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Morning markets: China inflation rise casts cloud over crops

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So is wheat to achieve a whole week of successive down days? Is cotton to record its fourth fall on the trot?

The odds were stacked against rises in agricultural, and other, commodities on Friday when those rumours of Chinese inflation that reported last night turned out to be true.

Chinese data showed inflation in the world's second-ranked economy hitting 5.4% last month, the highest since 2008, and inferring that efforts to slow price rises are not biting hard enough, and that more will be needed.

And further efforts to slow growth imply lower demand for raw materials from a huge buyer of them, from copper to cotton.

Fresh downgrade

Also stirring the pot were fresh concerns about eurozone debt, stoked by Moody's, which cut its rating on Irish sovereign debt by two notches (to Baa3), and left a negative outlook, signalling that more reductions might be on the way.

That helped revive the dollar a touch, as an alternative home to the eurozone for money, a further headwind for Chicago crops. A stronger greenback makes dollar-denominated assets less competitive as exports.

Shares struggled, with Tokyo's Nikkei index closing down 0.7%.

'Demand destruction'

And farm commodities got off to a poor, if not dismal, start too.


headed the loser board as of 07:40 GMT, (08:40 UK time), losing 0.5% to 195.00 cents a pound in New York for May, and 0.7% to 176.83 cents a pound for the better-traded July contract, as might be expected from a commodity of which China is the top importer.

Indeed, the fibre was already under something of a cloud after poor weekly US export data on Thursday, the worst for US upland cotton since October 2009, and depressed by (another) cancellation of old-crop supplies – this time of 96,000 bales.

"It finally appears as though the market is seeing evidence of physical demand destruction in the cotton market," Luke Mathews at Commonwealth Bank of Australia said.

Prices fall

As for


, of which China is also the top importer, they dipped 0.4% to $13.26 ¼ a bushel in Chicago for May delivery, depressed by their own weak US export data too.

Not that grains were much better off. Chicago


for May lost 0.4% to $7.51 ½ a bushel while


shed 0.3% to $7.38 a bushel, looking indeed for a fifth successive negative close.

"Profit-taking efforts and substantial technical resistance continue to keep the wheat market on the defensive," Benson Quinn Commodities said, also noting that "chatter regarding the possibility of more supply coming out of the Black Sea region prior is growing".

'Weather still an issue'

Still, bulls are not without hope. One comes from the relative outperformance of Kansas wheat, which shed a modest 0.25 cents to $8.63 ¾ a bushel for May.

It is the prospect of rain for the parched hard red winter wheat that Kansas trades which has been central to the weakness of the complex.

"Several months of dryness explain why rainfalls are badly needed, especially in Kansas. But it is too soon to say that the coming rains will be sufficient to compensate for losses already observed on crops," consultancy Agritel said.

However, the precipitation may slow spring sowings in areas yet to get crops planted.

"Weather still looks to be an issue [for plantings] but it may take a week or more for the market to react," Mike Mawdsley at Market 1 said.

"The six-to-10 and eight-to-14 day outlooks are wet for the entire belt."

Options message

And then there is the prospect of the expiry of May options, with call options on corn centring on a $7.00-a-bushel strike price, and with $8.00 popular option too, potentially acting as an anchor against further losses.

"Some may argue that puts the [corn] trade in a $7.40-7.60 trading range basis the May, while others are focusing in on the $8.00 level as a possible objective," Jon Michalscheck at Benson Quinn said.

"Sunday night's run to $7.83 ¾ in the May contract could have been short covering against naked May options with the next four sessions letting us know if they are done or not."

History repeating itself?

As for that other market in a bit of a tizzy at the moment,


, analysts are not too hopeful of an end to its losing run, which left it at a six-month low last night.

Is history repeating itself, asked Australia & New Zealand Bank.

"We would highlight that it was during the first and second quarter of 2010 where the market bottomed, we could be replaying the same story - and with [consumer's net long positions] still moribund, we would suggest buyers are pretty happy to sit back," the bank said.

At Commonwealth Bank, Luke Mathews noted that the July contract was "hovering just above the 200-day moving average, a level that the bulls will hope acts as support over the coming sessions".

However, a long-term forecast of dry weather bodes well for Brazil. And while Egypt purchased 50,000 tonnes of raw sugar on Thursday, "this was well below the tender amount of 150,000 tonnes".


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