Just when corn futures looked to be fighting back against wheat…
Corn, while typically trading at a discount to wheat (bar rare occasions such as early in the decade when US weather caused a rare reversal), has been at a particular disadvantage for much of 2020.
In April, as coronavirus worries hurt demand for (corn-based in the US) ethanol while spurring hoarding of food staples such as wheat, its discount topped $2.30 a bushel in a Chicago on a spot contract basis.
But there had been signs of corn fighting back of late, as US yield hopes wane against a backdrop of strong US export orders.
At $1.83 a bushel, December basis, at the close of the last session the spread had narrowed by 11% in a week, and was homing in on its 200-day moving average – if remaining well above year-before levels of around $1.20 a bushel (for December 2019 contracts).
However, the tide turned again in early deals on Wednesday, when Chicago corn futures for December stood down 0.8% at $3.59 a bushel as of 10:15 UK time (04:15 Chicago time), undermined by ideas that the trend of reducing yield estimates may be over, at least for now.
The US Department of Agriculture’s crop condition report overnight showed a 1-point to decline in the proportion of the US crop rated “good” or “excellent” – but hardly a surprise at this time of year (and in fact in line with investors forecasts).
Not does the resulting 61% good or excellent figure suggest crop disaster.
“One might expect this type of downgrade due to seasonal influences,” said Benson Quinn Commodities, adding that declines in ratings for major growing states Illinois, Iowa and Nebraska were “not that uncommon even without the hot temperatures of last week”.
‘A caution to the bulls’
Meanwhile, there is the prospect of the USDA’s Wasde report on Friday, a key briefing, which often inspires some profit-taking ahead of it – a not-so-upbeat prospect given that hedge funds are now net long in the grain.
“The funds being long merits some caution,” Benson Quinn Commodities said.
Although the December contract’s close, just, above its 200-day moving average in the last session did earn some kudos with technical investors, that dissipated when the level was surrendered early in this session.
It was a “good close, but the MACD”, moving average convergence/divergence, a key momentum indicator, “is showing momentum slowing - a caution to the bulls,” said Mike Mawdsley at First Choice Commodities.
US vs Argentina, Black Sea, Europe
By contrast, Chicago soft red winter wheat for December was down a more modest 0.1% at $5.43 ½ a bushel, and spent much of earlier trade in positive territory.
While USDA data overnight showed a better-than-expected start to US winter wheat sowings, ahead of the 2021 harvest, that was driven by hard red winter wheat-growing areas, with dry weather allowing rapid fieldwork, if creating some moisture concerns too.
Kansas City hard red winter wheat for December shed 0.3% to $4.68 ¼ a bushel.
While moisture ahead is expected to improve prospects for Plains hard red winter wheat crops getting off to a good start, as Steve Freed at ADM Investor Services noted, “it remains dry in Europe, Black Sea and Argentina”.
‘Rainfall has been scarce’
Indeed, in France, where growers are also seeding wheat (if with much of the sowings window yet to come), “the rainfall deficit persists in a significant way, penalising farmers”, said Agritel.
In Russia, “producers are slowing down their winter planting pace”, the analysis group said, noting that “rainfall has been scarce or even absent during the last month.
“The surface moisture of the soil is strongly affected,” with the two-week outlook dry.
The situation is raising questions over estimates of an increase in winter crop sowings to 19m hectares, from 18.2m hectares last year and 17.6m hectares in 2018, Agritel said, adding that dryness was a concern in Ukraine too.
‘Keep an eye on freeze events’
Back in the US, Minneapolis spring wheat nudged 0.1% higher to $5.36 ½ a bushel, amid worries over a cold snap over growing areas in the US and, more especially, Canada where the harvest is less far along, leaving more crop vulnerable to frost damage.
“Keep an eye on frost/freeze events for the unharvested spring wheat crops across Canada and the US,” said Terry Reilly at Futures International.
This has been a factor for the canola market too, helping dive prices of the oilseed to a two-year intraday high of Can$514.90 a tonne in the last session for the spot November contract.
Mr Reilly said that while for Canadian canola “demand is great”, the recent rally was “surely weather driven as cold/freezing temperatures in the forecast for Canada this workweek”.
Still, profit-taking set in on Wednesday, to drive the November contract 0.3% lower to Can$509.60 a tonne.
‘Demand bull market’
Sticking among oilseeds, Chicago soybeans proved better at hanging on to buyers, overcoming early weakness to stand up 0.2% at $9.75 a bushel – and setting course for what would be a 12th successive positive close, besides setting a fresh two-year high for a nearest-but-one contract.
The early weakness followed the release of a USDA US soybean crop rating of 65% good or excellent which, while down 1 point week on week, was 1 point ahead of market expectations.
However, strong demand for US soybeans, notably from China, remains the bull’s friend. If there are any jitters over retaliation against US President Donald Trump’s plans to block some ag imports from western Xinjiang over allegations of use of forced labour, the concerns remain in the background.
“Longer term for beans… this feels like a demand bull market,” said Benson Quinn Commodities.
“In such cases, breaks are shallow.”