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Evening markets: Asia inundations foster palm oil, coffee price rallies

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Wuhan is in the news again. And this time, it is nothing to do with coronavirus – and supportive for vegetable oil prices.

 

The Chinese city, alongside provinces of Anhui, Jiangxi and Zhejiang, declared red alerts on Friday after heavy rains which have left water levels in the vast Three Gorges reservoir more than 10m above warning levels.

 

The inundations have not been confined to China either, with reports of heavy rains in Indonesia and Malaysia, the world’s biggest palm oil producers.

 

This after, as Oil World reported, “the palm and copra producing regions of South East Asia received above-normal rainfall in May and June”.

 

Biodiesel aid?

Worries over palm oil output were only one prop to the vegetable oil complex, with reports too of producing countries and the European Union working together over Brussels’ “Farm to fork” ag policy currently being drafted.

 

The EU has taken a tough line in biofuels against South East Asian palm oil (which is used largely in making biodiesel) on grounds of the excessive deforestation it says that production of the vegoil encourages.

 

And that before getting too to reports that Iowa senators are attempting to add support to the biofuels industry to a pending US Covid-19 relief package.

 

“One reason for the higher trade in soyoil is the possible reintroduction in biodiesel aid,” said Terry Reilly at Futures International.

 

‘Smartly higher’

Soyoil futures for August closed up 2.2% at 29.92 cents a pound in Chicago.

 

This after Kuala Lumpur palm oil futures for October soared 3.7% to 2,614 ringgit a tonne, the highest finish for a benchmark contract in four months, and taking to 8.4% price gains this week – the best performance since late 2016.

 

“Malaysian palm oil futures moved smartly higher, advancing to highs not seen since early February on increasing volume, supported by continued heavy rains in Malaysia, Indonesia and China and the perceived risk to supply they are causing,” said Benson Quinn Commodities.

 

Firm beans

Strength in soyoil was also supportive of soybeans themselves, which added 0.5% to $8.98 a bushel in Chicago for August delivery, and 0.4% to $8.95 a bushel for the new crop November lot.

 

Also helpful was the announcement by the US Department of Agriculture of the sale of 126,000 tonnes of US soybeans to an “unknown” importer for 2020-21.

 

Soymeal for August, by contrast, eased by 0.2% to $286.50 a short ton, proving the short foil, as it so often does, for long bets in fellow soybean processing product soyoil.

 

Corn vs wheat

And spreading appeared in evidence again in grain markets eventually too, with corn closing higher and wheat lower, helped by what looked like further cashing in short corn-long wheat bets.

 

Updated exchange data showed circumstantial evidence of this in the last session, with open interest (ie the number of live contracts) in Chicago corn futures falling by 12,337 lots, and that in Chicago wheat falling by 9,208 contracts.

 

This session, the outperformance of corn less substantial. Still, the Chicago September corn contract closed up 0.8% at $3.33 a bushel, while September soft red winter wheat eased by 0.1% to $5.34 ¾ a bushel.

 

Earlier in the session, wheat saw its premium against corn drop temporarily below $2.00 a bushel.

 

‘Concerns of dryness’

Corn futures found support from US weather worries (although as ever there were differing interpretations of the outlook).

 

Benson Quinn Commodities said that “moderate heat is to return across a majority of the Corn Belt this weekend followed by a return of precipitation across most of the belt next week.

 

“Dryness remains, still, in western Minnesota, north west Iowa, Indiana, and Ohio.”

 

CHS Hedging, noting that US corn “is in its critical pollination phase,” said that “there are concerns of dryness in parts of the US Midwest over the next couple of weeks”.

 

‘Darn hot’

There are some weather worries over wheat too, with the European Union and Russian crops seen by many commentators as contracting.

 

“It was darn hot in Russian fringe spring wheat areas again yesterday, offering support” to prices said Benson Quinn Commodities.

 

By contrast, Maxar noted that heavy rain in Russia’s Central region and far north eastern Ukraine “stalled winter wheat harvesting and may lead to some quality declines”.

 

Still, with wheat prices already having risen strongly from late-June lows, there was the temptation to take gains on long bets (and spreads).

 

Mr Reilly flagged pressure on futures from “follow-through profit taking”.

 

Hot coffee

Among soft commodities, coffee proved particularly strong, with robusta – produced largely in wet South East Asia – soaring 4.0% to $1,293 a tonne for September delivery, its best close in nearly four months.

 

“Vietnam also had hot and dry weather at flowering time and production ideas there are less than original expectations of a bumper crop,” said Jack Scoville at Price Futures.

 

Technical factors were also seen as supportive, with the contract in the last session closing above its 100-day moving average for only the second time in 2020.

 

New York arabica coffee for September, soared 4.0% to 102.30 cents a pound, also gaining technical help as they pushed back above the 100 cents-a-pound mark.

 

‘Sluggish demand trends’

New York cocoa for September close just $1 lower at $2,060 a tonne, after the London September contract, in its first session as the spot contract, gained 0.5% to £1,549 a tonne.

 

This after in the last session setting the lowest in 21 months for a nearest-but-one lot, little helped by weak European and North American grind data.

 

“The cocoa price is suffering not only from sluggish demand trends but also from generally bright supply prospects,” said Commerzbank.

 

“Especially in Ivory Coast, which is the biggest cocoa producer by far, soil moisture levels are now so good following plentiful rainfall that Ivorian cocoa growers are expecting to harvest a large main crop from October.”

 

As for consumption, “the restrictions imposed during the corona crisis, which have seen out-of-home consumption slump and sales outlets close, have been weighing on global demand for products containing cocoa”.

 

The bank noted data on Thursday reporting the European second quarter cocoa grind at 314,000 tonnes in the second quarter, “nearly 9% down on the previous year, and the lowest figure for one quarter in five years”, with North American volumes down nearly 11%.

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