Morning markets: corn, wheat gain, as index fund rejig looms

The new year may be beginning on a tentative note for shares, but agricultural commodities managed a generally positive start.

Shares struggled on Monday after HSBC's monthly survey of China's service sector showed a purchasing managers' index dropping from 52.5 in November to 50.9 last month,

That was only just above the 50.0 neutral level and indicated "marginal" growth.

It was also the lowest figure since August 2011.

Shanghai shares fell 1.8% to their lowest in five months, while Tokyo stocks slumped 2.4%.

Chinese data

But while China is a huge buyer of commodities, agricultural ones included, the impact on raw material markets was muted, perhaps because the data concerned the country's services sector rather than its factories.

Copper, which slumped 1.1% in London in the last session, eased, but only by 0.1%.

And corn, over which there are already concerns over Chinese imports, after the rejection of a succession of US cargoes for containing a variety not yet approved in Beijing, added 0.5% to $4.25 a bushel for March delivery, as of 09:10 Uk time (03:10 Chicago time).

And this was despite a report from the official Xinhun news agency that China had rejected 601,000 tonnes of US corn, more than the 545,000 tonnes refused by December 29, and implying that more cargoes had been affected than many investors had thought.

'Fund rebalancing is anticipated'

But corn has one big factor in its favour, and that is, ironically, its dismal performance in 2013, when it fell 40% in Chicago on a spot futures contract basis.

That means that some - if only temporary - buying pressure will be imminent when index funds come to rebalance their portfolios, readjusting weights back to mandated levels, meaning purchases if poor performers, and sales of 2013's winners.

"Buying for fund rebalancing is anticipated this week," CHS Hedging said.

Benson Quinn Commodities said: "Additional short-covering could lead to higher prices as trade looks ahead to the index fund rebalance," besides to a series of key US Department of Agriculture reports scheduled for Friday.

Hedge funds had a net short of some 88,000 lots as of Christmas Eve, although fresh data on positioning will be released later on Monday.

Egyptian buying

It also helped that rival grain wheat was in the ascendancy, again in part on the prospect of fund rebalancing, with wheat prices down 22% last year in Chicago.

But there was more to it than that, with ideas that US prices may have reached an appealing level for buyers, after their underperformance of last month, when Chicago futures fell 7% compared with, say, a 0.4% drop in Paris wheat.

Such thinking gained credence with the details of the submissions to the tender by Egypt's Gasc grain agency last week.

While Gasc's huge 535,000-tonne order did not include any US wheat, that looked only down to transport costs, and potentially talk of shipping delays thanks to the cold weather in the US.

US hard red winter wheat was notably cheaper, excluding shipping, than Black Sea or French supplies.

'Better opportunities'

Indeed, there has been "talk of US hard red winter wheat trading into Egyptian private buyers", Brian Henry at Benson Quinn Commodities said.

"Perhaps, we don't get to point that US wheat takes favour over EU and Black Sea supplies into the Mediterranean, but current values could and should open up better opportunities into Latin America/Brazil."

"There seemed to be a different attitude towards the wheat market" in the last session "as it feels like many in the trade are on the verge, or at least, have the potential to get caught short", he added.

"While the wheat markets aren't exactly screaming 'buy me', all three markets [Chicago, Minneapolis and Kansas] are giving signs that they have some value."

Cold threat

As an extra help, there are growing ideas that the US cold may threaten some winter wheat seedlings, especially in Kansas, the top wheat-growing state, and Nebraska, where temperatures are today expected to hit minus 5-15 degrees Fahrenheit (minus 21-26 Celsius).

And there are concerns too that Argentina may shut down exports after its poor crop.

Soft red winter wheat for March was 0.4% higher at $6.07 a bushel in Chicago, while hard red winter wheat gained 0.5% to $6.45 a bushel, and Minneapolis spring wheat 0.2% to $6.31 a bushel.

Soybean headway

Against such as background, soybeans gained too, although by a modest 0.1% to $12.72 a bushel for March delivery, with US cold or index fund buying not such an issue.

(Chicago soybeans lost 7.5% last year, in line with the average for agricultural commodities, so limiting rebalancing needs.)

Strong US export and export sales data on Friday eased some of the concerns about a lack of Chinese interest as South American supplies come onstream, with the Brazilian harvest now in its early stages.

Indeed, prices on China's Dalian market rose overnight for a fourth successive session, this time by 0.2% to 4,500 yuan a tonne for May delivery.

More China data

Many soft commodities started strongly too, including New York cotton, which gained 0.9% to 83.70 cents a pound for March delivery, backed by Chinese data.

China, the top cotton importer, producer and consumer, has stockpiled 5.0m tonnes of 2013-14 crop, after buying 331,160 tonnes in the latest week under its producer support programme, official statistics showed.

Meanwhile, China Cotton Association said that domestic cotton plantings would fall 8.9% to 4.25m hectares this year thanks to rising costs and reduced profit expectations from the crop, and uncertainty ahead of potential reforms to the support programme.

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