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Morning markets: corn, hurt by China fears, leads ags lower

It was a not unreasonable expectation that corn might fare better on Monday, after its drubbing last week.

After all, hedge funds are a frame of mind to close short positions, on which they are holding gains, as indicated by Chicago futures' fall back below all major moving average lines.

(For investors who have held corn shorts for 200 days, the profit looks like a healthy $0.80 per bushel or so.)

That time of year

Data late on Friday showed hedge funds cutting their net short in Chicago corn futures and options by more than 26,000 contracts in the week to last Tuesday, driven by a cut in short positions (rather than an increase in long holdings).

Year ends tend to be a time which encourage funds to take profits, an extra stimulus being the approach of the index fund rebalancing exercise, which will give, temporary, support to 2013's commodity losers such as corn as portfolio weights are readjusted to mandated levels.

Ben Bradbury at Benson Quinn Commodities said ahead of trading: "There's nothing fundamentally supportive in the corn market right now.

"But I'll vote for sideways to lower trade as a slow producer sell rate and the likelihood of additional short covering by the funds heading into year-end should offer some minor support."

China jitters

However, China fears kept headway off the agenda in early deals.

These jitters, in agricultural commodity markets, concern the rejection of cargoes of US corn over contamination with an unapproved (by Beijing) genetically modified variety.

Ideas that China will "continue rejecting US cargoes of corn after the unapproved strain was discovered" should "continue pressuring US corn prices for the week ahead", Vanessa Tan at Phillip Futures said.

"The strict checks that China will implement on incoming US cargoes of corn could result in further rejections or discourage US corn imports."

There are growing fears too that the curbs may spread to distillers' grains, or DDGs, a feed ingredient produced as a byproduct of ethanol manufacture.

Shares decline

As an extra China concern too, HSBC's "flash" manufacturing survey - a preliminary look at monthly sentiment in the sector - fell to a three-month low of 50.5, down 0.3 points from the November reading.

Although the figure was still above 50.0, indicating growth, the decline was felt in stock markets, with Shanghai stocks losing 1.6%, and Hong Jong ones 0.6%.

While there is support to corn prices from decent US ethanol margins, and the slow pace of farmer selling, futures for March fell 0.7% to $4.22 a bushel as of 09:55 UK time (03:55 Chicago time).

'Ample supplies'

That weighed on wheat too, which had the extra pressure, from an Iraq tender, of confirmation of the difficulty US supplies face competing on the world market.

"Ample supplies of exportable wheat throughout the world keep the wheat market under pressure, as Australia and Argentina harvest", CHS Hedging said.

The cheapest offer Iraq received was from Australia, at $339.70 a tonne c&f.

US wheat, liner out, was priced at $358.87 a tonne, nearly $20 a tonne more expensive, although it was at least more than $2 a tonne cheaper than Canadian supplies, at $361.05 a tonne.

'Continuing to lose competitiveness'

 Not that Phillip Futures' Ms Tan was convinced that US wheat prices will recover for now.

"For the week ahead, we are bearish on wheat as we may see further pressure from US wheat continuing to lose its competitiveness to strong competitors such as Canadian and Australian wheat," he said.

Benson Quinn Commodities said that "it is hard to recommend being short wheat with the market so oversold", and hedge funds nearly 70,000 lots net short as of last Tuesday a record, questioning how much unfulfilled selling pressure there remains out there.

"But there really isn't anything to indicate we are done going down."

Especially when Russia raised to 95m tonnes, from 90m tonnes, its target for next year's domestic grains harvest (mainly wheat).

Wheat for March was 0.6% lower at $6.25 a bushel in Chicago.

'Could be overbought'

And soybeans dropped too, down 0.3% at $13.23 a bushel for January delivery, amid concerns over China imports here too, although more of the prospect of strong South American crops prompting buyers to cancel orders and switch to lower priced Brazilian supplies.

"Many traders continue to fear that China may be close switching substantial purchases from US to South America for February forward positions," CHS Hedging said.

"There is also some talk that nearby needs could be overbought."

That said, prices in China itself traded firmer, with Dalian soybeans for May adding 6.3% to 4.492 yuan a tonne, and soymeal for May 0.8% to 3,351 yuan a tonne, although soyoil, the other main soybean-processing product, dropped 0.8% to 7,036 yuan a tonne.

Canola rebound?

Indeed, there was some life elsewhere in the oilseeds sector too, with Winnipeg canola for January adding 0.7% to Can$443.00 a tonne, recovering from its lowest close in three years.

The rapeseed variant has been pressed by Canada's upgrade of its domestic crop to a record 18m tonnes, besides concerns that it too may fall foul of Chinese import hiccups, as it has done in the past.

In Kuala Lumpur, palm oil for March gained 0.5% to 2,582 ringgit a tonne.

This despite concerns that the narrowing discount to rival vegetable oil soyoil will depress demand, especially at a time when northern hemisphere biodiesel consumption is limited by winter.

(Biodiesel made from palm oil solidifies at a relatively high temperature.)

'Prices will reverse down'

Among soft commodities, robusta coffee was weak in early deals, amid continued doubts over the staying power of a market price which revived prices last week to three-month highs.

With Vietnam heading towards the close of a record harvest, "supply of robusta coffee is there, and therefore we expect prices to reverse down anytime", Phillip Futures' Vanessa Ta said. 

London's March contract was 1.1% lower at $1,780 a tonne.

Cotton for May dropped too, undermined by an industry report that Chinese cotton imports fell 43% to 173,100 tonnes last month, encouraging profit taking after a three-week rally in prices.

Cotton for March stood down 0.6% at 82.74 cents a pound in New York.

Evening markets: grains dip as China corn import scare grows
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