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|Grain, soy price falls 'gone too far', brokers say
By Agrimoney.com - Published 07/01/2013
The fall in grain and oilseed prices may have gone too far, being fuelled by fund sales rather than fundamentals, a clutch of brokers said, viewing wheat as particularly oversold.
The improving weather conditions in South America - where some parched areas of Brazil are receiving rain, and flooded parts of Argentina drying out – have been seen as fuelling a decline in corn, soybean and wheat futures to six-month lows already in 2013.
"Corn and soybean harvests in South America are looking likely to be very robust this spring," Commerzbank said.
In the US, some analysts foresee corn sowings hitting their highest since the 1930s, of nearly 100m acres, while winter wheat plantings have been pegged at their highest in four years.
'Price fall exaggerated'
"Nonetheless, we believe the latest fall in prices to be exaggerated, as the supply risks – which have not gone away – are largely being ignored," the bank added.
"The unfavourable weather in the US, for instance, is likely to negate part of the expansion in winter wheat acreage, while the coldest winter for 28 years in China could hamper the development of this winter crop."
And the sentiment was echoed by Luke Mathews at Commonwealth Bank of Australia, who said that a negative reaction to Friday's weekly US wheat export sales data, which fell to 402,000 tonnes from 1.0m tonnes the week before, was "unwarranted considering the Christmas disruption".
"More importantly, cumulative sales over the past four weeks are up 107.5% year on year," Mr Mathews said.
He also noted the return to a, widening, premium of east coast Australian wheat, which for March delivery closed on Monday in Sydney at Aus\$278.00 (\$292) a tonne, over Chicago grain – a dynamic long forecast by CBA and indeed by rival bank Australia & New Zealand Bank.
"Despite weakness last week, local markets remain buoyant compared to those offshore. East coast wheat basis now quoted around Aus\$18 a tonne versus Chicago," Mr Mathews said.
Meanwhile, Societe Generale – which was among the more bearish commentators running into the slide in crop prices since the autumn - said it was "cautious over becoming too optimistic" on prospects for US corn and soybean crops "given the lingering drought conditions in large areas of the Corn Belt".
SocGen said the persistence of drought was "especially troubling for the major hard red winter wheat areas", if it lasted into the "critical heading stage of development once the crop breaks dormancy in April".
"While there is still time for improving conditions, speculation is already beginning that abandonment of planted acreage will be higher than normal this summer," SocGen analyst Christopher Narayanan said, noting that 77-79% of area sown typically makes it to harvest.
"Higher than normal abandonment and/or lower yields, owing to the drought, could bring final production numbers much lower than currency expected."
Chicago vs Kansas
SocGen recommended a long bet in the hard red winter wheat, the variety traded in Kansas, potentially hedged against a short position in Chicago wheat, which if of soft red winter type.
While Kansas futures already have a premium over Chicago ones - of some \$0.57 a bushel as of early deals on Monday, above the five year average of \$0.46 a bushel - "it stands far below the spring-time high of 2011 of just above \$1.77 a bushel when drought conditions in hard red winter wheat sent the spreading soaring".
The comments came as grain and soybean prices indeed showed signs of recovery on Monday, the start of the week which will on Friday bring much-watched US Department of Agriculture reports on world crop supply and demand, and domestic wheat sowings and grain inventories.
Nonetheless, they remain near six-month lows, a factor blamed in part on withdrawals of fund money from agricultural commodities, with what positions remain taking an increasingly bearish stance.
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