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Morning markets: US yield fears keep wheat price rally alive

Often investors overcook crop fears, injecting a little too much risk premium, and encouraging "buy the rumour, sell the fact" price corrections.

But that may not be the case with wheat.

Wheat futures set course for an eighth positive session, as data from crop tours indicated that yield prospects for the US hard red winter wheat crop are even worse than had been thought.

Much-watched tour

It has been some comfort to wheat bears that, while the US hard red winter crop has been negotiated severe drought in much of its southern Plains heartland, it did for much of last season too, and results beat many expectations.

However, this year, while official crop ratings for the likes of Kansas, the top winter wheat state, may not be much worse than a year ago, the much-watched Wheat Quality Council crop tour of the state is indicating a poor yield outlook.

The first day, on Tuesday, found a yield of 34.7 bushels per acre, down from 43.8 bushels per acre in the same part of the state a year ago.

On Wednesday, reporting from south western Kansas, scouts pegged the yield at 30.8 bushels per acre, down from 37.1 bushels per acre a year ago, and the lowest figure for the second day of the tour on records going back to 2000.

'Not a pretty picture'

The data, and comments from scouts, "aren't painting a pretty picture", said Brian Henry at Benson Quinn Commodities.

"The Kansas crop looks to be well below 300m bushels."

And given that forecasts show further hot weather, and remote chances of rain relief, "a crop of 250m bushels might not be off the table".

In Oklahoma, meanwhile, the crop has been estimated at 70.3m bushels, down 35m bushels year on year.

'Precarious situation'

Another broker said: "As the tour works west, we have seen some lower yield estimates, and the market is taking them seriously.

"Wheat is in a precarious situation because it hasn't had the best growing conditions in the US," even if in many growing countries abroad weather has been "rather favourable".

Furthermore, the winning price streak, of nearly $0.50 a bushel, has boosted futures' technical appeal too.

Citigroup's Sterling Smith noted that in the last session, "the most active Chicago July contract did push through resistance as reports from the Kansas wheat tour are yielding more disappointing results".

He also noted that the spread between Kansas City-traded hard red winter wheat, at the centre of the concerns, and Chicago soft red winter wheat "continues to widen out", given the dry weather "playing havoc with hard red winter wheat yields".

Hard red winter wheat for July stood 0.3% higher at $8.15 1/4 a bushel as of 08:30 UK time (02:30 Chicago time), when Chicago soft red winter wheat for July was up 0.2% at $7.22 1/4 a bushel.

New month, new money?

An extra support may also be the influx of new money into the market.

Many traders believe that month-ends are often a negative period for crop prices because funds pull money out to pay the likes of bonuses and client redemptions, with month beginnings seen bringing in fresh cash.

Still, there was not too much heading the way of corn, for which weather concerns, in terms of the wetness and cold delaying US spring sowings, do not seem to be strong enough to attract much extra risk premium for now.

One broker said that "corn planting is not expected to significantly progress" by the time of the US Department of Agriculture's next weekly crop progress report, taken on Sunday.

(The last one showed sowings 19% complete, behind an average of 28% by then.)

But "the six-to-10 day forecast is a little bit drier, which should promote more fieldwork next week".

Softer demand signs

Also for investors to ponder are some signals of slower demand, with weekly US ethanol production data on Wednesday coming in at 898,000 barrels a day, down 12,000 barrels a day week on week, and behind the pace needed to meet the USDA forecast for corn use in making the biofuel in 2013-14.

(That figure is 942,000 barrels a day, according to Benson Quinn Commodities.)

Stocks grew to 17.2m barrels, from 16.5m barrels the week before.

In terms of poultry sector demand, the USDA also reported a decline in chick placements to 164.1m, from 166.4m the previous week and 164.7m a year before, with egg sets falling week on week by 1.7m to 203.0m.

'Technical crossroads'

Technically, there is a bit of a battle going on too, with Mike Mawdsley saying that corn futures had reached a "crossroads" in reaching a potential resistance levels to further price gains.

"April price highs have not been exceeded, although we have come close," he said, noting that for July corn the high was $5.24 1/4 a bushel.

"The planting delays are real, but summer weather will determine what we actually get."

Still, there are the important weekly US export sales data due later, and expected to come in at 450,000-675,000 tonnes old crop, which could give futures fresh direction.

And with fellow grain wheat higher, for now, July corn was 0.2% up at $5.20 a bushel.

China improvement

Soybean futures too are at a "crossroads", Mr Mawdsley said, near April highs, which for the July contract is $15.21 a bushel.

And this when US imports are believed to be hotting up, undermining price prospects.

"More vessels in port in Brazil are said to have been switched to US destinations," from Chinese ones, "and will be loading and steaming to the US in short order," Benson Quinn Commodities said.

Still, there is some better feeling regarded Chinese processors, the world's top importers, whose poor profitability spurred talk of the switch in orders to US buyers.

"China's crush industry is seen improving moderately, with letters of credit reportedly being issues this week as negative crush margins ease of recent lows," the broker said.

Chinese markets were, though, closed. The revival in Dalian soybean futures, of some 3% in the previous five sessions basis September, has been a big support to sentiment in Chicago.

Chicago soybeans for July were 0.2% down at $15.10 a bushel.

Cotton eases

Among soft commodities, cotton also failed to enjoy any start-of-the-month buying, standing 0.1% lower at 94.21 cents a pound in New York for July delivery.

Luke Mathews at Commonwealth Bank of Australia noted that "worries about US new crop production prospects continue to mount," with dryness in Texas, the top US producing state.

However, there is also talk of some producers proving keen to sell at prices amongst the highest in two years.

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