of the US.

"Temperatures remain very cold across the wheat belt," CHS Hedging said.

"There is sufficient snow cover for most areas, but parts of eastern Indiana, north central Kentucky, and southern Ohio lack snow cover and could be in danger of winterkill.

"Winter wheat kill in the Ohio River Valley has the market concerned. Satellite imagery shows there was a large area without sufficient snow cover to protect the crop from sub-zero temperatures."

Technical breakdown

Still, other investors showed less concern.

Benson Quinn Commodities said that freeze damage "is expected to be limited to a few areas and it's tough to count out a resilient wheat plant", and put more stress on poor technical factors in the wheat market.

"All three US wheat markets [Chicago, Kansas City and Minneapolis] tried higher trade overnight, but are reeling from the poor close experienced yesterday," the broker said.

"The technical structure in the wheat market showed signs of improving on Friday and early in yesterday's trade, but seems to be breaking down as the market simply can't trigger additional short covering."

Argentina factor

And as an extra pressure, ideas of Argentine supplies continue to improve, albeit from low levels.

"Argentina's wheat harvest, which is now about 75% complete, has been better than expected and there is talk that they will begin exporting as soon as January 10," CHS said.

"This would cut into potential US hard red winter wheat business to Brazil."

Soft red winter wheat for March ended 0.5% lower at $6.02 a bushel in Chicago.

Data expectations

Indeed, wheat helped weigh on fellow grain corn, which closed 0.4% lower itself at $4.26 a bushel for March.

It helped bears' cause that, even though the prospect of Friday's slew of data has created uncertainty, there is reason to think that sellers may emerge in the ascendancy.

The report is expected to raise the USDA estimate of last year's US corn crop by 77m bushels to a record 14.066bn bushels, with the forecast for stocks at the close of 2013-14 upgraded by 69m bushels to 1.86bn bushels.

And as for the December quarterly US corn stocks figure, that has exceeded trade expectations in three of the last five years.

'Hot and dry' for now

OK, the news was not all bad, with JCI reporting that China is going easy on rejecting imports of distillers' grains (DDGs), a corn-based feed ingredient, even if cargoes of US corn itself are still under a cloud over concerns about containing a genetically modified variety not approved by Beijing authorities.

"DDG values appear to have found a price from which they can bounce after the $90-per-tonne break since Christmas," Allendale said.

Furthermore, "Argentina is hot and dry", CHS Hedging said.

"But rains are still in the forecast for later in the week."

At RJ O'Brien, Richard Feltes said that "weather leans negative [for prices], with dry areas of Brazil limited to 10-15% of crop areas, while Argentine dryness is limited to 20-25% of the crop in the south west quadrant of Pampas."

Optional origin?

The pressure from South American weather goes for soybeans too, and the oilseed struggle despite what should have been a big shot in the arm, with the announcement by the US Department of Agriculture that China had purchased 350,000 tonnes for 2013-14 delivery.

Concerns that China will switch its custom to South America, spurning US supplies and even cancelling orders, have been a big concern to soybean investors as Brazil's harvest ramps up.

However, was Tuesday's order quite as good as it seemed?

At Country Futures, Darrell Holaday said: "Our bet is that it is optional origin," meaning that the soybeans China has bought need not come from the US.

"They are making these purchases as somewhat of a hedge against logistics problems at Brazilian ports.

"There seems to be very little concern about the size of the crop, but concern about the ability of the Brazilian ports to meet the shipping demands of China."

Meal gains

The steadiness in DDG prices was on paper a boost to soybeans too, in that DDGs compete with soymeal as a protein source in feed rations.

"Both the domestic and export DDG market are finding demand at these levels," US Commodities said.

Still,  although soymeal futures for March managed a 0.3% gain to $415.80 a tonne, soybeans themselves for March ended 0.75 cents lower at $12.76 a bushel for March delivery.

Soyoil prices weighed, falling 0.6% to 37.93 cents a pound.

Coffee cools

Among soft commodities, arabica coffee for March tumbled 3.1% to close at 117.25 cents a pound in New York, on profit-taking after the bean's 4% gain in the last session.

"The premium as compared with robusta coffee has reached a six-month high," Commerzbank said.

Raw sugar for March closed down 0.1% at 16.06 cents a pound, still looking for its first positive finish of 2014.

"The short term arguments we hear for a short term bounce are chat that the potential for a sugar deluge from India is unlikely around present levels  - it's rumoured near 17 cents a pound is the price it becomes attractive," Tom Kujawa at Sucden Financial said.

However, the broker said it expected price "pressure in the long term, and lower prices for the medium-to-long term".

Morning markets: grains struggle to keep New Year resilience
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