PRINTABLE VERSION   EMAIL TO A FRIEND   RSS FEEDS 20:07 GMT, Thursday, 29th May 2014, by
Evening markets: soft commodities soar. But grains flounder

Grain markets failed to hold on to early headway.

But soft commodities managed decent gains, especially coffee, which rebounded strongly on indications that the Brazilian arabica harvest may turn out to be as bad as had been feared.

Ipanema Coffees, a supplier to Starbucks, warned that its production may near-halve year on year after the drought early in 2014 in Brazil's main coffee producing state of Minas Gerais stunted crop development.

The group sees its output falling to 65,000 bags, from 127,000 bags a year ago, and a forecast of 80,000 bags in January.

In part, the decline reflects the decreased size, as well as number, of beans collected, with potentially 700 litres needed to meet the 60kg bag weight, compared with a typical 500 litres.

'Still waiting for news'

The report came into a market eager for news on the Brazil harvest.

While analysts have made large cuts to their estimates for Brazil's coffee harvest, which were initially around 60m bags, they have warned that it is tricky to forecast given the highly unusual nature of a drought at what is meant to be a wet time of year when, for instance, sugar cane mills take seasonal breaks.

"The market is still waiting for news of actual harvest yields in Brazil, but the reports have been hard to find," Jack Scoville at Price Futures said.

However, after the Ipanema news, Judith Ganes-Chase, at J Ganes Consulting, said that "finally, the truth is coming out".

Ms Ganes Chase on Wednesday, even as robusta coffee futures were tumbling, cautioned over bearish interpretations of a Vietnam production report at the heart of the price retreat.

Ball vs beans

As an extra support, Citigroup's Sterling Smith noted "some sporadic concerns about the World Cup resulting in work stoppages, which could cause some issues".

The football (soccer) World Cup starts in Brazil next month, just as the country's coffee harvest is ramping up.

Arabica coffee for July soared 3.3% to 181.95 cents a pound in New York, staying comfortably ahead of its 100-day moving average, and nearly retaking its 10-day moving average.

London robusta coffee for July gained 2.2% to $1,949 a tonne.

Selling gone far enough

The strength spread to cotton too, which stood up 1.9% at 86.45 cents a pound in late deals in New York for July delivery, amid ideas that a correction on ideas of better US sowing conditions had gone far enough for now.

The new crop December contract was 1.0% higher at 78.48 cents a pound, after all, offering rich pickings in terms of profit taking for investors with short positions.

And raw sugar for July gained 2.2% to 17.48 cents a pound, extending its bounce from the bottom of its trading range, reached on Tuesday, and retaking its 200-day moving average.

"We are now approaching the mid-point of the range in the July contract with the 17.60s cents-a-pound, high-volume battleground seemingly the magnet for values," Nick Penney at Sucden Financial said.

"Whether we return to test the upper reaches at 18 cents a pound and over is doubtful in the near term without any fresh bullish news to give the market traction."

Grains drop

However, such gains were a distant dream for grain investors who, having seen Chicago wheat futures depart from the script somewhat in early deals by posting gains, saw them return right back on message, a negative one, to close lower for the 15th time in 16 sessions.

The strength in early deals had gone counter to ideas that month ends typically attract fund selling and cash withdrawal although position closing could mean tying up, profitable, short contracts, of course.

There are some "dry weather forecasts for Russia's grain producing area", broker Allendale noted.

Traders are keeping one eye on a shortfall of rain in Central Region, Volga Valley and North Caucasus, given Russia's history of dryness at this time of year, hitting wheat production forecsats and sending world prices soaring.

'Stress spring crops'

But in parts of Central Region at least, "rains have eased dryness, and additional improvements are expected," weather service MDA said, if warning of "notable dryness in north eastern North Caucasus, Volga Valley and western Kazakhstan, which will continue to stress spring crops, especially spring wheat".

Still, while "chatter about dry conditions in and near the Black Sea region are getting some attention, but the issue isn't anywhere near being critical at this point", Benson Quinn Commodities said.

"The trade isn't concerned about overall global wheat production."

The International Grains Council cut its forecast for world wheat production, but by a modest 3.4m tonnes to 694.1m tonnes, with a reduction of 4.0m tonnes to 55.0m tonne in the forecast for the drought-hit US crop offset by a 1.0m-tonne upgrade to 12.9m tonnes in hopes for Argentina.

'Back on the defensive'

Thinking of the US crop, with harvest ramping up, viewed as some 10% complete in Texas, wheat futures are seen likely to come under harvest pressure, viewed as often tailing off with the coming of July.

Although the harvest "has gotten off to a pretty slow start with very minimal yield and quality data, this weekend is expected to be a fairly active harvest weekend for winter wheat, which could put the wheat market back on the defensive," CHS Hedging said.

Chicago wheat for July dropped 1.0% to $6.32 a bushel, the contract's lowest close in three months.

In Paris, wheat for November did a little better in falling 0.5% to E191.50 a tonne, but then there was talk that Algeria bought 700,000 tons of French wheat for August shipment.

London wheat for November edged 0.2% higher to £144.35 a tonne or November delivery, given some support from softer sterling, and having fallen by 9% so far this month.

Soft data

Back in Chicago, fellow grain corn dropped too, little helped by International Grains Council upgrades to expectations for both world production and inventories in 2014-15.

Estimates for crops in the likes of the European Union, Mexico, Russia and Brazil were raised by an aggregate 5.0m tonnes.

And weekly US ethanol data were not so encouraging.

While production rose 2,000 barrels a day to 927,000 barrels a day, meaning extra usage of corn, inventories rose 499,000 barrels to 17.5m barrels, raising questions over demand.

PEDv returns

Furthermore, there are broad concerns over the reinfection of US pig farms with porcine epidemic diahorrea virus (PEDv), dashing hopes that herds would gain lasting immunity after an outbreak.

"There have been more reports from pork producers of PEDv coming back a second time," after an initial one from Indiana, Allendale noted.

"Many believe we have not seen the tight numbers from last winter's spread of the virus."

Some more distant lean hog futures gained on the prospect of thinner supplies, with the October contract adding 0.8% to 106.00 cents a pound in Chicago, although nearer-term, the July contract shed 0.6% to 120.60 cents a pound.

"Lean hog futures have been hit with technical and fund liquidation the last few sessions," Allendale said.

Feed needs

For grain markets, the prospect of a smaller herd implies less feed use.

"The corn market traded lower on concerns of the deadly pig virus in the US. A recurring outbreak of the virus raises concerns of reduced feed demand," CHS Hedging said.

And, as Sanderson Farms pointed out, expansion is not too forthcoming in the US poultry sector either.

With, as Benson Quinn Commodities said, "conditions for new crop soybean and corn development remaining very close to ideal", corn for July dropped 0.6% to $4.69 a bushel, with the new crop December lot shedding 1.4% to $4.63 a bushel.

China improvement

It was left to soybeans once again to keep bullish hopes alive, although gains were hardly convincing.

That said, even in rising 0.1% to $12.44 a bushel, the November contract lifted the new crop soybean: corn ratio to 2.69: 1, around the top of its trading range.

Soybeans are being helped by a reversal of bearish sentiment on China, helped by talk that the country may soon stop weekly sales from state inventories, and that processors are returning to buying, after appearing to concentrate on ditching orders for much of the last six weeks.

In fact, there was talk that China bought two cargoes of Brazilian soybeans, albeit not for shipment until March next year.

Demand hopes

Among other news, China's Ministry of Commerce estimated the country's imports this month at 5.94m tonnes, down some 600,000 tonnes month on month but well above the 5.1m tonnes in May last year.

The Argentine soybean crush rose last month, by more than 300,000 tonnes to 3.89m tonnes, with the country also ditching domestic taxes on biodiesel, and lowering the export duty to 11% in an effort to encourage shipments (and government revenues).

Meanwhile, Brazil has announced, as expected, a rise to 6% in its minimum biodiesel blending rate as of July 1, and 7% from November 1, from the current 1%.

"Each 1% increase is likely to increase soyoil usage by 30,000-40,000 tonnes per month assuming soyoil accounts for 75-80% of the feed stocks," New York-based Jefferies Bache said.

'Rally near term is unlikely'

Still, in Chicago, Richard Feltes at RJ O'Brien cautioned that a "cash-led soybean price rally near term is unlikely, with domestic soy basis stable and meal premiums easing".

Chicago soybeans for July gained 0.1% to $14.99 a bushel, signally failing to hold above $15.00 a bushel, where they spent much of the day.

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