Grain markets are getting a habit of proving a strong consensus wrong.
A month ago, they - expensively - wrong-footed hedge funds, caught record net short in US grain futures and options just as the rally prompted by the slowest US spring sowings season on record was about to begin.
On Wednesday, it was the bulls who were blind-sided.
As of the last session’s close, there appered a unanimity that grain markets were poised for fresh strength, after the US Department of Agriculture in its Wasde report cut its forecast for its corn harvest this year, and stocks at the close of 2019-20, by far more than investors had expected.
However, futures in fact fell back in early deals, in line in fact with a somewhat risk-off sentiment in broader markets, most evident in a 2.2% dip to $60.95 in Brent crude in early trading.
It was little help that the next ag data of note, Malaysian palm oil statistics for last month, did not impress.
The Malaysian Palm Oil Board showed Malaysian palm oil stocks last month at a 10-month low of 2.45m tonnes, a drop of 10.3% month on month, and some 17,000 tonnes below market expectations.
That said, the data disguised a larger-than-expected production number, of 1.67m tonnes, above forecasts by some 55,000 tonnes, and the highest May output figure in four years.
Exports, meanwhile, at 1.71m tonnes, were at a three-year high, if in line with market estimates.
Still, Kuala Lumpur palm oil futures for August shed 1.3% to 1,981 ringgit a tonne as of 10:30 UK time (04:30 Chicago time), amid ideas that exports, having benefited last month from pre-Ramadan and Eid demand, will fall this month.
(As indeed, cargo surveyor data unveiled earlier this week for the first 10 days of June have already indicated.)
Meanwhile, in Chicago, corn futures for July shed 0.7% to $4.24 ¾ a bushel, giving back a portion of their gains made in the last session on the USDA Wasde revisions.
That was on song with the declines in major share markets, after poorly received Chinese inflation data – showing consumer prices rose 2.7% year on year in May, the fastest rate in 15 months, and boosted by an 18.2% surge in pork values, reflecting the fallout from the African swine fever epidemic.
Furthermore, there was a bearish case to draw from the Wasde, with Benson Quinn Commodities highlighting a 100m-bushel downgrade to the USDA’s forecast for US corn exports in 2018-19.
“Logistic issues on the waterway system combined with aggressive competition from South America and the Ukraine cut into US export business,” the broker said.
‘Buffer a shock’
And, after all, the 2019 crop is not made yet, and there is one theory that the extreme wetness at least provides some benefit for the yield this year, on a rain makes grain basis, contrasting with the USDA’s 10 bushels-per-acre downgrade to 166 bushels per acre in its corn yield forecast.
“In the coming few months, Chicago traders will hotly debate the weekly crop conditions and implications for yield potential above or below 170 bushels per acre,” Rabobank said.
“The market will also grapple with current high inventories, and the potential that these can buffer a supply-side shock.”
‘Export potential increasing’
And, with corn lower, other Chicago ags attracted selling too.
Chicago wheat futures for July shed 0.4% to $5.15 ¾ a bushel, facing something of a Black Sea headwind too.
The Wasde raised by 1.0m tonnes its forecasts for Russian and Ukrainian wheat harvests this year, to 78m tonnes and 30m tonnes respectively, undermining ideas of weather damage to these crops.
“Export potential is increasing consequently,” Agritel said.
And, indeed, the tender on Tuesday by Egypt’s Gasc for wheat highlighted international competition, with winning Romanian and Russian offers priced below $200 a tonne, excluding freight.
Soybeans for July dropped too in New York, by 0.6% to $8.53 ¾ a bushel, more than erasing gains of the last session, and setting up for a technical battle with 40-day and 20-day moving averages, at just below $8.53 a bushel.
The Wasde was not so upbeat for soybeans anyway, standing by existing 2019 US production estimates, and in fact raising stocks expectations, thanks to a cut to 2018-19 export hopes.
“Demand continues to look bleak, with the ongoing China-US trade escalation, African swine fever, and strong production from competitive South America,” Rabobank said
And even though a yield and potentially area downgrade is expected next month, “even a couple bushel reduction in yield, say 47.5 bushels per acre on 83.8m harvested acres, only pulls carryout down 167m bushels - or still about 800m more than we need,” said Benson Quinn Commodities.
Soyoil for July added pressure by falling by 1.0% to 26.94 cents a pound, undermined by the losses in rival vegetable oil palm oil.
‘Demand growth tepid’
Cotton futures fared better, adding 0.3% to 65.82 cents a pound in New York for July delivery, but this only after falling in the last session.
The Wasde made no changes to the US balance sheet forecasts for 2019-20, although it nudged higher by 1.7m bales to 77.3m bales its forecast for world stocks at the close of the season, reflecting factors including a cut to Chinese consumption expectations.
“The market was perhaps a little disappointed the USDA made no changes” to the US balance sheet, said Tobin Gorey at Commonwealth Bank of Australia.
On a world level, “alongside improved demand, global demand growth remains tepid into next season,” Rabobank said.
‘Thrive on uncertainty’
All this said, a flavour of the upbeat thinking on corn referred to earlier. Will this come back into play later?
Mike Mawdsley at First Choice Commodities, for instance, said overnight that he was “still stunned USDA dropped yield 10 bushels per acre.
“It is very early in the year to do so.
“Bottom line, we should see corn trade in this upper range for a while, with the chance to break into new high territory” if weather threatens what is planted.
Benson Quinn Commodities said that the USDA taking “an axe to corn yields, should be enough for follow through” price gains.
At RJ O’Brien, Richard Feltes said that the “stage is set for the largest summer rally in December corn since the 2012 drought.
“Bull markets thrive on uncertainty, with plenty to go around until later this summer, amid widely varying estimates of both corn acreage and yield.”