Equity and agricultural commodity investors sure aren’t seeing eye to eye over the impact of the China-US trade deal.
Shares made new record highs on Wall Street, with the S&P 500 index topping 3,300 points for the first time, amid sentiment also boosted by strong earnings from Morgan Stanley, decent US retail sales data, and Senate approval of the new Nafta deal, USMCA.
By contrast, the Bcom ag index stood 1.3% lower in late deals, on course for what would be its lowest close in a month, undermined by widespread losses, although in particular among grains.
‘A lot of fund selling’
Chicago corn futures for March plunged by 3.2% to $3.75 ½ a bushel, their weakest finish in more than a month, as the selling that has greeted the signing of the China-US trade deal gathered momentum.
Terry Reilly at Futures International, backing widespread talk of “buy the rumour, sell the fact” liquidation in grains, told Agrimoney that “we are seeing a lot of fund selling, especially in corn”.
While the China-US trade deal has opened the way for substantial purchases of ags by the former from the latter, investors are awaiting evidence of actual deals.
“Now trade is asking when and if China is going to buy.”
At Agrivisor, Karl Setzer said that “bottom line is that the signing of the agreement is just the first step in how the market reacts, now is when we see what the real effect of the plan is”.
‘Room to sell’
CHS Hedging, noting “an overall negative sentiment regarding the trade deal”, flagged “scepticism from traders regarding whether China will be able to purchase the pledged amount of [US] agricultural goods”, of some $80bn over two years.
And Benson Quinn Commodities noted that the trade agreement had cut the risk of going short in ags, in meaning one ostensibly bullish risk was now out of the way.
“Basically, the group that believes that these markets are too high can now sell the markets with little fear that the positive trade news will result in a sharp move higher.”
Funds - which have over the past four months turned from a net short of 350,000 lots in futures and options in the main grains to a net long of 33,000 contracts – “have room to sell these products”, the broker said.
‘A lot of profit-taking’
Wheat futures also suffered, with Chicago soft red winter wheat for March ending down 1.4% at $5.65 ¼ a bushel, and Kansas City hard red winter wheat for March by 2.4% to $4.84 ¾ a bushel.
Mr Reilly, said that the market was “seeing a lot of profit-taking in wheat, especially Kansas City wheat”, which he termed a “particularly price sensitive” contract.
Even after Thursday’s losses, the Kansas City March contract remains up nearly 5% over the past month.
Also weighing on prices were ideas that Russia’s winter wheat crop, while lacking snow cover, remained in good condition, with Mr Reilly flagging too rumours that the French transport strike, which threatens to squeeze supplies of grains to ports, “may be coming to an end”.
In Paris, soft milling wheat futures for March ended down 1.2% at E193.00 a tonne.
Cotton, soy resilience
One irony of Thursday’s trading was that cotton and soybeans – far more directly vulnerable to China-US relations – performed relatively well, although this was after already suffering fund selling, notably in the last session.
Chicago soybean futures for March ended down 0.5% at $9.24 a bushel, with New York cotton for March down 0.1% at 70.22 cents a pound.
Their resilience looked down also to decent US export sales data for last week which for soybeans came in at a four-week high of 711,500 tonnes, and for upland cotton at a decent 233,000 running bales.
More importantly for cotton, actual exports of upland fibres hit 301,710 running bales, the highest since August, and raising hopes that the US might after all be able to ship 16.5m bales in 2019-20, as the USDA expects.
‘On a better footing’
However, another irony is US export sales data were strong for the grains too, at a four-week high of 784,762 tonnes for corn, beating market expectations of a figure of 300,000-700,000 tonnes.
All-wheat export sales were also decent, at 650,622 tonnes, ahead of the 200,000-500,000 tonnes investors had expected.
Indeed, there was plenty of surprise around at the extent of the selling in grains.
Richard Feltes at RJ O’Brien, while acknowledging “perceived ‘loopholes’” in the agreement, added that “while these concerns are valid, sceptics cannot deny the reality that the US-China trade relationship today is on a better footing than six months ago, and that even a return to China’s 2017 level of US soy purchases would be a positive for the soybean market”.
He also flagged that, as part of the deal, China had agreed to honour its tariff rate quota commitments for crop imports, amounting to 9.36m tonnes for wheat, 7.2m tonnes of corn, 5.4m tonnes of rice and 0.298m tonnes of cotton.
For wheat, the commitment, “if executed, is well above” the USDA’s forecast for Chinese wheat imports this season of 3.2m tonnes.
‘Time for shares and grains to converge’
At Global Commodity Analytics, Mike Zuzolo said that he was “without a doubt, not expecting this level of negativity in the trade.
“It is my strong opinion that, given the trade deals being signed or soon to be signed, we have very little fundamental, global trade reasons for the equities to make new highs while the grains make new lows.
“The time for these two assets to converge is upon us fundamentally, in my view, given the level of protein feeding of grains we are likely to see in 2020.”
As to what that level might be, Mr Zuzolo said that “the highest in the last decade would be my assumption if China doesn’t break-out with fresh African swine fever”.
Back among softs, the coffee market had some data to deal with in the form of Conab’s first forecasts for Brazilian production in 2020-21.
The bureau forecast, at the centre of its estimate range, an all-coffee crop of 59.58m bags, well above the 49.31m bags reported for 2019-20 (an “off” year for arabica output, which operates a biennial production cycle) but a touch below the record 61.66m bags achieve in 2018-19.
Bar some impact from October dryness in the key arabica-growing state of Minas Gerais, and a hangover to plantations in Espirito Santo, the top robusta producing state, from last year’s bumper harvest, prospects looked pretty good, Conab said.
New York arabica coffee futures for March ended down 1.2% at 112.95 cents a pound, the contract’s lowest finish in nearly two months.
London robusta futures for March settled 1.0% lower at $1,314 a tonne, within an ace of their weakest finish since October.