For the reason why agricultural commodity futures fared so poorly on Thursday, some of the blame must go to Brazilian pension reforms.
Or, rather, the reduced chance of the shake-up, seen as crucial to curbing public debt, being voted through by Brazil’s Congress.
The knock-on effect of a delay to a vote on the overhaul, a postponement seen as a sign of the government lacking the muscle to get the measures through, was not just to send Sao Paulo shares 2 lower, but to prompt a drop of nearly that much in the real too, against the dollar.
A weaker real undermines the value, in dollar terms, of assets in which the South American country is a major player.
‘Close eye on weather’
New York arabica coffee futures for March tumbled by 2.5% to 122.90 cents a pound for March delivery, a contract closing low, in a drop seen fuelled by technical factors, after the contract last week failed to hold above the 130-cents-a-pound mark.
Meanwhile, a fall below 125 cents a pound seen was creating something of a vicious circle of system selling and further price drops.
“Fundamentals are relatively muted, with a close eye being kept on weather for Brazil’s main coffee producing areas, with the latest forecasts showing some of the key areas receiving over 100mm of rainfall,” CoffeeNetworks noted.
Futures in robusta coffee, in which Brazil is not such a major player as in arabica beans, ended down a more muted 1.6% at $1,730 a tonne in London for January delivery.
Back in New York, raw sugar, of which Brazil is also the top producer and exporter, dropped 1.0% tp 14.31 cents a pound, also hurt by technical factors, besides the weakness in the real.
“The inability for the market to breach a double top on the charts at 15.49 cents a pound and the psychological barrier at 15.50 has weighed on sentiment,” Sucden Financial said.
The trading house added that price weakness “shows that despite the ‘ethanol story’ in Brazil”, and the ideas of the country’s mill turning more cane into biofuel rather than sweetener, “traders have been reacting to the continuing estimates of large sugar surpluses for 2018-19”.
Supply ideas are being supported by the “increased production expected in India and Thailand as well as the potential for refined exports out of the European Union”.
Meanwhile, in Chicago, the weakness in the real was a particular challenge for dollar prices of soybeans, of which Brazil is the top exporter, ahead of the US,
Indeed, the January contract ended down 1.1% at $9.92 a bushel, suffering its own technical tainting as it fell decisively back through the psychologically important $10.00-a-bushel mark.
As a further setback, Argentina could be about to encounter some much-needed rain, with MDA saying that “the current outlook shows rains building across central areas by late next week, and increasing even further across central and northern areas into the following week.
“The rains would help to finally significantly improve moisture supplies and would also improve corn and soybean conditions.”
‘Didn’t offer any support’
Furthermore, futures tumbled overnight on the Dalian exchange in China, the top importing country, by 2.4% to 3,497 yuan a tonne for January, a contract closing low.
Richard Feltes at broker RJ O’Brien flagged talk that Chinese soybean imports had risen “far more than the soybean crush, which - along with large port stocks of soy products and soybeans - could suggest slower Chinese soy buying pace in weeks ahead”.
Indeed, such ideas took the shine of some upbeat US export sales data for soybeans last week, of 2.02m tonnes for 2017-18, well above expectations of a 1.0m-1.5m tonne figure.
“Weekly export sales were friendly at 2.02m tonnes, but didn’t offer any support” to prices on their release, Benson Quinn Commodities noted.
‘Corn area may go unplanted’
Corn futures fared a little bit better, in easing a more modest 0.4% to $3.51 ½ a bushel, having gained less from the Argentine dryness scare, despite a production threat.
“Talk about the impact of drought conditions in Argentina is ongoing, with some traders noting that some of the planned corn area may go unplanted this season,” CHS Hedging said.
“In an average year, half of the corn crop would have been planted by the middle of this week.”
Furthermore, there was continued mention of Wednesday’s data showing record US ethanol production last week, although another demand signal, US export sales, came in towards the bottom end of forecasts, at 876,400 tonnes.
In fact, corn futures may have fared better still, were it not for a further decline in wheat, which for March delivery closed down 0.9% at $4.21 ½ a bushel in Chicago, a fresh contract low.
“Yesterday’s big Statistic Canada all-wheat production number of 30.0m tonnes continues to weigh,” said Benson Quinn Commodities.
Spring wheat, which accounts for the bulk of the Canadian wheat crop, fell 0.5% to a six-month closing low of $6.11 a bushel in Minneapolis.
Benson Quinn Commodities added that US weekly export sales data for wheat “did not offer much either, with sales below the average weekly pace needed to reach US Department of Agriculture forecast” for 2017-18.
Sales came in at 321,400 tonnes, which was at least within the range of market expectations, of 250,000-450,000 tonnes.
Wheat vs corn
In fact, sales of hard red winter wheat, traded as Kansas City wheat, were half decent, coming in just over 200,000 tonnes, and helping the March contract at least temper its decline to 0.7%, leaving it at $4.20 ½ a bushel.
Indeed, it cut its discount to its Chicago soft red winter wheat peer by 0.75 cents a bushel.
Still, another spread being watched is that of wheat and corn, with the former’s premium dropping below $0.70 a bushel, March basis.
Is that low enough to trigger a switch in demand away from corn by users, such as livestock feeders, able to alter their grain mix a bit?
Bulls found solace in cotton, which for March soared 2.1% to 74.23 cents a pound, the highest finish in seven months for what is now the spot contract.
And this despite US export sales of upland cotton falling 33% week on week last week to 186,600 running bales.
Still, a drop had been forecast, with Louis Rose at Rose Commodity Group earlier flagging that “data analysis suggests that export sales are likely to slow significantly versus the recent torrid pace”, and noting too rumours “regarding potential sizeable cancellations to be reported” in the data.
In fact, while there was a notable cancellation, by China, at 39,700 running bales for upland cotton, it was not too frightening.
Meanwhile, actual exports - over which traders have been more concerned, with their pace far lagging that of sales – more than doubled week on week, to 246,800 running bales for upland cotton, the highest of 2017-18.