Morning markets: grains extend rally on US supply tightness
By - Published 14/01/2013

So was the last session's revival in grain prices a flash in the pan, or the start of something more sustainable?

That was the key question in grain markets on Monday, after a weekend which gave investors extra time to mull over the slew of US Department of Agriculture data which showed US corn stocks as of December far lower than had been thought, and on their way to a 17-year low.

US wheat inventories are to end 2012-13 smaller than had been expected too, and may not get the refill this year that investors had expected either, with winter wheat sowings coming in below forecasts.

'Likely to retune market expectations'

So, while the data on soybeans was more neutral, the default thinking was that crop prices, corn especially, should be in for some kind of recovery from the six-month lows reached during the opening sessions 2013.

Joyce Liu at Phillip Futures noted that the US corn stockpile is now "sufficient to last less than three weeks.

"Given the current US corn situation and uncertainty of the South American crops, together with strong domestic demand for corn feed, we believe Friday's data are likely to retune market expectations and clear corn prices out of their six-months low reached early last week."

Luke Mathews at Commonwealth Bank of Australia termed the USDA corn data "relatively bullish" while Rabobank was less muted in its bullish sentiment.

"With remaining on-farm stocks at multi-decade lows, higher Chicago corn prices are necessary to kick-start further US demand rationing," the bank said.

'Significantly diminished supply outlook'

On wheat, the bank said that the "supply outlook in 2013-14 is now significantly diminished, with the lower-than-expected increase in planted area likely to accompany high abandonment as only 33% of the US winter wheat crop was in good or excellent condition as the crop entered dormancy".

But, of course, this report comes against a backdrop of fund liquidation in agricultural commodities, one of the drivers behind a drop in prices to six-month lows, with the improved prospects for South America's newly-started row crop harvests another.

(It is perhaps no coincidence that cash heading into equity funds hit $22.2bn in the first week of 2013, the second highest weekly figure ever in data collected by EPFR, a funds research company, going back to 1996.)

Old crop vs new

And Richard Feltes at RJ O'Brien pointed out a potential source of pressure, in the temptation among farmers to cash in on higher prices.

"I suspect the farmer will be inclined to sell into a post-January crop report rally which should follow through on the upside this week," he said.

"Whether or not March corn can clear its mid-November $7.63-a-bushel highs remains to be seen, although a failure to do so would likely trigger more fund liquidation."

And the outlook for 2013 crop contracts looks less equivocally testing, with the prospect of large South and North American row crop harvests ahead. US prospects for corn and soybean sowings this year have only been enhanced by the relatively low winter wheat planting figure.

"Friday's report sharpens the contrast even more between tight old crop corn supplies and abundant new crop supplies," he said.

"Bull spreading row crops and/or selling December corn futures and November soybeans outright should be pursued."

Prices rise

Still, at least, even if fund selling does return, it has already got a stack out of its system, with US regulatory data released late on Friday showing managed money, a proxy for speculators, cutting its net long position in Chicago corn futures and options for a fifth successive week, and to the lowest since July.

For Chicago soybeans, the net-long position was cut to an 11-month low.

And while speculators raised a little their long exposure to Chicago wheat, they remained net short, meaning short bets, which profit when prices fall, outnumbered long ones, which benefit when values rise.

There was little sign of fresh fund selling as of 09:10 UK time (03:10 Chicago time) anyway, when corn for March stood 1.9% higher at $7.22 a bushel, and March wheat up 1.9% also at $7.69 a bushel.

Soybeans for March were 1.4% higher at $13.92 a bushel in sympathy.

"While tight US soybean stocks in the near-term are tight, fresh supplies are already being harvested in Brazil," Kim Rugel at Benson Quinn Commodities said.

"Soybeans will struggle versus corn and wheat with record large crops on the horizon for Brazil and Argentina."

'Inventories may remain high'

Still, the positive sentiment did not spread as far as palm oil, which eased 1` ringgit to 2,367 ringgit a tonne in Kuala Lumpur, continuing to feel pressure from data on Friday showing Malaysian inventories at a record high last month.

"Malaysia's palm oil stocks climbed to a record 2.63m tonnes in December, going against market consensus of a slight drop and fuelling concerns that inventory levels may remain high for the first month of the year," Ker Chung Yang, at Phillip Futures, said.

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