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Morning markets: soybeans ease as traders query huge 'order'

Here's two assertions related to agricultural commodity prices, only one of which is, apparently, true.

The first is that an unknown soybean buying country, presumed to be China, the top importer, purchased 568,000 tonnes of the crop from the US, the top grower.

The second is that the rally in oat futures to a record high is down to air brakes.

Running on empty

It is actually the first that investors are finding hard to believe, as evident in the muted price reaction in Chicago, where May soybeans actually eased in early trade on Wednesday, standing down 0.2% at $13.84 a bushel as of 09:45 UK time (03:45 Chicago time).

And this despite a statement from the US Department of Agriculture confirming the order, for 2013-14 delivery.

If this order were deemed true at face value, prices would have soared, given that the US is already seen running on empty at the close of the season, expected to end with pipeline supplies of 4.1m tonnes - and this assuming net cancellations of export orders for the rest of the season.

'Highly irregular'

Which is why investors are attempting to read something between the lines of the USDA bulletin.

"The sale was confusing as traders are expecting old crop soybean sales to be cancelled as buyers switch to South American origins and the price of soybeans in South America are much lower than US for forward delivery," said Anne Frick at broker Jefferies Bache.

"Fulfilling all of the current export commitments along with Tuesday's sales and the other USDA demand estimates is not possible, as it would reduce ending stocks below what is believed to be sustainable levels."

Another broker said: "This is highly irregular to see a sale like this when South America is offering soybeans at a steep discount."

Not China?

Besides, there is some reason to think that Chinese importers are not in the market in such a big way at the moment, although it also has to be highlighted that there is talk they are buying big from Brazil for July delivery.

"Chinese soybean crushing margins are the most negative that they have been in nearly a year," said CHS Hedging.

Soybean futures on the Dalian exchange have certainly underperformed Chicago peers in the last couple of weeks.

"Chinese crushers have been trying to back out of current US purchases not add to them," another broker said. 

"If the sale announcement actually gets shipped in 2013, more than likely it will not be going to China."

Reported in error?

And there are other explanations too for the statement which would not involve squeezing the US balance sheet, even down the idea among traders that Ms Frick noted "that the sale may been reported in error".

Kim Rugel at Benson Quinn Commodities said that "not much is known about this new sale, but market is speculating that the destination is China and that the shipment period is right at end of marketing year so that new-crop supplies could be available to meet the boats".

Richard Feltes at RJ O'Brien came up with a credible idea, from a "reliable commercial source" that the sale "may be 'optional origin' to Indonesia that will likely be sourced out of South America".

It would hardly be irrational for a buyer to hedge its bets on origin, given that Argentine farmers are unwilling to sell crops, which they see as a dollar-denominated hedge against a falling peso, while Brazil's success in grains production well exceeds its ability to transport the harvests.

And there are actually a few doubts about the quantity and quality of this year's Brazilian soybean crop, given the drought which has stressed southern areas, and the heavy rains in the west hampering harvesting besides washing away roads.

Crop scout Michael Cordonnier has cut his forecast for the Brazilian crop by 500,000 tonnes to 88.5m tonnes, with Oil World slashing its estimate by 4.5m tonnes to 85.0m tonnes.

'More signs of El Nino'

Another dynamic to factor in is the prospect of the start on Friday of the expiry process for Chicago March futures, when they take on physical commitments, and which also show the enthusiasm of traders for delivering against the market.

So far, there have been no deliveries against March soybeans, 1 lot put against March soymeal, and 11,622 against soyoil, indicating that this represents an attractive destination for sellers.

Still, soyoil futures outperformed on Wednesday, soaring 1.3% to 41.39 cents a pound for March, helped by a 2.3% gain to 2,796 ringgit a tonne in the price of rival vegetable oil palm oil in Kuala Lumpur, lifted by concerns of dryness in Malaysia, which it is feared could represent the start of an El Nino weather pattern.

"There are more signs pointing towards the arrival of El Nino this year," Phillip Futures said.

"Once actualised, areas like Australia and parts of Asia including major palm producing countries such as Indonesia and Malaysia will experience drought conditions."

Cold air

As for the other statement, about the rally in oats being down to air brakes, the reasoning goes like so.

Air brakes do not operate efficiently at the kind of low temperatures that Canada is experiencing, meaning that rail operators are having to run trains at shorter lengths and at slower speeds, cutting capacity.

And, with plenty of commodities, from crude to canola, competing for rail space, that has left oat volumes well down, at a time when the US, a structural importer, is crying out for them.

'Within an eyelash'

"We are within an eyelash of shutting down the milling industry in the US in terms of trying to get enough grain down there for them, and it's not getting much better," said Randy Strychar, president of Ag Commodity Research.

"We have got bottlenecks all over the place," he said, adding that US millers have only some 20 days of supplies left.

And it has to be remembered that the, growing, outbreak of porcine epidemic diahorrea virus (PEDv) in North America is fuelling demand too, with oats a recommended part of the diet for piglets, and sows, when attempting to limit fatalities from the disease.

Oats for March hit a fresh record high, for a spot contract, of $5.22 a bushel before easing to stand at $5.13 a bushel in Chicago.

The better-traded May lot added 1.9% to $4.77 a bushel.

'High end of its range'

Both were, unusually, at a premium to corn, which stood 0.3% lower at $4.54 a bushel for March and by 0.3% to $4.59 a bushel for May delivery.

CHS Hedging noted, on the bullish side, that "the next 'polar vortex' occurrence has reintroduced concerns of barge traffic restrictions," while an "oil spill on the lower Mississippi will also slow export flows".

However, another broker said that "we believe old crop corn is at the high end of its range given the near-1.5bn bushels expected for a carryout" in inventories from 2013-14.

"The old crop/new crop corn spreads could weaken as we get into spring and summer when bushels come to market to pay inputs."

US weekly ethanol production later may have a bearish on corn price moves.

'Too many shorts'

Meanwhile, Chicago wheat for May held at $6.18 a bushel, a resilience which nonetheless improved its chart appeal in lifting its premium over its 75-day moving average line (which is on a descending trend).

Staying on technical, "it feels like the market still has too many shorts," Benson Quinn Commodities said.

"Markets are overbought, or close to it, but technicals continue to offer the support."

Cold weather in the US, threatening winterkill, is also propping up prices.

Evening markets: soy extends rally. But coffee, sugar falter
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