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Morning markets: Cotton leads ags lower, as China-US tensions sink markets

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Markets, including agricultural ones, remain highly unsettled at the turn worse in China-US trade relations.

 

If US President Donald Trump last week unnerved investors by announcing plans to hit a further $300bn in Chinese goods with a 10% tariff, the renminbi’s 1.3% plunge on Monday to 7.03 per $1, breaking the 7.0 mark for the first time in 11 years, only added to the jitters.

 

The People’s Bank of China, which has previously defended the 7 mark, said that the currency’s drop reflected trade protectionism and tariffs on Chinese goods (albeit without specific mention of the US).

 

The Chinese central bank added that it “has the experience, confidence and capacity to keep the renminbi exchange rate fundamentally stable at a reasonable and balanced level”.

 

Still, share markets were showing signs of the trade worries, with Hong Kong stocks ended down 2.8%, and Shanghai ones 1.6%, with Tokyo’s Nikkei index closing 1.7% lower, and London shares trading 1.6% to the bad in early deals.

 

Wall Street shares are forecast opening more than 1.0% down.

 

‘Remain gloomy’

“The atmosphere on markets remain gloomy,” said Agritel, adding that “the escalation in the trade war between US and China will have a negative impact on the level of US agricultural products’ exports”.

 

And on ag markets, it was cotton again which showed particular softness.

 

Not only is the fibre usually a hefty US export to China, trade which is obviously threatened by trade tensions, it is also, as an industrial commodity, viewed as more sensitive than many other ags to world economy fears, and more likely to move in the same direction as shares.

 

Growing dryness

Not that cotton bulls don’t have some cards to play.

 

Louis Rose at Rose Commodity Group flagged that “concerns regarding dryness across west Texas, Oklahoma and Kansas are increasing, with some areas of the south eastern states also reporting very hot and dry conditions”.

 

While the “latter (and the Mid-south) are expected to see rain and showers over the coming week… the forecast remains hot and dry across the former areas”.

 

Mr Rose also saw, with prices now at three-year lows, the potential for physical demand to increase, and for support as speculators take profits on their hefty short bets in cotton.

 

“Despite the market moving (and settling) below the psychologically significant level of 60.00 cents per pound, we expect speculators to lock in some profit this week ahead of next week’s Wasde report release” from the US Department of Agriculture, on August 12.

 

‘Prevailing downtrend’

Plexus Cotton said that “we need to remind ourselves that while the crops are generally looking good at this point, there is still a lot of weather to negotiate over the coming months,” while viewing the weak interest-rate regimes as ultimately supportive of commodity prices.

 

“We believe that sooner or later this monetary folly of cheap money is going to lift commodities.”

 

However, the trading house added that “timing these events is difficult and for now there is no reason to fight the prevailing downtrend”.

 

New York cotton futures for December slumped a further 2.5% to 57.91 cents a pound as of 09:55 UK time (03:55 Chicago time) - taking to 9.3% their plunge in three sessions.

 

At one point, the contract touched 57.26 cents a pound, the weakest for a nearest-but-one contract since March 2016.

 

Dryness factor

In Chicago, grain futures were lower too, reversing their gains of the last session, when they found some support from bargain hunting and pre-weekend profit-taking on short bets.

 

Again, bulls had some cards to play, with US weather less than ideal for row crops, at a sensitive time for corn in many areas.

 

“It seems a dry area in parts of eastern Iowa, Illinois, Indiana may be getting a bit more attention in the coming days,” said Mike Mawdsley at First Choice Commodities, based in Iowa.

 

Maxar said that this week “dryness will continue to increase across northern Illinois, and eastern Iowa, however rains will somewhat improve moisture in southern Illinois western Iowa, Indiana and Michigan”.

 

Benson Quinn Commodities said that Corn Belt “soil conditions remain adequate to surplus but did the wet spring and early summer leave crops with shallow root systems that are susceptible to dry weather?”

 

Russia downgrade

Then there are the ideas of US corn sowings actually being far smaller than the 91.7m acres that the USDA currently estimates, with some companies, including Archer Daniels Midland, seeing a figure of in the mid-80s million acres.

 

An update is due in next Monday’s Wasde.

 

And for wheat, there was a downgrade by Ikar of 900,000 tonnes to 75.5m tonnes in its Russian harvest estimate.

 

However, it was tricky for any risk assets to make headway against the negative macro-market backdrop.

 

Stocks idea

Besides, there remain demand worries too.

 

ADM Investor Services said that, in fact, in Monday’s Wasde “some feel” that the USDA corn acreage numbers “may not change that much from their June guess.

 

“Focus will then be yield and demand.

 

“There are mixed ideas on yield. At the same time drop in US corn crush and slow exports could force USDA to drop demand.

 

“This could keep US 2019-20 carryout near their July guess of 2.01bn bushels.”

 

Basis shrinks

Tregg Cronin at Halo Commodity Company last week noted “weakness in cash markets across much of the Corn Belt and at export centres.

 

“CIF corn has eased 3-4 cents per bushel over the last 7-10 days, while major ethanol plant basis has softened as much as a dime,” a trend which has reversed the strength which proved a big spur to the rally in corn prices in late May and early June.

 

Karl Setzer at AgriVisor noted a role of transportation hiccups - a hangover from the wet spring as rail repairs continue - in weaker corn basis, saying that “logistics are becoming a factor in price discovery across the United States.

 

“Some elevators report having a difficulty in receiving needed rail cars to move inventory ahead of the upcoming corn and soybean harvest.

 

“Ethanol plants are struggling with this situation as well and is a reason for some plants to run at a reduced rate. A result of these issues is a weaker basis value in areas when movement is slow.”

 

Prices fall

Chicago corn futures were trading 1.5% lower at $4.03 ½ a bushel for December delivery, reversing nearly all the last session’s gains, and falling back below their 200-day moving average.

 

Soybean futures for November stood down 0.7% at $8.62 ¾ a bushel, more than reversing the last session’s headway.

 

Chicago soft red winter wheat for September stood up 1.8% at $4.82 a bushel, giving back most of Friday’s gains, and falling back below its 100-day moving average.

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