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Morning markets: crop price falls limited by weather scares

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You could hardly blame agricultural commodities if they threw in the towel on Friday.

There was very much a 2011 feel about financial markets, as downgrades to a range of Spanish banks, plus mounting fears of an exit from the eurozone for Greece, which faces fresh elections next month, encouraged very much a risk-off feel.


had a torrid time overnight, falling 1.4% in Shanghai, 3.0% in Tokyo, 3.4% in Seoul, 2.7% in Sydney etc.

The safe haven of the


maintained its rise, up 0.2% against a basket of currencies as of 08:45 UK time (02:45 Chicago time).

So some decline in agricultural commodities was to be expected.

But it was hardly widespread. Investors' reinjection of weather premia into crop futures stemmed losses.

'Short-covering a feature'

The primary weather fears are over dryness in Russia and the US southern Plains, plus in Australia, although it is early days for its winter crops, and in some parts of the European Union too.

"Short-covering remains a feature in the Chicago wheat market amid reports of unfavourably dry weather in southern Russia and recent drier weather in the central US wheat belt," Luke Mathews at Commonwealth Bank of Australia said.

Consumers have at least been able to take some consolation from the decent weather which has enabled rapid sowings of US spring crops, improving the chance for bumper yields, and indeed with the corn crop expected by officials to come in at a record 166 bushels per acre.

"Ongoing favourable weather in the US Midwest remaining a drag on new crop corn values," Mr Mathews said.

Hot summer

However, even that benign scenario is under threat after official weather forecasters predicted warmer-than-usual weather for three quarters of the US this summer.

Heat is bad news for


pollination, as was witnessed last year.

This year need not be anywhere near so disastrous. The warmer temperatures will miss out the northern growing areas, and besides, the early sowings mean the crop should develop earlier, and get its pollination out of the way in quick time too, potentially avoiding the worst of any summer heat.

Still, the forecast hardly looks good news for crop hopes. "Want to short corn?" GrainAnalyst trader Matthew Pierce asked.

As an extra reason for bulls not to throw in the towel, the Argentine government late on Thursday trimmed its estimate for the domestic crop by 200,000 tonnes to 20.1m tonnes, below a US Department of Agriculture forecast of 21.5m tonnes.

Thinking of supply tightness, this followed the forecast earlier by China's CNGOIC crop bureau, hardly renowned for underestimates, of Chinese corn imports rising 500,000 tonnes to 6m tonnes in 2012-13.

July corn edged lower, but by a modest 0.5 cents to $6.24 ½ bushel, with the new crop December lot down 0.3% at $5.26 ¾ a bushel.

'More rain is needed'

This time corn was doing better than wheat, which edged 0.2% lower to $6.56 ¼ a bushel for Chicago's July contract, with losses limited by the lack of an end in sight for Russian dryness.

"Dry weather is forecast for the Black Sea region, which could stress the early-headed winter wheat crop in southern Russia and eastern Ukraine," Lynette Tan at Phillip Futures said.

"Some light showers in the forecast for Thursday and Friday, but that will only provide temporary relief as more rain is needed."

Technically, Chicago's benchmark July lot is looking in much better shape too, having in the last session retaken both its 50-day and 100-day moving averages.

Uncomfortable shorts

Still, how real is the weather threat, with much of the growing season yet to go?

Brian Henry at Benson Quinn Commodities was reserved on his enthusiasm for wheat's rally.

"The deterioration of the hard red winter wheat crop in Kansas and expectation of continued dry conditions in key growing areas of the Black Sea region continue to provide support," he said.

"But, fund liquidation of short positions in Chicago and establishment of new length in Kansas and Minneapolis are the driving force behind the price action.

"I don't get the impression that many in the trade want to be long wheat at these levels, but there is a growing contingent that wishes they weren't short as much as they are," he said, estimating funds have reduced their net short by 15,000-18,000 contracts in the past two sessions.

Sowings estimates cut



, fund liquidation means the closure of long positions which funds had, until recently, record amounts, one reason why the oilseed has proved slightly more vulnerable to the broader market liquidation this week despite expectations of a supply squeeze for most of the next year following South America's poor harvest.

And poor US new-crop export sales data on Thursday gave investors an extra reason to think more bearishly.

Nonetheless, the US dry weather is having a, negative, impact on ideas for this year's soybean crop too, in cutting ideas on acres farmers will sow as a follow-on crop after the winter wheat harvest.

"Trade is now starting to lower its planted acreage forecast as dry conditions in Kansas, Arkansas, and Missouri could reduce double crop prospects," Benson Quinn said.

"This will offer support for the soybeans while near-record large fund length in a risk-off macro environment will limit rallies till more is known about US summer weather."

Soybeans for July fell by 0.6% to $14.30 a bushel, and for November by 0.4% to $13.00 ¾ a bushel.

'Very vulnerable to price corrections'

Elsewhere in the oilseeds complex

, palm oil

futures, as traded in Kuala Lumpur also eased, sapped by the big reliance on Europe for import demand.

The benchmark August contract dropped 0.3% to 3,087 ringgit a tonne, earlier hitting a 2012 low of 3,334 ringgit a tonne.

And, after all, "prices had run ahead of fundamentals",Macquarie said, noting the narrowing in the spread against soyoil to $100 a tonne, from a historical average of $150 a tonne, and despite the prospects of tight soy complex supplies.

"This renders palm oil very vulnerable to sharp price corrections as we have seen lately," the bank said, forecasting prices will in 2013 drop back below 2,900 ringgit a tonne.

Japan disruption?

It was little surprise also that


, an industrial commodity more exposed to macro-economy threats, fell, by 1.4% to 269.90 yen a kilogramme in Russia, especially given the prospect of disruption to the car industry in Japan, which has closed its nuclear power plants since the Fukuyama disaster.

Ker Chung Yang at Phillip Futures noted that the Japan Automobile Manufacturers Association said that it "is not considering any coordinated steps to deal with expected power shortages this summer in Japan.

"The auto body last summer asked Japanese car makers and parts makers to operate their plants on Saturdays and Sundays and take holidays to Thursdays and Fridays to ease pressure on the electricity grid during times of peak power consumption."

Low enough?



, another industrial commodity, did better, rebounding 0.1% to 76.74 cents a pound, encouraged by a 0.9% rise to 19,055 cents a pound in prices on China's Dalian exchange overnight, and with positive comment on the fibre – at last – at these prices.

Cotton prices have dropped to their lowest level in nearly two years and we believe stronger physical demand will re-enter the market at these levels," CBA's Luke Mathews said, noting strong US export sales data too on Thursday.

Even Goldman Sachs, a cotton bear, reckoned prices have fallen enough, and recommended closing a short trade in the fibre.


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