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Morning markets: China worries dent markets, ags included

So if soybeans outperformed in the last session, and grains on Wednesday, which would see the gains on Friday?

The answer is neither.

The day brought with it something of a "risk off" feel of old, with assets deemed more vulnerable to tumultuous events such as Chinese economy concerns and the Ukraine crisis falling while so-called safe havens, such as the dollar, appear more in demand.

"Risk assets continued to be under pressure as the factors that have been hitting global sentiment recently namely concerns on China growth and the Ukraine political situation have shown little signs of fading and if anything have intensified," Crédit Agricole said.

Brian Henry at Benson Quinn Commodities said: "From a fund perspective, whether equities or commodities, the focus is on China and how weakness in that economy would affect growth in the rest of Asia and dampen prospects in the US."

Crop implications

Shares tumbled by 3.3% in Tokyo, by 1.5% in Sydney and by 0.7% in Shanghai, with Hong Kong stocks down 0.9%.

As far as agricultural commodities go, China is of course a major importer of the likes of cotton, soybeans and sugar, with the prospect of weaker economic growth casting a shadow over these markets.

For Ukraine, the picture has a more bullish twist, given that the country is a big exporter of corn and wheat, and any setbacks to shipments or to spring sowings from the crisis would stand to divert importers to other origins, such as the European Union or the US.

However, with wheat prices having briefly hit four-month highs in Chicago in the last session, and their best in Paris for nearly a year, has enough risk premium been priced in?

'Emotional roller coaster'

"Since a lot of this wheat rally has been an emotional 'what-if' roller coaster we are starting to find resistance at key levels," one US broker said, citing the first one at the 200-day moving average, which Chicago futures bust through on Wednesday.

"Now we are finding resistance at the psychological level of $7.00 a bushel," the second key level.

"We can see a fundamental reason to worry only if banks hold off on loans to Ukrainian farmers for 2014.

"But so far there have been no confirmation of that happening and all signs point to 'business as usual'," an observation which, if true would mean that "we have built way too much fear premium into wheat".

'Demand being impacted'

At Commonwealth Bank of Australia, Luke Mathews said that "more traders and analysts are now questioning if the current rally has become overheated, and the latest sales data suggests demand is being impacted".

That was a reference to weekly US export sales data, which for wheat came in at 477,000 tonnes of old crop, down 14% week on week, if hardly disastrous it has to be said.

And some investors are questioning whether the concerns over US winter wheat condition have been overplayed, with Mark Welch at Texas A&M University highlighting that "Texas wheat crop conditions improved considerably" in this week's US Department of Agriculture crop progress report

As measured by an index score, it reached 290 points, up from 254 the previous week and not far below the average of a little over 300 points for this time of year.

'Drought remains a problem'

Still, Dr Welch cautioned also that Thursday's weekly US drought monitor report showed "much of the southern and western winter wheat growing regions in severe drought or worse.

And the "precipitation forecast for the next 5-7 days calls for amounts of inch or less in most growing areas".

Gail Martell, at Martell Crop Projections, said that while the southern Plains, a major wheat-growing area, received temperatures into the 80s Fahrenheit, stimulating wheat growth, drought "remains a problem".

"Less than half of normal precipitation has developed since early December in the 7 main bread-wheat states that make up 58% of US winter wheat," she said, noting that Okahoma, the second biggest winter wheat state, had received just 2.65 inches compared with an average of 6.57 inches. 

Wheat fell in Chicago, but its decline was limited as of 08:30 UK time (04:30 Chicago time) when the May contract stood down 0.4% at $6.71 a bushel, remaining above its 200-day moving average.

"Many participants may be waiting for reaction to this weekend's vote in Crimea before making their next move," Benson Quinn Commodities said, referring to a controversial, Moscow sponsored poll of the region, to see whether it wishes to secede from Ukraine and become part of Russia.

'Fields are frozen'

Corn for May fell in line, by 0.4% to $4.84 a bushel, staying just above its 10-day moving average.

But then conditions are an issue for the grain too, with the hangover from a cold winter, in terms of low soil temperatures, a potential hiccup to spring sowings, as Allendale highlighted on Thursday, while Midwest dryness is raising some concerns too.

"Producers are looking forward to moderating temperatures after a bitterly cold winter," Ms Martell said, noting that "fields are frozen through a deep soil layer down 8-12 inches". 

"Worsening" is "creeping into the Midwest", she added.

"Both Iowa and Minnesota currently have modest drought along with central Illinois and western Wisconsin."

One separate factor to watch out for, though, is talk that China is trying to cancel purchases of US distillers' grains, a byproduct of corn ethanol manufacture used in livestock feed, and of which China is by far the biggest importer.

'Basis trying to stabilise'

Talk of Chinese order cancellations remains a big talking point in the soybean pit, of course, with talk of some 500,000 tonnes of South American purchases ditched so far, and attempts to scrap or sell on a further 1m tonnes.

Furthermore, Allendale talked of huge US soybean sowings, with low soil temperatures, besides prices, driving farmers to a spring crop which can be later planted that corn.

Still, on the trade front, "it appears Brazilian basis levels are trying to stabilise after trading considerably weaker", Benson Quinn's Brian Henry said.

"There were also signs of soymeal being priced," speaking of some demand to mop up cancelled Chinese orders.

Market prices

The signals from China itself on pricing was mixed, with soymeal for September dropping 0.4% to 3,254 yuan a tonne on the Dalian futures market, but September soybeans settling up 0.3% at 4,354 yuan a tonne.

But palm oil, whose rise this month to the highest level since 2012 has been a big support to the oilseeds complex, dropped 0.5% to 2,794 ringgit a tonne, amid fears over China, a big importer of the vegetable oil.

In Chicago, soybeans retreated by 0.7% to $13.87a bushel, falling below their 20-day moving average, and on course for a drop of nearly 5% this week despite their bounce in the last session.

'Certainly a concern'

Among soft commodities, cotton for May traded down 0.2% at 91.51 cents a pound in New York, little helped by the worries over China, which is the top importer and consumer of the fibre.

From a chart perspective, Luke Mathews at Commonwealth Bank of Australia noted that "in the past five sessions the cotton market has rallied above 93 cents a pound on two separate occasions, but on both occasions the market has been unable to hold the gains".

Indeed, levels around 93-94 cents a pound have a habit of posing resistance to prices, although "only time will tell if this level again acts as the Achilles heel on the current rally".

Nonetheless, from a fundamental perspective, "the recent run of weak Chinese economic data is certainly a concern for the cotton bulls".

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