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Morning markets: wheat tests strength against chart lines

Have wheat futures the oomph to go much higher?

It is worth asking, as the rally in the last session which gave wheat futures their highest close since before Christmas in Chicago in the last session - and took Kansas City-traded hard red winter wheat and Minneapolis spring wheat to full two-month closing highs - bumped them up against a key technical level.

In Chicago, the rise took the March contract up nearly to its 75-day moving average, which it has not closed above since October.

For Kansas and Minneapolis wheat, March contracts were taken nearly to 100-day moving averages, which the lots have not closed above for three months or more.

'Fund activity'

Can they break above them?

It helps that the grain is being seen more positively by funds, or at least less negatively, with upward price movement encouraging them to close some of their large net short position in wheat, so creating more buying pressure.

It is a vicious, or virtuous, circle, depending on which side of the fence you are.

"Fund activity" has been "playing a big part of late", Brian Henry at Benson Quinn Commodities said.

"Upward momentum continues to force short position holders to cover positions."

'Severe signs of drought'

However, there is also more talk on the US fundamentals too, with the declining condition of the winter wheat crop as highlighted by monthly US Department of Agriculture data released two weeks ago.

Texas, which produces weekly statistics, in overnight data actually showed a further decline in condition over the past week, by one point to 17% rated "good" or "excellent".

"Small grains in the Cross Timbers show severe signs of drought," USDA scouts said, adding that the state was "rated mostly in a moderate drought, with parts of the Panhandle in a severe to extreme drought".

"The recent cold fronts in the Blacklands took a toll on wheat fields, causing them to grow at a slow pace."

'Weather will be a factor'

And dryness matters, even in winter when seedlings are, supposedly, dormant.

"Weather will be a factor for the US central and southern Plains because there's a threat that unseasonably warm temperatures may trigger winter wheat to break dormancy prematurely under severely dry topsoil conditions, which would increase the risk of winterkill," said broker Doane.

The more immediate risk, however, appears to be more of cold temperatures, with the last week of the month expected to bring fresh frosts to the US.

"The forecast has trended colder in the central and southern Plains," MDA said, adding that "the precipitation outlook is drier in the central Plains.

"Cold temperatures across the central and southern Plains wheat belt will increase winterkill threats."

According to Commodity Weather Group, some 15% of the US winter wheat crop is at risk of bitter cold.

'Raising concerns'

At broker Phillip Futures, Vanessa Tan said that "unfavourable weather conditions in the US that could put the winter wheat crop at risk of damage".

Benson Quinn's Mr Henry highlighted that the cold was coming after this week's warmer weather which had melted snow.

"Despite recent snowfall in many key hard red winter wheat growing areas, the generally drier trend experienced much of the winter is raising concerns," he said.

Indeed, Kansas City hard red winter wheat, grown on the central and southern Plains, added 0.2% to $6.87 a bushel for March, outperforming Chicago soft red winter wheat, produced in the Midwest, which edged 0.1% higher to $6.12 a bushel as of 09:40 UK time (03:40 Chicago time).

Minneapolis spring wheat did best, up 0.4% at $6.81 a bushel for March.

It will not be long, of course, before the melting of the northern US snowpack raises concerns about flooding and spring wheat seedings...

Oats vs corn

With poor North American weather back on the radar, it was no surprise that oats rediscovered upward movement, having been driven to record highs two weeks ago by the difficulty of getting the grain from Canada to the US.

(The US relies on Canadian imports for half its oats.)

Oats for March soared 4.1% to $4.46 a bushel, threatening once again to gain a premium over corn, which eased 0.2% to $4.49 a bushel for March delivery.

Corn is being supported by ideas that stocks are not as huge as had been thought, sapped by strong US exports which were underlined in cargo inspection data of 827,610 tonnes released on Tuesday.

Furthermore, "with the recent buying spree, money managers are thought to be building perhaps a small long position in corn futures," CHS Hedging said, with speculators having last week turned net long for the first time in seven months.

However, higher prices are also encouraging sales by US farmers still sitting on a large quantity of supplies left over from last year's record harvest.

'Fundamentals offer support'

For soybeans, South American weather has taken centre stage, with concerns particularly over Brazilian drought, but also over Argentine wetness too.

And all this against a backdrop of silence in terms of cancellations by Chinese importers of their orders of US soybeans in favour of South American ones, a dynamic which had been expected now that decent harvests look on their way, even if weather has taken the highest forecasts off the table.

"News out of South America isn't typically supportive, but to this point the trade hasn't seen evidence that South American supplies are going to take the pressure off tightening old crop supplies in the US," Benson Quinn Commodities said.

"In the absence of prior sales being cancelled and supplies tightening due to an extended period of strong crush and weekly inspections coming in at five times what needs to be averaged to meet USDA estimates, fundamentals continue to offer support."

'Stepped-up farmer selling'

However, the Argentine crop, for which harvest has yet to start, may prove to be strong despite mixed conditions.

"The Argentine soybean crop is said to be rated near 87% good-to-excellent despite recent less than perfect weather," CHS Hedging said.

At RJ O'Brien, Richard Feltes noted that the rise in soybean prices is "triggering stepped-up Brazil farmer selling in addition to a modest pick-up in movement by US farmers and soy resellers".

Soybeans for March eased 0.1% to $13.60 a bushel, with the now better traded May contract easing 0.1% to $13.46 a bushel.

'Lack of conviction'

Of course, South American weather is a huge factor for soft commodities too, with Brazil the top producer and exporter of the likes of arabica coffee, orange juice and sugar.

Softs in early deals proved unwilling to repeat their heroics of the last session, when arabica coffee enjoyed its strongest session since November 2004.

Raw sugar for May was down 0.4% at 16.44 cents a pound, although May arabica coffee edged 0.% higher to 155.15 cents a pound.

Cotton edged 0.2% lower to 89.29 cents a pound for May delivery, undermined by a China Cotton Association report that Chinese imports of the fibre tumbled 36% last month, compared with January 2013, to 292,500 tonnes.

On the technical front, Luke Mathews at Commonwealth Bank of Australia noted that "prices remain trapped within the previous two sessions trading ranges, signalling a current lack of conviction within the cotton complex".

Evening markets: Brazil drought fears fuel broad rise in ags
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