Inflation worries may by unnerving equity investors a touch, but only enhanced the appeal of commodities – ags included.
While share markets struggled to start the week, wading through concerns that economic recovery hopes might spur inflation and prompt some tightening in monetary policy earlier than had been thought, commodities markets focused more on the inflationary/economic revival aspects.
Commodities overall, as measured by the Bcom index, stood up 1.5% in late deals, helped by a 3.1% surge to $64.88 a barrel in Brent crude, which found support too from US oil production cutbacks forced by cold weather.
‘Inflation is coming’
Copper topped $9,000 per tonne for the first time since 2011, taking to some 7% gains since China returned on Thursday from its lunar new year holiday.
“Copper still indicating inflation is coming,” said Benson Quinn Commodities.
(The metal has a Covid angle too, with the Environmental Protection Agency having said earlier this month that the virus is killed by contact with some copper alloys.)
Gold, meanwhile, stood up 1.5% in late deals at $1,808.70 per ounce, lifted by the worry of inflation cutting the value of the likes of fiat currencies, while by contrast, the dollar shed 0.4% to hit a five-week low against a basket of currencies.
As for ags, the Bcom ag subindex stood up 1.6% in late deals at its highest since July 2017, handing gains to the managed money investors which as of last Tuesday raised their net long in ags to a record high.
Plexus Cotton noted that index funds in particular are “seeing strong inflows, as commodity ETFs [exchange traded funds] are becoming an interesting asset in the inflation narrative”.
And while much of the focus of late has been on grains and oilseeds – and tightening stocks at a time of resilient buying from the likes of China – this time it was soft commodities which actually proved the best performers.
This complex, after all, provides more scope for fund buying than grains, without bumping up against historical highs, besides being in many cases more sensitive in demand terms to the prospect of the retreat of the pandemic.
‘Sharp drop in Brazilian production’
Cocoa is one such commodity, with chocolate demand having been badly depressed by the hit to travel, and impulse confectionery purchases, stemming from the pandemic.
Cocoa futures for May ended up 1.9% at $2,490 a tonne in New York, closing above their 50-day moving average for only the second time this year.
However, it was arabica coffee - demand for which has been hit by the curbs on coffee bars and restaurants - which really blew the lights out, in jumping 4.5% to 134.95 cents a pound for May, setting a 14-month closing high for a nearest-but-one contract.
ADM Investor Services noted “demand showing some early signs of improvement, at a time when the market is preparing “for a sharp drop in Brazilian production” this year, as outlined by analyst Judith Ganes last week, cautioning of damage so widespread that 2022-23 prospects may be impaired too.
‘May reduce quality and yield’
In Brazil, Cepea noted that “temperatures were high and rainfall was low between late January and early February in most coffee-producing regions in Brazil.
“This scenario concerned farmers… since arabica crops were entering into the bean-filling stage.”
Meanwhile, the country’s robusta crops “were at the peak of the bean-filling stage”, the institute said, cautioning that “dry weather may reduce quality and yield of coffee beans in the 2021-22 season”.
London robusta coffee futures for May settled up 3.4% at $1,416 a tonne, a three-month closing high for a nearest-but-one contract.
‘Absence of sellers’
Raw sugar was a strong performer too, for May jumping by 3.3% to 17.44 cents a pound, the strongest close for a nearest-but-one contract in nigh on four year (ie since March 2017), amid something of a dearth of sellers.
The “accelerating rise” in prices of the sweetener “is fuelled not by bullish events, nor by buyers keen to buy sugar, but by an absence of sellers,” said Marex Spectron.
“Producers are over-hedged, and getting nervous about margins, while the trade are scared of selling because they simply do not understand what is going on.
“So the ‘only’ sellers are the funds – and profit-taking is not part of their DNA,” at least, not while momentum is firmly higher.
‘Aggressive sugar exporter’
“Do they have a notion that sugar has gone ‘too far too fast’? Probably not - on the contrary, they love an accelerating trend,” Marex said, noting too that “they have more buying power”, with their net long in futures and options as of last Tuesday at 197,124 contracts.
That was some 90,000 contracts below the record high, ie indicating potential for buying before the position looked top heavy.
ADM Investor Services reminded too that “crude oil prices have risen over $25 a barrel since early November, and that price rise should still give Brazil’s Centre South mills plenty of incentive to increase ethanol’s share of next season’s [cane] crushing at the expense of sugar”.
Furthermore, the “ongoing shipping container shortage has restricted the flow of India’s sugar exports”, while there was late last week “further evidence of improving global demand when Pakistan tendered for 50,000 tonnes of white sugar, as they had been an aggressive sugar exporter in recent years”.
2010-11 all over again?
If holders of short positions may be feeling uncomfortable in sugar, there are ideas of them being squeezed in cotton, given the extent of purchases made “on call”, ie for fixing against futures prices - which keep on rising.
“The cotton market continues to move higher, and it is now apparent that mechanics associated with mill on-call commitments is moving the market higher,” said Louis Rose at Rose Commodity Group.
This is “especially with little old crop US cotton left to buy from producers and this little requirement for futures selling”.
Mr Rose added that “many are now wondering if we are looking at a run-up akin to that seen in 2010 and 2011,” when prices topped 200 cents a pound, although he said that “we think not.
“China’s reserve was essentially found to be empty in 2010, which is not the case now.”
India vs New York trade
Plexus Cotton noted too that last week “international merchants purchased several hundred thousand bales [of cotton] in India”, where Cotton Corporation of India prices “didn’t follow the lead of New York futures.
“This meant that Indian high grades could be procured at around 86-87 cents break-even, CIF China, which resulted in a very attractive basis,” when hedged against New York contracts.
“However, hedging foreign cotton by going short US cotton, which is almost sold out this season, sounds like a risky bet to us.”
“Sooner or later” the many shorts in the cotton market “will have to find a way out, otherwise it might lead to another squeeze like in early 2008”.
For now, cotton futures for May closed up 2.1% at 92.41 cents a pound, the highest finish for a nearest-but-one contract since June 2018.
‘Elevated risk of Russian winterkill’
Among grains, wheat was the only contract which managed a softs-type performance, ending up 2.2% at $6.69 ¾ a bushel in Chicago for May delivery.
Again, it is one high profile ag in which funds have not already built a substantial net long position, and which faced too fundamental support from worries over the impact of cold on northern hemisphere crops – mainly in the US, but elsewhere too.
Richard Feltes at RJ O’Brien noted an “elevated risk of Russian winterkill across one-quarter of the wheat belt following disappointing weekend snow”.
(That said, Maxar was less concerned, saying that “snow cover will continue to build across Central Region, North Caucasus, and Volga Valley, maintaining winterkill protection”.)
In Europe, the Mars bureau reported “limited” damage to crops affected by temperatures which mid-month “were among the lowest for the past 50 years” in some areas hit by a cold snap which stretched from northern Europe through Germany, Poland to Turkey.
“Some frost damage is expected to have occurred in western Germany, eastern France, Hungary, south eastern Europe and Turkey, in areas without significant snow cover and where frost tolerance was poorly developed due to the prevailing warmer-than-usual conditions preceding the cold spell.”
Still, on the demand side, US export data for last week, at 324,597 tonnes, were not huge, coming in at the lower end of the range of expectations of 300,000-550,000 tonnes.
‘Weather leans positive’
The data were better for corn, at 1.23m tonnes, in the upper end of the range of forecasts of 500,000-1.40m tonnes.
Chicago corn futures for May ended up 1.6% at $5.50 ½ a bushel, helped too by South American weather concerns.
“Weather leans positive [for prices] with a drier tone in Argentina, while wet weather returns to Mato Grosso late week, keeping the soybean harvest/safrina corn planting two-plus weeks late,” Mr Feltes said.
“Rains for northern [ie central from a geographic perspective] Brazil are forecast to continue, hampering fieldwork and corn planting,” said Benson Quinn Commodities.
Meal vs DDGs
Soybean futures lagged, closing up 0.5% at 13.87 ½ a bushel in Chicago for May, finding some support from the South America weather worries, but less from soymeal, which eased by 0.2% to $422.90 a short ton for May.
That saw the soymeal lot close below its 50-day moving average for the first time in six months.
Terry Reilly at Futures International noted a setback to US soymeal demand from a knock-on effect of the container shortage as highlighted in eg the sugar market.
“US DDGs [distillers’ grains] exports could slow over the next 1-2 months over container shortages and rising freights rates,” he said.
With DDGs like soymeal a high protein feed ingredient, that could undermine meal values.