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Soft wheat futures outperform. But cotton dips again

Another one bites the dust.

Kansas City hard red winter wheat futures have been among of the more resilient grains to the broad market decline, helped by the impact of remarkably malign weather.

Drought in its southern US Plains heartland during the growing season constrained development, and yield potential, and when did start arriving, it only added to the setbacks, when it landed on ripe grain, threatening quality downgrades.

However, their outperformance of its soft red winter wheat peer the type traded in Chicago, and the world benchmark has gone into reverse this week, down 17% as of the close of the last session.

And on Thursday it struggled again early on, for reasons deemed both fundamental and technical, before joining in an uplift on a wave of short-covering.

Stocks upgrade?

Fundamentally, there is talk that the US Department of Agriculture is to lift its estimate for domestic hard red winter wheat inventories, which it had seen falling more than 40% to 200m bushels over 2013-14.

Grain stocks data on Monday showed wheat stocks in the main hard red winter wheat states down as of June 1, the start of the 2014-15 wheat marketing year in the US, but not by  quite that much.

Inventories in Kansas, the hard red winter wheat-growing state, were down 28%, with those in Oklahoma down 26% and Nebraska down 34%, although Texas did see a 39% drop.

"I'll probably use a 40m-bushel increase, but won't be surprised if it's closer to 20m bushels," said Brian Henry at Benson Quinn Commodities, referring to the potential upgrade the USDA will make to its hard red winter wheat inventory level.

Fund positioning

As an extra setback, the weather is looking better for harvesting in the southern Plains this weekend, meaning extra supplies, lower need for risk premium, and harvest pressure on prices.

Meanwhile, technically, the contract suffers the disadvantage of having remained in the favour of hedge funds, for reasons given above.

Their net long of nearly 25,000 contracts as of Tuesday last week, the latest data available, compared with a net short of more than 40,000 contracts in Chicago soft red winter wheat.

So in a downbeat market, in which funds are looking to cut long exposure and raise short bets, it is not difficult to see which wheat contract is more at risk from liquidation losses or, on Thursday, likely to see least benefit from short-covering.

'Mostly profit taking'

Indeed, this is especially true ahead of a long weekend, with US markets closing early today ahead of the July 4 holiday, and not opening until Monday 8.30am Chicago time.

CHS Hedging flagged upward pressure on Chicago wheat futures from "mostly profit taking [on short positions] ahead of the long weekend".

Citigroup's Sterling Smith flagged "routine fund short covering in front of the long weekend".

Chicago wheat for September was up 0.5% at $5.78 a bushel as of 09:40 UK time (03:40 Chicago time), while its Kansas City peer was up 0.2% at $6.82 a bushel, reducing the spread between them below $1.05 a bushel.

Earlier, the Kansas City contract set a four-month low of 6.78 a bushel,

Spring wheat stocks

As for Minneapolis hard red spring wheat, it traded 0.25 cents higher to $6.76 a bushel for December delivery, the best-traded contract.

If Monday's USDA grain stocks data implied that US hard red winter wheat stocks may have been larger a month ago than thought, spring wheat inventories appeared a little lower.

While the USDA had spring wheat stocks up 14%, at 188.1m bushels, at the close of 2013-14, inventories in fact came in lower year on year in major producing states such as North Dakota and Minnesota.

Overall wheat inventories, at 590m bushels, were pretty much in line with the 593m bushels the USDA had forecast.

'Resistance stems from nearly every factor'

The theme of short-covering ahead of the long weekend was viewed as behind a recovery in corn too - which added 0.2% to $4.13 a bushel for September delivery and 0.2% to $4.19 a bushel for the new crop December lot despite ideas of benign weather.

CHS Hedging said: "The extended forecast calls for slightly cooler temperatures with above average precipitation for the next 10 days," ie conditions favourable for pollination, which "should begin in earnest by early next week going through July".

Mr Henry said: "Resistance stems from nearly every factor associated with the corn market.

"Weather remains favourable especially in areas where the corn crop is tasseling or ready to tassel.

"Given adequate-to-ample moisture, it's hard to believe this crop would go backwards from its current state, regardless of the weather."

'Storage crunch'

Meanwhile, after highlighted the extent of Chinese corn inventories, JC Intelligence speculated that the country may be poised to scrap a stockpiling programme which has kept domestic prices well above global rates, and encouraged imports.

"Corn will be next after cotton and soybeans. The stockpiling has left a large amount of stock with the government while imports of feed grains have surged," the influential consultancy said.

And, back in the US, Richard Feltes at RJ O'Brien cautioned of a "storage crunch" as farmers holding out for higher prices on stocks left over from last year's record crop look down the barrel of another huge harvest.

"Farmers resolved to wait out the recent price plunge may be undermined by mid-July if all indicators suggest favourable pollination and with a looming storage crunch for those still clinging to large 2013 corn stocks," Mr Feltes said.

'Record Chinese port stocks'

Soybeans themselves, managed gains too despite being open to many of the same kind of dynamics, although with the important bullish support of tight stocks left over from the 2013 crop.

Still, on the downside, there is renewed talk of soft crush margins in China, the top soybean importing country, and cargo washouts.

"Record Chinese soybean port stocks, near 7m tonnes, are getting more air-time especially in the wake of reports that a Chinese crusher is trying to resell soybeans back to Brazil," Mr Feltes said.

January soybeans edged 8 yuan lower to 4,353 yuan a tonne on China's Dalian market.

In Chicago, soybeans for August added 0.3% to $13.18 a bushel, while the new crop November contract added 0.3% to $11.44 a bushel.

'Beneficial weather'

However, the theme of pre-weekend short covering did not extend to cotton, which fell a further 0.3% to 72.25 cents a pound in New York for December delivery, hitting a two-year low for the contract of 71.17 cents a pound earlier.

"The US new crop continues to see beneficial weather, and this along with the large global stockpile should keep any upside limited," Citigroup's Sterling Smith said.

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