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Evening markets: Ags show defiance - in session showing a rare correlation


OK, agricultural commodities put in a soft finish to a dismal, coronavirus-clouded month.


But they fared a lot better than other risk assets, doing their bit to support the idea of the sector as somewhat defensive among asset classes. (This was a topic mulled by Olam’s Sunny Verghese earlier on Friday.)


‘Markets are rolling over’

Sure, the Bcom ag subindex stood down 0.5% in late deals, on course for what would be a five-month closing low.


“Commodity and equity markets are rolling over for the sixth consecutive trading session,” said Terry Reilly at Futures International.


As CHS Hedging said, “the weakness in the market continues to stem from the coronavirus, as new cases multiply rapidly”.


But the Bcom ag’s losses of 1.9% for this month are far lower than, say, the overall Bcom commodities index down 5.2% for February, little helped by weak oil markets.


Brent crude, at $50.52 a barrel in late deals, stood down 3.2% for the session, and 13.2% for this month.


Meanwhile, Wall Street’s S&P share index stood down 2.6% for the session and 10.2% for February.


‘Palm oil is a steal’

One theme helping ags were indeed signs of end user demand going on at lower prices, supporting the idea of food, being a must-have, as relatively recession proof.


The Philippines bought 275,000 tonnes of optional origin feed wheat on Friday, while Tunisia purchases 75,000 tonnes of feed barley (reported to be from either Black Sea region or eastern Europe origins).


Meanwhile, Ethiopia issued a tender for 200,000 tonnes of milling wheat, and the US Department of Agriculture announced the sale of 135,000 tonnes of US soymeal exports, also to the Philippines.


At Futures International, Terry Reilly said that “palm oil is a steal, in our opinion”.


‘Hanging in the balance’

Still, that did follow a 5.7% plunge in Kuala Lumpur May palm oil futures on the day (and $30 a tonne on cash markets), taking the vegetable oil’s losses for February to 10.9%, on a benchmark contract basis.


Indeed, one sub-theme within the ag sector was that, again, it was the more food focused ones which fared best, while those such as palm oil, used largely in making biodiesel, continued to prove more vulnerable to investors’ wrath.


Cotton is, of course, a particularly industrially focused ag, and fell 1.6% to 61.49 cents a pound on the day in New York for May delivery, a five-month closing low.


“Cotton has shed 10% in the last three days of trading alone,” said Commerzbank, noting price damage from “growing fears of a marked slowdown in demand as a result of the rapid spread of the Covid-19 virus”.


While the USDA has forecast a decline in world cotton stocks, outside China, in 2020-21, “this expectation is now hanging in the balance”.


‘More opaque future’

Staying in New York, raw sugar, exposed to the energy market via its competition with ethanol for cane, also closed a little easier, down 0.4% at 14.14 cents a pound for May.


Sucden Financial said: “We now have a more opaque short-term future from a sugar perspective as heavily influential related markets, eg oil, have utterly collapsed,” a factor which “seems to have shaken the net-long-position-building sugar funds”.


That said, the sweetener did get some support from comments by the International Sugar Organization, which noted that the last time sugar supplies were as tight as forecast for 2019-20, prices averaged about 18 cents a pound.


‘Temporary and negligible’

Still, New York arabica coffee for May managed a 1.5% gain to 111.35 cents a pound, retaking its 40-day moving average, although not quite its 200-day one.


Rabobank offered some supportive comments in saying that “the effect of coronavirus on [coffee] demand is likely temporary and negligible”, and issuing an above-market forecast for late-2020 prices.


While prices did face pressure from the prospect of a huge Brazilian harvest, they also needed to remain high enough, at least later in the year, to encourage Central American farmers to pick crops rather than abandon them, and ease tightness in supplies of washed arabica beans, the bank said.


‘Main focus’

And in grain markets, a number of contracts – including Chicago corn and soymeal and Minneapolis spring wheat - posted gains too.


End-user demand, eg the US soymeal export sale, may have been a help in such resilience.


But was there another current in play too – that of position closing by funds, which have a reputation of using the ends of months for tidying up portfolios and withdrawing cash.


“The main focus of today’s session will be month-end positioning,” said Karl Setzer at AgriVisor earlier.


Contrary trend

Certainly, it was the contracts in which managed money held net short positions according to latest regulatory data (new statistics are due later on Friday) which fared best on the day.


These included arabica coffee, and soymeal, which ended up 0.4% at $305.90 a short ton for May, plus Chicago corn for May, which edged 0.1% higher to $3.68 ¼ a bushel.


Minneapolis spring wheat was another one in which speculators had a short position, and which ended higher on Friday, by 0.7% to $5.27 ½ a bushel for May.


By contrast, Chicago soft red winter wheat, in which funds held a long position, ended down 0.4% at $5.25 a bushel.


Ditto soyoil for May, which ended 1.2% lower at 28.68 cents a pound, cotton, raw sugar and cocoa, which for May settled down 2.7% at $2,672 a tonne in New York.


Two exceptions

Soybeans were among the only two major ags to buck the trend, ending a touch down, by 0.3% at $8.92 ¾ a bushel for May, despite latest data showing funds with a substantial net short in the oilseed.


This despite too a lowball US 2020 soybean sowings estimate of 80.6m acres from a Farm Futures poll (which showed corn seedings at a lofty 96.6m acres), and with rumours too of Chinese purchases of US supplies of the oilseed.


Benson Quinn Commodities flagged “rumours floating [China] could come in and buy 10m tonnes of US soybeans next week”.


The other exception was Kansas City hard red winter wheat, which closed a touch higher, by 0.3% at $4.53 ¼ a bushel despite funds already having a net long in the grain.

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