Could crops stage a Turnaround Tuesday?

Chicago traders say that the second day of the week typically sees a reversal of the trend of the previous session, which would this time mean gains in grain and oilseed prices.

But agricultural commodity markets currently face extra drags, thanks to the broader market forces in play.

'Disenchanted with commodities'

One is a switch, traders believe, in investor interest away from crops, which have largely struggled so far this year (cotton being a notable exception) to equities.

Doane, the Missouri-based broker, became the latest to caution over "rumblings about investment funds pulling out of commodity-based indices", a trend which it cautioned "will be an ongoing, if not intensifying, driver" of raw material prices.

"Pension funds, in particular, have become disenchanted with commodities as a useful hedge against inflation."

Certainly, shares, which are seen as gaining investor interest, have performed well.

Wall Street's S&P 500 index, for instance, the previous session fractionally below its best levels since November 2007, while Tokyo's Nikkei 225 index on Tuesday ended close to a four-year high – and up 31% in the last three months.

Changing exchange rates

The Nikkei's performance indicates another dynamic in play, of currencies moving out of historic trading ranges – Japan's yen being one, in hitting multi-year lows on ideas that the country's latest attempt at monetary stimulus really might instil a bit of inflation at last.

(From the agricultural commodity perspective, Japan is a big importer of the likes of corn, beef and chicken, which will become more expensive as the yen depreciates.)

The euro, meanwhile, is strengthening, up some 8% since July on a trade-weighted basis.

Importantly for commodities, the dollar has also on an upswing, adding 1.6% so far this month, including a 0.2% gain on Tuesday, so making dollar-denominated exports including many raw materials less affordable to buyers in other currencies.

'Budding currency war'

Doane noted that a summit of G-20 finance ministers in Russia this week "will be closely watched by commodity traders", coming amid "early signs of a budding currency war".

"Several key players indicate a willingness to devalue their currency vis a vis the dollar in order to spur their economy with more export sales."

At least from a crop investors' point of view, the Brazilian real is appreciating against the dollar a touch, putting upward pressure on dollar prices of major Brazilian exports such as corn, coffee, soybeans and sugar (not that you might have noticed from futures movements).

'May struggle to find support'

Viewed through this lens it was not so difficult to see a Turnaround Tuesday struggling.

Especially with end-user demand turned down thanks to lunar new year holidays in China, a huge importer of the likes of soybeans, palm oil and rubber, and in some other parts of Asia too.

Furthermore, there are improved ideas over South American weather, in terms of dryness to speed the central Brazilian harvest and rains to ease drought further south.

"The weather forecast for better rains is bearish and, with China on holiday, the market may struggle to find support this week," Benson Quinn Commodities said, of soybeans.

On corn it said: "Although ending stocks are extremely tight the market is lacking any fresh news and will likely require confirmation of improving domestic demand to inspire new longs to enter the market."

'Lowball area forecasts'

Meanwhile, the preliminary US Department of Agriculture crop data out on Monday added another sour note to price prospects, in talking of substantial yields and rising ending stocks.

In corn, for instance, the yield estimate of 163.5 bushels per acre was 3 bushels per acre above that forecast by Informa Economics (besides being up more than 30% from the 2012 result).

And while the USDA was more conservative than other commentators on corn and soybean planting area, Richard Feltes at RJ O'Brien said: "I would advise reading anything into their lowball area forecasts, which are well under trade estimates."

Instead, he suspected the USDA forecast "calling for 2013-14 corn, soybean and wheat price declines versus 2012-13 of $1.75 a bushel, $2.95 and $0.70 respectively is triggering more liquidation".

'Due for a bounce'

In fact, there was some hope for corn, with talk that four ethanol plants will reopen, after the loss of some 15% of capacity produced enough of a squeeze to support sector profitability.

"Although I'd anticipate weekly grind rates will continue to be low near-term, they will likely recover in the coming months as capacity returns and increased driving in the summer months leads to greater gasoline demand," Ben Bradbury at Benson Quinn Commodities said.

"Thoughts of improved corn demand stemming from increased ethanol production, along with steady cash markets, has kept nearby calendar spreads supported."

However, this did not manage on Tuesday to ward off selling pressure, which sent Chicago corn for March down 1.0% to $6.95 ½ a bushel as of 09:45 UK time (03:45 Chicago time), falling below $7 a bushel for the first time in a month.

Indeed, the fall below that psychologically important point was seen as fuelling selling.

At broker Market 1, Mike Mawdsley said: "For seven days, corn has closed lower. It is due for a bounce, but if it can't $6.78 a bushel or lower is very likely," technical analysis suggests.

Technical support

Wheat was lower too, by 0.5% to $7.37 ½ a bushel for March, as precipitation in the US raises hopes of an easing of the drought which sent winter wheat seedlings into dormancy in their worst condition on record.

Australia didn't help by nudging higher by 32,000 tonnes, to 22.077m tonnes, its estimate for the latest domestic wheat harvest, which some had believed could have seen a downgrade thanks to undue dryness in parts of the growing season.

Soybeans at least managed to post a 1-cent gain, to $14.32 ½ a bushel for March delivery, resilience attributed to the 30-day moving average, at 0.75 cents below that level, which is rarely mentioned in despatches, but was credited with arresting the oilseed's fall in the last session.

The March contract is below its major moving averages, including the 20-, 50-, 100- and 200-day lines.

Sugar vs ethanol

Soft commodities felt the selling pressure too, even cotton, which has been supported by raised ideas for US exports, and forecasts of a slump in US sowings this year.

That said, a USDA initial projection of farmers receiving 68 cents a pound in 2013-14 did little to boost sentiment.

"These USDA projections make current forward prices look very attractive," said Luke Mathews, at Commonwealth Bank of Australia, even as New York's March lot eased 1.2% to 81.90 cents a pound.

New York raw sugar could not maintain its winning run, easing 0.1% to 18.42 cents a pound for March, even after Kingsman said that the price at which mills earned more from turning cane into the sweetener rather than ethanol had risen to 19.0 cents – the first premium over sugar prices in two years.