Are grains really such a bad bet?

Just as the new year rally in equities appeared to be struggling for traction, the rebound in grains from a dire few months shifted up a gear, driving soybeans and wheat back close to 2013 highs, and corn to its best since mid-December.

And it was not just because of the US Department of Agriculture revisions to crop estimates on Friday which, for corn and wheat at least, were broadly viewed as bullish, in cutting forecasts for US stocks at the close of 2012-13.

'Prices likely to continue to rise'

Commerzbank was one of the banks on Monday to react positively to the data, in the flagship Wasde crop report.

"The market was overly optimistic about supply ahead of the publication, so prices are likely to continue to rise," Commerzbank said.

In the US, broker US Commodities termed Friday's data "positive", and saying that "the market price is not rationing corn feed use or the domestic crush in soybeans".

US stocks for all three main Chicago crops, corn, soybeans and wheat, were "at low levels", indeed "near pipeline minimums".

'Ripe for a technical bounce'

However, there were ideas that the recovery in prices was being supercharged by the negative fund positioning ahead of it, with speculators holding a net short in Chicago wheat, and having cut corn and soybean net long positions to multi-month lows.

"The market had been trending bearish into this report and it has triggered short-covering beyond the corn market," Benson Quinn Commodities said, noting funds' positioning.

US Commodities said: "The market was oversold going into the report and ripe for a technical bounce. This is exactly what is occurring."

'Very good number'

Furthermore, there were some extra fundamentals on crops' side too, including for soybeans, which came out least bullishly from Friday's data revisions, as Goldman Sachs noted in cutting its price forecasts for the oilseed.

Data from the National Oilseed Processors Association showed the US soybean crush last month at 159.89m bushels, up 2.59m bushels month on month, if slightly below trade estimates of a 161.0m-bushel figure.

"It wasn't a record for December, as some had thought, but it was still a very good number," Mike Mawdsley at Market 1 said.

The data also implied the highest domestic soymeal use since December 2007, and Richard Feltes at RJ O'Brien flagged "a risk" that US soymeal use "trends even higher".

South America weather concern…

Separately, China bought 120,000 tonnes of US soybeans, the USDA said through its daily alerts system, countering fears caused by huge cancellations by China last month. (Was this indeed down to smoke and mirrors?)

And a big boost to prices came from the re-emergence of some, slight, caution over South American crop hopes.

"There is a little more concern about some Brazilian and Argentine soybean production areas as warmer and drier conditions have dominated some key regional production areas over the last two weeks," Darrell Holaday at Country Futures said.

"At this point there is little concern about a drop in soybean production numbers, but the market is not as comfortable as it was in the middle of last week.

"Midday models did not offer any significant rain in key areas in the next 10 days."

'A drier profile'

If the caution was muted in its amount, it was large in its scope, being flagged by other brokers too.

"Argentina and southern Brazil will see only light showers with coverage forecast at 30%," Benson Quinn Commodities said.

"Next rains are not in forecast till end of January. Any shift to drier weather pattern will be closely monitored."

US Commodities, while terming South American weather "non-threatening", said that "a drier profile is beginning to exist in southern Brazil and Argentina".

'Shown gains all day'

The impact on markets was to send corn for March 2.2% higher to $7.24 a bushel, their best finish in nearly a month, and March soybeans up 3.3% to $14.18 a bushel, their best close of 2012.

Wheat for March added 1.6% to $7.67 a bushel in Chicago, and rose in Europe too, gaining 1.7% to E245.50 a tonne in Paris for March, and 1.4% to £212.50 a tonne in London for May.

"European wheat futures have shown gains all day driven mainly by the fairly supportive USDA on Friday," traders at a major European commodities house said.

"As the USDA has changed the time they release the reports to 5pm UK time, EU markets had almost no time to react to the report."

Still, the "volume traded today has been very light as consumers are understandably reticent to pay £3 a tonne more than they would have on Friday".

'Global supply glut'

The gains did not carryover far into soft commodity markets, which felt more of the malaise of external markets and, in New York arabica coffee, selling by producers.

"Origin began to get the better of the technical buying capping the May contract just above 158.50 cents a pound, and as day trader long's exited it also became evident that the buying had backed off a little as sellers went hunting," Sucden Financial said.

The May lot actually closed down 0.3% at 156.10 cents a pound, having showed gains up to 158.55 cents a pound earlier.

Raw sugar for March dropped 1.5% to 18.87 cents a pound, as the prospect of a large 2012-13 supply surplus came back to roost.

"The newswires/ market chat is talking of a fantastic crop in Brazil next year and the phrase 'global supply glut' seems to have appeared more than once," Sucden said.