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Morning markets: Turnaround Tuesday for ag futures? Not yet

Tuesdays may be renowned for turnarounds, reversing the trend of the last session, but this one was signally bucking the trend.

Early deals saw grain and oilseed futures resume their positions of the last session, reached after the US Department of Agriculture's monthly Wasde crop report.

"The numbers were price-friendly for corn and wheat, neutral for cotton and negative for soybeans," was Doane's assessment of the report, voicing a pretty widely-held view (although would argue the data are supportive for soybeans too).

Australia upgrade

And wheat futures remained in the ascendancy despite the release of some further data overnight - this time from the Abares crop bureau on Australian crop production which were not all so upbeat.

(There is further ag data later on Tuesday, when Brazil's Conab releases its monthly report on domestic crops, a briefing deemed particularly important for corn and soybean markets.)

Abares lifted to 27m tonnes its forecast for Australia's wheat crop, 500,000 tonnes more than USDA has factored in.

That said, Abares also cautioned over prospects for the sorghum crop, saying that "low rainfall and heatwave conditions across major summer crop planting regions are likely to lead to significant decline in summer crop production".

Sorghum output is seen tumbling by 26% to a seven-year low of 730,000 tonnes, implying extra feed demand switched to other grains such as wheat.

'Frigid temperatures'

Bulls had some other support overnight too from the latest wheat crop condition data in Texas, where USDA officials unlike other states produce statistics weekly even at this time of year.

The proportion of Texas winter wheat rated "good" or "excellent" fell 1 point week on week to 18%,

"Frigid temperatures continued across Texas last week," USDA scouts said.

"Producers in the Cross-Timbers reported cold temperatures continued to inhibit winter wheat emergence. 

"South central Texas reported that the lack of rainfall had caused minor damage to winter wheat and oat fields."

That countered some of the ideas of a boost to wheat that a warm-up in the US weather to come.

'Momentum indicates higher prices'

Indeed, "there is some exposure on soft red winter wheat and hard red winter wheat production due to cold morning temperatures early this week", Brian Henry at Benson Quinn Commodities said.

And with "concerns about the state of the winter wheat crop growing, the pace of hard red winter wheat sales merits attention," he added.

Technically, "momentum studies on all three wheat markets [Chicago, Kansas City and Minneapolis] indicate higher prices before establishing a near term top".

The grain also has support from the knowledge that, as of a week ago, hedge funds still had a large net short in Chicago wheat futures and options, of more than 50,000 lots, over which they may be tempted to cover positions now that the momentum in the market has improved.

With wheat futures still comfortably below their 50-day moving average in Chicago, if not Kansas City, longer-term holders of short positions will still be sitting on a profit to take.

Chicago soft red winter wheat for March stood 0.5% higher at $5.87 a bushel as of 09:55 UK time (03:55 Chicago time), while Kansas City hard red winter wheat for March was up 0.4% at $6.65 a bushel.

'Good producer selling'

These rises rebuilt premium over corn, which lagged, falling 0.1% to $4.42 a bushel, despite coming off well from the Wasde too.

The grain has faced two problems, the first being that higher prices are encouraging US farmers to sell some of their huge inventories still remaining from the record 2013 harvest.

"Cash markets have a softer tone to start the week as good producer selling last week and a little more today on the rally has taken some of the edge out of the basis," Benson Quinn Commodities said.

Another US broker noted that the grain's lower close to the last session, despite the bullish Wasde, "could be a sign of increased farmer selling".

'USDA may be over-shooting'

The other headwind is some scepticism over the US export upgrade at the heart of the USDA's decision to cut its estimate for corn stocks at the close of 2013-14 to 1.48bn bushels.

"The USDA may be over-shooting US corn exports given the 1.77m tonnes of outstanding US corn sales to China," Richard Feltes at RJ O'Brien said.

"Trade will monitor whether stepped-up corn import interest from the European Union, Mexico, Egypt and South Korea is enough to offset further slippage in Chinese corn commitments from the US which already total 1.3m tonnes."

Another broker said: "The question now becomes will we see the recent increases to our export pace continue in order to meet the USDA's estimate or will our competitors in Ukraine undercut us on the world market this spring?"

CHS Hedging noted that latest weekly export data, at 27.4m bushels, were below the 28.8m bushels needed to meet the USDA's new target.

'Bearish for oilseed prices'        

Soybeans actually manage to ease only 0.1% to $13.25 a bushel for March, despite a Wasde which was ostensibly bearish in keeping the end-stocks estimates steady at 150m bushels, rather than cutting it as expected, (although takes issue with that assessment).

"The USDA report was bearish for oilseed prices, raising fears the recent rally may have run out of fundamental support," Luke Mathews at Commonwealth Bank of Australia said, echoing a common theme.

Another broker said that "futures rallied $0.80 a bushel off their lows two weeks ago so it would not be surprising to see a retracement lower after a report like this".

Meanwhile, ArgiSource said that US soybean acreage should be up 6.8% to 81.75m acres this year, a reminder of large US sowings to come.

'Export sales continue to sizzle'

There has also been further talk of China switching some orders of US soybeans to Brazil, although no confirmation yet.

Still, export data thus far remains positive.

"Export inspections were 57m bushels. We only need to ship 9.6m bushels per week to meet the USDA projections," CHS noted.

Doane said that US soybean "export sales continue to sizzle, more than offsetting the pressure that stemmed from some improved weather forecasts for South America".

'Stocks have been rising steadily'

Among soft commodities, cotton for March eased 0.7% to 86.76 cents a pound, continuing to ease back as the Wasde failed to cut its estimate for domestic stocks of the fibre at the close of 2013-14, as investors had expected.

Indeed, ideas of lower supplies are finding a setback on more than one front.

"The latest surge in old crop cotton futures had its genesis in concern about extremely tight supplies of certificated stocks eligible for delivery against short positions in futures," Doane said.

"But over the last several weeks, those stocks have been rising steadily."

'Perhaps a warning sign'

CBA's Luke Mathews said that Monday's "mid-session reversal" in cotton futures, "combined with the fact that the market has not been able to sustain any push above 87 cents a pound over the past 12 months, is perhaps a warning sign for the cotton bulls.

"More importantly, the fundamental outlook remains bleak.  The USDA made absolutely no changes to its US cotton balance sheet for 2013/14 - analysts had expected exports to be revised higher and carryout to be revised lower."

Furthermore, cotton inventories, "despite being revised slightly lower this month, are still forecast at a record 94.5m bales", Mr Mathews added.

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