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Morning markets: emerging market calm revives cotton, rubber

President Barack Obama's State of the Union address isn't the only factor on Tuesday potentially of significance to world financial markets.

The Reserve Bank of India, for instance, is to hold a policy meeting later, which will be of unusually large significance given the jitters over emerging market currencies.

Wednesday, of course, brings the later decision from the Federal Reserve on whether to further reduce its stimulus measures.

'Risk has eased'

For now, in fact, world markets appeared a bit less nervy, with many emerging market currencies at least stabilising, and some showing small gains.

"This doesn't mean that we are out of the woods, of course," said Scotia Bank Asia currency strategist Sacha Tihanyi.

"However, the risk that the weakness seen in global assets spirals into a short-term asset meltdown has eased somewhat."

And that was evident in the markets for industrial ags - more attuned to world economic sentiment than food crops, for which demand is more stable which made early headway.

Industrials recover

Cotton for March bounced 0.5% to 84.64 cents a pound in New York as of 09:30 UK time (04:30 New York time, 03:30 Chicago time), despite some residual negative sentiment in some quarters.

"Record high global cotton inventories and a change in China's cotton stockpile policy means there is no real reason for prices to be above 85 cents," said Luke Mathews at Commonwealth Bank of Australia.

In Tokyo, rubber for July, the benchmark contract, soared 1.8% to 232.20 yen a kilogramme, looking for its first positive close in nine sessions, which had cost it more than 10%, and taken prices to a seven-month low.

Both commodities are especially exposed to emerging markets too, with China the top importer of both, and biggest producer of cotton.

Thailand, which has seen violent clashes ahead of a planned national vote next week, is the biggest rubber exporter.

Real concerns

However, it was not apparent yet that investors are  sowilling to bet on a recovery in Brazil's real which would support prices of agricultural commodities in which it is a major player, and which have suffered on concerns that the Argentine peso debacle could cause some tremors next door.

Raw sugar for March (Brazil is the top sugar producer and exporter) was 0.1% higher at 14.82 cents a pound New York, but only after to falling earlier to 14.7o cents a pound in, hitting a fresh lowest-for-a-spot-contract in three and a half years.

"As this soft commodity is dollar-denominated, weakness in domestic currencies would spur farmers to sell more as it meant more profit for them," said Vanessa Tan at Phillip Futures, adding that "the market is already dealing with an abundance of supplies".

While Brazil output is at a seasonal low, "harvesting of cane in other producers like Thailand and India is picking up and keeping prices pressured," Ms Tan said.

"In light of these fundamentals, we remain bearish on raw sugar prices."

Arabica coffee, of which Brazil is also the top sugar producer and exporter, eased 0.3% to 113.50 cents a pound for March delivery.

'Harshly cold temperatures'

Gains were easier to find in Chicago, where a somewhat Turnaround Tuesday feel greeted investors in wheat, which added 0.7% to $5.67 a bushel for March, bringing the contract into collision with its 10-day moving average.

Sentiment is being underpinned in part by concerns over the impact of US cold weather, at a time when some winter wheat seedlings are lacking snow cover.

"Even though snow is covering most of the soft red winter wheat crop in the US Midwest, harshly cold temperatures could still pose as a threat," Ms Tan said.

The National Weather Service's office in Des Moine, Iowa is expecting wind chill readings of minus 20-40 degrees Fahrenheit (minus 29-40 Celsius).

Late selling

But will the gains stick this time, unlike in the last session, when a boost to prices from concerns over the US freeze was undermined by poor export data?

Brian Henry at Benson Quinn Commodities noted that the emergence of late sellers "has become a daily occurrence" in US wheat markets.

"Right now a session that didn't end with a significant offer in the wheat markets would be a positive, he said.

"I am not convinced the wheat market needs to be cheaper, but I have a hard time believing new ownership is going to be rewarded in the near future."

'We remain bearish'

However, in wheat's favour this session is yet another sign of demand from importers keen to exploit prices among their lowest in more than three years.

Egypt's Gasc grain authority announced a tender later on Monday, its fourth of the month, and following high profile purchases last week from Algeria and Iraq.

Not that this has turned everyone supportive on wheat.

"Recent tenders in wheat show how competitive the wheat export market is as tenders were for wheat of multiple origins," Phillip Futures' Vanessa Tan said.

"With the highly competitive export market and a persistent global surplus of wheat, we remain bearish on US wheat."

'Crop damage quantified'

Corn managed smaller gains, receiving less support from firmer wheat now that the corn-wheat spread has closed dramatically, from levels above $2 a bushel late last year to less than $1.40 a bushel now.

That is a reflection of the US inventory report on January 10 which implied large amounts of switching by livestock feeders from wheat to corn, encouraged by the price gap.

Still, the grain is finding some buyers thanks to ideas of heat undermining Argentine yield prospects.

"Crop damage that resulted from hot and dry conditions earlier this month in Argentina had been quantified such that the worst-hit areas could lose 50% of production," Ms Tan said, terming this a price-supportive factor.

'Modest upward price movement'

Meanwhile, demand has been resilient.

"US corn exports this marketing year continue strong, despite recent controversy over shipments to China," noted Mark Welch at Texas A&M University.

"After sluggish numbers reported over the Christmas holidays, export sales the last two reporting periods are averaging 30m bushels a week," well ahead of the 8m bushels a week needed to meet the US Department of Agriculture forecast of 1.45bn bushels of shipments in 2013-14.

"Use numbers continue to look strong. This should provide modest upward price movement into spring," Dr Welch said, in unusual bullish comment on the grain.

'A mostly reluctant seller'

The resilient consumption is coming against a background of weak US farmer selling, underpinning the cash market.

"The producer remains a mostly reluctant seller," Benson Quinn Commodities said.

"Steady cash markets should continue to offer some underlying support," if adding that "with producer selling likely to pick up on any subsequent rallies and managed money's short position at a very manageable level I would expect the market to continue to move sideways".

Corn for March in fact stood 0.1% higher at $4.32 a bushel.

Corn vs soybeans

As for soybeans, one factor increasingly coming into view is the prospect of the US battle for acres in the spring, and the price signals being sent to growers by corn and soybean futures prices.

In fact, "December corn prices are at or below the cost of production for many producers in the Midwest," according to one broker.

This factor would appear to question the degree of downside remaining for prices, given that the US is the top producer and exporter of the grain, whose growing dynamics really matter to the global market.

In fact, the ratio of November soybean: December corn futures prices has fallen to 2.44, from levels of close to 2.60 last month, but still historically high.

"We believe the November soybean contract looks overpriced to December corn.  The ratio could get back to 2.35 before US planting begins," the broker said.

Chinese cancellations?

However, on old crop, corn failed to make ground against soybeans as concerns that China will switch orders of the oilseed en masse from the US to South America fail, yet, to be realised.

Strong US export data on Monday "helped to alleviate concerns that China would not purchase US soybeans but soybeans of other origins instead", Ms Tan said.

In fact, weekly US export inspections were, at 73.8m bushels, record large for a fourth week of January, according to Benson Quinn Commodities.

"Talk remains of Chinese cancellations but so far there has been little in way of confirmation and Chinese continues to buy new crop US soybeans," the broker said.

Soybeans for March stood 0.2% higher at $12.90 a bushel.

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