PRINTABLE VERSION   EMAIL TO A FRIEND   RSS FEEDS 20:13 GMT, Monday, 15th May 2017, by Mike Verdin
PM markets: cotton extends rally. But wheat futures tumble

It was sure better to be a bull in cotton than wheat to start the week.

OK, New York cotton - which for July traded at 87.18 cents a pound at one point, up its expanded daily limit of 5.00 cents a pound and the highest for a spot contract since June 2014 - could not hold on to all those gains.

Nonetheless, the July contract ended at 85.32 cents a pound, a gain of 3.8% on the day, and up 11.5% over three sessions, since strong US export data sparked ideas of a squeeze on supplies.

Commerzbank, flagging that "the cotton price is continuing to soar", noted that the US Department of Agriculture "has been continuing its series of upward revisions" to estimates for US cotton exports, most lately last week, when it added 500,000 bales to its forecast for shipments in 2016-17.

"At the turn of the year exports of only a good 12m bales had been anticipated, whereas now the figure is already 14.5 million bales – the second-highest export volume of all time," Commerzbank said.

'Will keep support under futures'

The USDA itself, which many observers see as likely to need a further upgrade to its export estimate, said that "despite relatively high cotton prices, continued strong sales and shipments have boosted the US export forecast considerably over the last several months".

Meanwhile, there were technical factors in play too, with Jack Scoville at Price Futures highlighting the extent of cotton bought by mills "on call" – ie for pricing later against futures.

"US mills still have to fix July purchases and the need for them to fix will keep some support under July futures even after this rally blows off," Mr Scoville said.

"The mills did not price sales from producers at cheaper levels and now are forced to pay higher prices."

That said, he also noted that certified stocks for delivery against New York derivatives "have moved sharply higher in the last month as an indication of increased farm selling and somewhat reduced overall demand".

Soaring volumes

More distant cotton contracts continued to underperform, weighed by ideas of a strong US harvest this year.

That said, the December contract still added 1.8% to 75.06 cents a pound, jumping back above its 50-day moving average.

Interestingly, trading volumes in the December lot were higher too, up sixfold week on week.

In the July contract, volumes hit a record high for a spot lot. Whether this indicates a market peak…

'Much more moisture than desired'

Chicago wheat futures, meanwhile, attracted relatively modest trading volumes, amid somewhat downbeat sentiment.

In fact, there was some somewhat upbeat export data on hand for wheat too, with US shipments for last week pegged by the USDA at 691,226 tonnes, up more than 30,000 tonnes week on week, and more than 320,000 tonnes year on year.

And there are worries over the extent of wetness in the Plains encouraging disease and denting wheat output prospects.

"The rains expected in the southern Plains through the middle of this week are expected to drop much more moisture than desired when it comes to a maturing wheat crop," said Benson Quinn Commodities.

Dr Bob Hunger at Oklahoma State University said that samples from a crop visit to the north west o Oklahoma were "testing positive for wheat streak mosaic virus, high plains virus, and barley yellow dwarf virus".

'Dealing with the reality…'

Still, as Darrell Holaday at Country Futures pointed out: "The world wheat market is dealing with the reality that we are virtually on top of the new crop year in the and there is a lot of wheat sitting in inventories throughout the world."

And this when hedge funds have covered a stack of short positions in Chicago wheat, and built a net long holding in Kansas City-traded hard red winter wheat – stemming the potential for further price support from this dynamic.

Regulatory data late on Friday "showed that funds had been net buyers of Chicago and Kansas City", Benson Quinn Commodities noted.

"This limits the prospects of additional short-covering, which has been the supportive feature in wheat for the last number of years."

Prices drop

Chicago soft red winter wheat futures for July tumbled by 2.2% to $4.23 ¼ a bushel, returning close to contract lows.

Kansas City hard red winter wheat for July dropped 2.6% to $4.28 a bushel, losing a stack of premium over its Chicago peer, and closing below its 20-day moving average for the first time this month.

In Paris, wheat futures for September dropped by 1.2% to E167.50 a tonne, feeling pressure too from rains in much of Europe, which have eased dryness concerns.

'Potential for a short-covering rally'

Back in Chicago, corn futures dropped too, by 0.9% to $3.67 ¾ a bushel, falling below a stack of moving averages, including the 40-day and 200-day lines.

The weekly hedge fund positioning data were more supportive for corn, in showing a larger-than-expected net short position, meaning substantial scope for short covering and upward price pressure.

"Funds added to a short position in corn, which puts the potential for a short-covering rally on the table in that market," Benson Quinn Commodities said.

The problem for corn bulls was the lack of cause for such a shift, although weekly US export data were strong, at 1.40m tonnes, up from 843,240 tonnes the previous the week, and the 1.13m-tonne figure a year before.

'Weather leans negative'

What investors are really looking at at the moment is US weather, and whether or not this is disrupting US spring sowings of the grain.

In fact, the eastern Corn Belt, where wetness has been a worry for plantings, "will see much better progress this week due to warmer temperatures and restricted rainfall", Benson Quinn Commodities said.

While the western Corn Belt will see increased rains this week, some "expected to be excessive… given the progress that was made this last week, the western Corn Belt will remain in pretty good shape" sowings wise, the broker said.

As Richard Feltes at RJ O'Brien put it: "Weather leans negative [for prices] with five days of open weather for the delayed/waterlogged eastern Midwest to catch up [on sowings], while the more advanced planted area in the western Midwest welcomes incoming mid-to-late week rains."

'String of bearish numbers'

It was soybean futures this time which outperformed in Chicago.

And this despite some soft industry data on the US crush, which dragged futures below earlier highs, which had temporarily taken the July lot back above 10-day and 40-day moving averages.

According to the Nopa industry group, the US processed 139.1m bushels of soybeans last month, some 6.6m bushels below market expectations, and a figure deemed "bearish" by Terry Reilly at Futures International.

"This continues a string of bearish US soybean crush numbers," said Country Futures Darrell Holaday.

"USDA is going to have to re-examine their crush estimates again for the current crop year and the next crop year."

Rising oils

The Nopa data "reversed a somewhat positive gain day" for soybeans, Mr Holaday added.

Still, the July soybean contract ended up 0.3% at 9.65 ¼ a bushel in Chicago.

Soyoil for July fared better, adding 0.8% to 33.02 cents a pound for July, helped by a positive performance by rival vegetable oil palm oil overnight, besides by the weak US soyoil stocks stemming from a lowball crush.

US soyoil stocks of 1.73bn pounds were 52m pound below the market expectation.

'Demand to grow'

Back in New York, cocoa gained too, rising 1.3% to $2,041 a tonne for July, amid further reports of unrest among troops in Ivory Coast, by far the top cocoa-growing country.

Price Futures' Jack Scoville also said that a price recovery in cocoa "has come as the West African main crop harvest has ended and the mid crop harvest has started.

"That makes less supply available to the market."

While the recovery in demand "has been weak so far… demand is expected to continue to grow in the next few months," Mr Scoville said.

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