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Evening markets: crops drop amid fears for investor credit

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We may never know who this unnamed German official was, who warned over the potential for eurozone countries still to snatch defeat from the jaws of victory.

"A number of actors have not understood the seriousness of the situation," the source was quoted as saying, after it had looked like European countries could get along without changes to European Union treaties.

A "bad compromise" of small steps or "little tricks" would not meet the expectations of the public or the financial markets, the official added, according to the Financial Times.

Whatever, the comments knocked the stuffing out of a rally in risk assets, leaving European

shares

to close in negative territory, with Wall Street stocks struggling in late deals to avoid a similar fate.

Nor, in commodity markets, did data showing US

crude

stocks rising by 1.34m barrels last week help, a poor sign for prices of oil, which dropped 1.3% for Brent crude, as well as for the crops turned into biofuels.

Prices tumble

Indeed, some agricultural commodities fell particularly badly, underperforming crude and the average drop of 1.1% in raw material prices, as measured by the CRB index.

New York

coffee

for March tumbled 2.5% to 229.85 cents a pound, without apparent cause from supply and demand fundamentals.

Raw

sugar

for March slumped 4.7% to 23.05 cents a pound, with some conspiracy theorists linking the size of the drop to a change of the guard at Cargill, where top sugar trader Jonathan Drake left.

Still, perhaps more to blame for the liquidation, also evident in a 1.6% drop to 92.31 cents a pound in New York

cotton

for March, and a 2.0% drop to $6.00 ½ a bushel in March Chicago

wheat

, was the potential credit squeeze, as banks hoard cash to protect capital and liquidity.

'Money is on alert'

Banks in Europe, the epicentre of sovereign debt concerns stoking credit fears, "are primary lenders to many hedge, fund, and speculator investors", US Commodities noted.

"This money is on alert as a credit crunch is likely to tighten lending."

(Separately, fertilizer giant Uralkali noted concerns of bank lending constraints sapping European purchases of potash too.)

Interestingly, speculators, while already having liquidated significant net length to liquidate in New York coffee, cotton and sugar too, have scope for more before turning net short, which could be why these commodities suffered particularly.

But the theory falls down at Chicago wheat, of which speculators already have a bundle of net shorts.

'Dismal situation for feed'

Still, there were other, fundamental, reasons to sell wheat other than to erode an overhang of long positions, with investors still chatting about the slew of bearish news for the grain on Tuesday which, miraculously, failed to sink prices.

The setbacks assisted in Wednesday's price drop, with US Commodities noting that wheat was "under pressure from Stats Canada reporting increased wheat production estimates, a potential record crop in Australia, and moisture in the US winter wheat belt", were dryness has been an issue.

The setback is especially so for lower quality wheat, like that traded in Chicago (soft red winter wheat is used largely as feed) , given that Australia's mega 28.3m tonne crop looks set to prove disappointing on vital statistics such as protein content.

Sudakshina Unnikrishnan at Barclays Capital said: "On the back of excessive rains we anticipate downgrades to part of the Australian wheat crop to feed quality, which would make these supply competition for corn in use as feed," echoing comments from Standard Chartered's Abah Ofon.

GrainAnalyst trader Matthew Pierce chipped in too, saying: "I see a dismal situation for feed [wheat], while high protein is becoming more interesting due to problems with the finishing Australian crop.

"There is dramatically more feed than the world needs and no matter how much Ukraine and Russia pull back from the world export market there is plenty to go around."

Barges beached

He recommended investors yet "look for opportunities" to buy Kansas hard red winter wheat over its Chicago equivalent, although that spread failed to work on Wednesday.

Kansas wheat for March marginally underperformed its Chicago peer, closing down 2.2% at $6.61 ¼ a bushel.

High protein, Minneapolis hard red spring wheat was, however, resilient, shedding 1.1% to $8.23 ¼ a bushel.

Still, European wheats did better, with Paris wheat for March easing 0.6% to E176.75 a tonne, and London wheat for May losing all of 0.2% to end at £145.25 a tonne.

Near-term London lots gained ground, still gaining support from barge setbacks caused by low Rhine and Danube water levels which have forced some European buyers to turn instead to UK supplies, shipped across the sea.

Agrimoney.com has heard an estimate that this substitution situation could go on until at least February.

'Potential short squeeze'

With wheat, and oil, down

corn

struggled too - if less so thanks to help from bumper US ethanol production data, which soared 24,000 barrels a day last week to a 954,000 barrels a day.

This was "another record level" and "supportive for corn", broker Country Futures said - if not that supportive.

The March lot ended down 0.6% at $5.92 ¾ a bushel, with the close-to-expiring December lot falling 0.5% to $5.82 ¼ a bushel.

But will the December lot, which goes off the board next Wednesday achieve a last hurrah?

"The expiration of the December corn contract is setting up to be very interesting," Country Futures said.

"There still have been no deliveries of corn and there is no corn registered for delivery. This could be a potential short squeeze."

'Limited precipitation'

Soybeans

for January kept up their record of relative strength, adding 0.1% to $11.31 a bushel, amid further concerns about South American.

"

South American weather is becoming more important as a potential dry spell could emerge, supporting US corn and soybean prices," with it being a La Nina year, US Commodities said.

The European weather model suggests "limited precipitation and warm temperatures in the 10-15 day forecast. A continued hot/dry spell could create production reductions", for corn too, with the crop approaching pollination.

By Agrimoney.com

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