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Morning markets: grain futures stage revival. Can it last?

Late recoveries which pared losses in grain futures in the last session set the scene for a firm start to this one, although the mood in markets is hardly bullish.

The question is whether prices have already fallen enough for now, promising though signs are for crops in the US and other major producing countries too.

It remained difficult to find outright news to support price gains, although there has been some comment over some removal of rainfall, and injection of heat, into the Midwest forecast.

'Warmer and drier forecast'

"Weather models pointing to warmer seasonal temperatures next week and into July 28," said Darrell Holaday at Country Futures.

"The GFS did have a slightly warmer and drier forecast for next week which may have been the reason November soybeans rallied 16 cents off the daily low" in the last session, another US broker said.

That said, while excessive heat and dryness can threaten ongoing corn pollination, a vulnerable process, the conditions being talked about for next week are thus far "not very threatening", the broker added.

Indeed, CHS Hedging said that "the corn crop could use a few heat units" to improve its development.

Too high, too early?

Still, there is an appreciation that investors can overdo the price gloom, just as they can the market top.

It is generally reckoned that the market is factoring in a yield of 170 bushels per acre for US corn, or somewhere near, above the 165.3 bushels per acre that the US Department of Agriculture has forecast, already set at a record high.

Is the higher yield justified?

Commodity Weather Group noted that although the current corn crop has high condition ratings, these remain well those in 1986, 1987 and 1994, which posted final yields 8-12% above trend.

"Thus corn yield sceptics caution against taking 2014 US corn yield too high, too early," Richard Feltes at RJ O'Brien said.

Leave room for further losses…

The US cash market has also already reached bargain basement levels in some regions.

"Nearly all locations in North Dakota are posting [per bushel] fall corn bids to farmer that begin with $2," Mr Feltes said.

And this already, before the crop is fully made, and when there is still harvest pressure later on in the year to weigh on futures prices, which typically bottom out in the autumn.

"Traders are increasingly aware that years with large crops typically post row crop price lows October-November," Mr Feltes said.

Indeed, Moore research shows a tendency for corn prices to stay rangebound from mid-July to mid-August.

Whether they have already begun this process, well, December corn futures rebounded 1.2% to $3.86 ½ a bushel as of 09:15 UK time (03:15 Chicago time), failing for the first time in 12 sessions – yet – to put in a new contract low.

The old crop September contract added 1.3% to $3.78 ¾ a bushel.

'Still non-competitive'

That was some help to fellow grain wheat, but it also felt pressure from the harvest in the northern hemisphere, limiting its gains to 0.5%, taking Chicago's September contract to $5.40 ½ a bushel.

There is increasing comment on the progress of harvests in the Black Sea, a region which typically sets the pace on export markets early in the marketing year, ie around now, with competitive offers.

"The Russian harvest is expected to accelerate and this will add more physical pressure to the market," Sterling Smith at Citigroup said.

"US wheat is still non-competitive in the global market and this only adds to the bearishness that pervades the market."

'Trying to push prices lower'

The competitiveness of Russian wheat has been highlighted by offers to an Iraq tender, for which its grain is offered at $309-311 a tonne including freight, a discount of more than $40 a tonne to US supplies.

"Black Sea exporters keep trying to push prices lower in order to attract some buying," Darrell Holaday at Country Futures said.

"Obviously, one of the problems is they have a large crop to move.

"But the other problem is that the turmoil between Ukraine and Russia has caused potential buyers to hesitate to contract with them as they are concerned about default if tensions escalate.

"There is a lot of competition to sell wheat in the world."

'Worried about crop quality'

A more price-positive point is that concerns remain over rain damage to European crops, with moisture on ripe wheat encouraging sprouting, lowering protein levels and cutting kernels' milling qualities.

"Operators remain worried about crop quality because of latest rains registered around France and Germany," Paris-based Agritel said.

"Indeed, germinated wheat and barley are signalled on several production areas."

Canola resilience

As for oilseeds, palm oil showed a bit of life, adding 0.7% to 2,300 ringgit a tonne for October delivery in Kuala Lumpur, helped by a ringgit retreat which bodes well for Malaysian exports, such as the vegetable oil, making them more affordable to buyers in other currencies.

Indeed, data from cargo surveyor SGS showed Malaysian palm exports up 11.4% so far this month, compared with the first half of May.

And canola has already managed to recover from early week lows, adding 0.4% to Can$447.10 a tonne in Winnipeg for November delivery, looking for a third successive positive close.

While prices faces weight from ever-increasing estimates for the European Union harvest of sister-crop rapeseed, which Oil World now pegs at a record 22.7m tonnes, a rise of 1.5m tonnes year on year, prospect for canola in Canada, the top exporter, look less favourable, with heavy rains preventing some sowings and inundating some of what was planted.

November canola has the rare honour of yet to come close to setting contract lows, unlike many other grain and oilseed contracts, including Paris rapeseed for November, which hit E325.50 a tonne in the last session.

'Negative price dynamic'

In Chicago, new crop soybeans for November added 0.7% to 10.94 ¾ a bushel, signally reducing further their discount to the old crop August contract, which added 0.6% to $11.87 ¾ a bushel.

The August lot was undermined in the last session by data showing the US soybean crush for June at 118.7m bushels, a touch shy of expectations, and adding to ideas that old crop supplies are, while tight, not distressingly so.

Indeed, on a bearish note, Country Futures' Darrell Holaday said that "the breakdown of this [August-November] spread is a negative price dynamic for the soybean complex as it indicates the cash market strength is basically gone.

"Keep in mind that this spread was over $1.80 a bushel just six weeks ago."

Morning markets: strong US crop ratings quash grains rally
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