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Morning markets: soybean futures sink as China jitters mount

As if commodity investors didn't have enough to worry about over China, the latest economic data did little to assuage concerns.

HSBC's preliminary purchasing managers' index for April signalled contraction for a fourth month, with an index level of 48.3, below the 50.0 neutral reading.

"Downside risks to growth are still evident as both new export orders and employment contracted," said HSBC economist Qu Hongbin, forecasting that Beijing would undertake stimulus measures to boost the economy.

"We think more [stimulus] measures may be unveiled in the coming months and the [central bank] will keep sufficient liquidity."

State auction looming?

Still, for now, the weak index reading only added for agricultural commodity investors to the downbeat picture which has got them particularly concerned about soybeans.

There isn't just the potential for economic weakness to undermine growth in demand for meat, and therefore for livestock feed, to factor in

There is the talk that China will as early as next month begin auctioning soybeans from state supplies, a month early than usual, adding extra supplies to a market hardly in deficit.

Indeed, the talk of Chinese buyers continuing to default on or switch deals continues at the forefront of investors' minds, especially after two Marubeni shipments bound for China were switch to the US, whose tight balance sheet is encouraging imports.

Financing story

Of course, the Chinese default story is not just down to crushers having overbooked soybean imports.

The oilseed has been used as a financing tool, with the credit that buyers have been able to raise against cargos being used to raise temporary cash for all kinds of purposes a situation now unravelling.

One broker said that "this could help explain why earlier this year China continued to purchase US soybeans even though there was a large discount in Brazilian beans," with the US seen by lenders as a better credit risk.

There is now talk is that Chinese banks have raised the downpayment on letters of credit for soybean purchases from 10% to 30% or more, reducing liquidity.

'Tight US soybean situation'

That said, the market retains support from the tightness of US supplies, which are expected to end 2013-14 at their thinnest in 50 years, relative to demand, on US Department of Agriculture estimates.

Indeed, the Chinese situation "does not solve the tight US soybean situation," Kim Rugel at Benson Quinn Commodities said.

But investors appear "more comfortable that the situation is loosening as imports look to work into the Gulf, upstream of the Mississippi and possibly even into the Great Lakes if the ice ever melts".

Soybeans for July stood 0.7% lower at $14.61 3/4 a bushel, as of 09:50 UK time (03:50 Chicago time), setting course for a fourth successive negative session.

New crop November soybeans were 0.3% down at $12.12 1/2 a bushel, dropping below their 20-day moving average, beneath which the contract has not closed since early February.

Corn planting comments

What is negative for soybeans is not necessarily downbeat for grain prices, with investors having already factored in lower Chinese imports of corn, and with a splurge on wheat imports earlier in the season viewed as over.

Indeed, some saw short soybean-long corn spreading as a major factor behind the grain's rally in the last session, for which the headline reason was the slow pace of US plantings, 6% complete as of Sunday compared with the typical rate of 14%.

Commentators has contacted or read from are universally relaxed about the slow planting pace so far, although that does not mean investors are not warranted in injecting some risk premium into prices, especially when weather forecasts are downright contradictory.

Among the latest comments was from Vanessa Tan at Phillip Futures, who said that "if plantings conditions in the Midwest remain favourable, progress could be spurred and be reflected during the next crop progress report".

At Commonwealth Bank of Australia, Luke Mathews said: "It is far too early in the season to be overly worried about US row crop planting progress."

Corn for July was flat at $5.02 a bushel, although progress later may depend too on weekly US ethanol production data.

The last batch showed a jump in output to 939,000 barrels a day, and declining inventories too.

Ukraine tensions rise

It was left to wheat to prove the strongest of Chicago's big three, although of course only after a 3% slump on Monday.

The revival is in tune with the situation in Ukraine, where tensions are growing again after two men, including local politician Vladimir Rybak, were found dead  - after being, according to President Oleksandr Turchynov, "brutally tortured".

The suspicion is that the deaths were the work of pro-Russian separatists.

"The terrorists who effectively took the whole Donetsk region hostage have now gone too far," Mr Turchynov said.

The US has warned Moscow that "absence of measurable progress on implementing [last week's] Geneva agreement will result in increased sanctions on Russia".

Futures in wheat, of which the Black Sea region is a key source of exports, have proven themselves a barometer of Ukraine tensions.

Wheat damage

Furthermore, there is the damage to the US southern Plains hard red winter wheat crop from drought and late frost to factor in.

Oklahoma State University academics added a bit more colour to how the state's crop is being affected, revealing significant damage, of more than 50%, in some of its plots, but little in others.

"While it is fairly easy to determine the extent of injury on individual fields, the hit or miss nature of freeze injury this year makes it difficult to estimate the total impact on the Oklahoma wheat crop as a whole," they said.

Still, university grains extension specialist Jeff Edwards added that "the drought has severely limited resilience in our crop and we are entering late April, so I do not anticipate there will be much of a recovery or rebound in fields that were severely damaged".

Hard red winter wheat for July was 0.1% higher at $7.47 3/4 a bushel, while Chicago soft red winter wheat for July, the world benchmark, was 0.1% up at $6.80 1/4 a bushel.

'Continue trending upwards'

Among soft commodities, one key question was whether arabica coffee could maintain its upswing, after a 7% jump in the last session following a Volcafe downgrade to the drought-hit Brazilian crop.

"The market reacted so strongly due to the lack of current market moving news and uncertainty over the damage done to the coffee crop due to hot conditions," Vanessa Tan at Phillip Futures said.

"Everyone was waiting for further evidence that would quantify the damage."

She added:  "We expect arabica coffee to continue trending upwards on the supportive backdrop of reduced coffee output for Brazil's 2014-15 crop."

Indeed, arabica coffee for July added 1.6% to 216.75 cents a pound, earlier hitting a fresh two-year high of 217.40 cents a pound.

Chinese imports

But cotton eased back 0.3% to 92.96 cents a pound for July delivery, despite fears for the US crop, of which drought-hit Texas is the top contributor.

"Worries continue to persist about West Texas cotton production prospects given ongoing drought conditions," CBA's Luke Mathews said.

Still, Chinese economic concerns are hardly positive for the market. China is the top producer, consumer and importer of the fibre.

In fact, customs data showed Chinese cotton imports falling 58% last month to 222,100 tonnes, an accelerating rate of decline, with overall buy-ins so far in 2014 down 44% at 760,637 tonnes.

Evening markets: grains, cotton join coffee among ag winners
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