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Morning markets: grains struggle to keep New Year resilience

Rises in grain and oilseed prices over the last two sessions went against the common idea that they are due a further fall in 2014, as world stocks rebuild further.

On Tuesday, the negative thinking reasserted itself, underpinned by further firmness in the dollar, linked to the prospect of the tapering of Federal Reserve bond purchases in support of ultra-easy monetary policy.

A stronger dollar undermines prices of dollar-denominated commodities by making them less affordable to buyers in other currencies.

'May represent a watershed'

But there was also widespread comment that the previous sessions' resilience had been linked to the prospect of a plethora of US Department of Agriculture data on Friday, when it releases not just the monthly Wasde report, but data on winter wheat plantings and crop stocks as of December 1.

"The longer term outlook for soybeans appears bearish. The question is when the market will roll over and begin declining," said Anne Frick at Jefferies Bache.

"We think the January 10 crop report day may represent a possible watershed."

Furthermore, there is the index fund rebalancing process to think of.

In this exercise, early in the calendar year, funds adjust weightings to return individual commodities to the levels stipulated by the index they follow meaning buying 2013's poorest performers, such as corn and wheat, and selling the winners.

Hedge fund positioning

Not that hedge funds appear to have been making too much of a bet on this raising agricultural commodity prices, cutting their net long position in futures and options for a record 10th successive week as of the week to last Tuesday, ending 2013 on a decidedly bearish note.

This included returning their net short (meaning short positions which benefit which prices fall exceed long holdings which gain when values rise) in Chicago wheat to within 300 contracts of its all-time high (reached earlier in December) and boosting their net short in corn too.

In soybeans, they slashed their net long by 29,000 contracts.

In fact, among major agricultural commodities, it was only cotton and live cattle which enjoyed more bullish positioning.

Winterkill fears

Nor were they keen to push the boat out on Tuesday, with only wheat among Chicago's big three managing to hold its ground, standing unchanged at $6.05 a bushel for March delivery as of 09:30 UK time (03:30 Chicago time).

And that required the support of the US cold snap which is seen as causing some winterkill, although how much is open to question.

Often, damage does not show until late in the growing cycle.

Commodity Weather Group estimates that the damage is just 1.3%, in terms of overall US winter wheat yield potential.

Paris-based Agritel said: "Cold temperatures in the US should not have a deep impact on winter wheat crop development, as main production areas register temperatures between -20 and -25 degrees and are protected with a snow cover."

'Some damage'

At Benson Quinn Commodities, Brian Henry said: "Given the temperatures of the last couple of days and the fact that snow cover in some areas - portions of Nebraska, Kansas and perhaps a couple areas of South Dakota - is lacking, I don't doubt that some damage to the crop has occurred.

"Additionally, there are also areas of soft red winter wheat production that were susceptible to cold temperatures.

"However, damage, if it occurred, will not be known anytime soon and believing the favourable state of the balance of the crop has potential to offset minor damage in localised areas is a sound way to approach any new crop issue at this point."

US export pace

Besides, there is some talk that the Argentine wheat crop is not as dismal as some have said.

CHS Hedging noting that with the crop 75% harvested "wheat exports to Brazil could start resuming", a negative for prices in the US, which has been gaining unusual amounts of Brazilian custom.

The slowing US export pace has been giving comfort to wheat bears, with Mondays data, showing cargo inspections of 13.6m bushels last week, below the 15.4m bushels needed to meet USDA forecasts.

'Expecting more rejections'

Corn futures for March were 0.1% lower at $4.27 a bushel, with ideas that Friday's report will raise USDA estimates both for US production of the grain and year-end stocks for 2013-14.

The harvest is seen by analysts being upgraded by some 77m bushels to 14.066bn bushels, on a yield raised by 0.8 bushels per acre to 161.2 bushels per acre, with end-stocks pegged at 1.861bn bushels.

That would be an upgrade of 69m bushels.

Furthermore, there remain concerns over Chinese rejection of US corn cargoes containing a genetically modified variety unapproved by Beijing officials.

"The trade is expecting more rejections and possibly cancellations until the issue is resolved," CHS Hedging said.

'Water deficit'

Meanwhile, concerns over Argentine dryness appear to have eased off for now, despite talk of some further dryness and high temperatures.

"A heat wave in Argentina could cause water deficit for crops before the arrival of expected rains at the end of the week," Agritel said.

Anne Frick at Jefferies Bache said: "Hot weather has returned to Argentina, reigniting some concern about yields.

"But forecasts still appear to call for a record large soybean crop there."

'Potentially record crop'

At Chicago broker RJ O'Brien, Richard Feltes said: "Current South American crop conditions, if sustained, suggest that the USDA may be underestimating 2014 South American soybean production by 2-3m tonnes.

"It will be difficult for the soybean market to mount a sustained rally with a potentially record 2014 soy crop looming in the backdrop."

And, indeed, soybeans for March were 0.6% lower at $12.68 a bushel in Chicago.

'Finally finding a bid'

Soymeal dropped 0.4% to $412.30 a short ton despite some easing concerns over domestic competition, as a protein feed ingredient, from distillers' grains (DDGs), after Chinese rejection of these too.

"DDG prices are finally finding a bid after declining $80-100 per ton over the past couple of weeks," CHS Hedging said, noting that "both the domestic and export DDG markets are finding demand at these levels".

 Mr Feltes said that cash market sources were reporting the DDG and meal markets "firming once again following a $90-a-ton freefall from post-Christmas levels".

Chinese cotton concerns

Among soft commodities, New York cotton got off to a firm start, adding 1.1% to 84.57 cents a pound for March, amid a hedge fund reassessment which saw them rebuild their net long position by more than 35,000 contracts to 43,288 lots last month.

Concerns have eased over a slowdown in China's state stockpiling, which has been a primary support for world prices, while Chinese production, the world's biggest, is expected to be challenged this year by falling sowings.

"As it stands, China is putting a lot of emphasis on promoting crops for food security and many of the cotton farmers in inland China, particularly Henan and Hunan provinces, have not been doing well," International Cotton Advisory Committee statistician Rebecca Pandolph told

"So cotton is likely to be grown mostly in the Xinjiang area with inland farmers switching to other crops or leaving farming all together as finding labour has been an ongoing problem."

The ICAC has forecast Chinese sowings falling below 4m hectares for the first time since 1999-2000.

Sugar gains for now

Raw sugar for March added 0.1% to 16.10 cents a pound, despite some scepticism over price potential.

"Strong Indian production prospects and the likelihood of a strong Indian export programme is likely to cap advances in sugar markets," Luke Mathews at Commonwealth Bank of Australia said.

Evening markets: rebalancing hopes lift corn, coffee prices
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