How much tread has the ag price rally got left?
One indicator for investors kicking the tyres is to look at the price differences between different calendar contracts – notably that between the spot lot and the next contract in.
And that is, at the moment, proving somewhat reassuring for bulls, with front contracts narrowing their discounts to the second-in contracts - so-called “bear spreading”, seen as a signal of strong spot demand.
In the soy complex, front contracts have even gained small premiums. For soybeans themselves, “the excitement is” that “there is no carry in the market”, ie with the futures curve not in its usual contango structure, said Mike Mawdsley at First Choice Commodities.
Buyers “want the beans now”.
‘Spreads could invert’
As John Walsh at Walsh Trading noted, “the soymeal spreads are inverted, soybean spreads are attempting to invert.
“If the situation in South America remains, and the weather remains dry, the bean spreads could invert, and the meal should continue with a larger inversion.”
In fact, the Chicago November soybean contract, which closed last week at a 4 cents-a-bushel discount to the January 2021 lot, outperformed to achieve a marginal premium in early deals on Thursday.
The November lot gained 0.4% to $10.55 ½ a bushel as of 10:15 UK time (04:15 Chicago time), while the January 2021 contract added 0.3% to $10.55 a bushel.
Soymeal vs DDGs
In soymeal, meanwhile, the best-traded December lot gained 0.8% to $364.50 a short ton, expanding further a premium over the January 2021 contract, which added 0.6% to $359.70 a short ton.
Again, this tallies with ideas of firm spot demand, as crushers struggle for supplies in Brazil (thanks to low stocks) and Argentina (thanks to farmer hoarding of crop as a currency hedge), as well as strength in the market for distillers’ grains, or DDGs – US output of which has fallen thanks to the ethanol market downturn.
“Soymeal prices have rallied for several reasons, including slowing Brazil and Argentina exports, a surge in DDGs prices at the Gulf (up 21% since July), and the soymeal/corn [price] relationship,” said Terry Reilly at Futures International.
Soyoil futures for December, which regained a premium over the January 2021 lot in the last session, held on to it somewhat precariously in early deals, as they edged 0.1% lower to 32.99 cents a pound. The January lot eased 0.1% to 21.98 cents a pound.
In Chicago soft red winter wheat, meanwhile, the spot December lot has managed to outperform the next-in March 2021 lot, but not yet to overhaul it.
The December contract in early deals added 0.7% to $6.11 ½ a bushel, while the March 2021 contract added 0.6% to $6.13 ½ a bushel, retaining the edge.
Still, the December discount of 2 cents has narrowed from 6.25 cents as of the end of last week, giving gains to investors long the front contract and short the second.
‘Along for the ride’
For corn, meanwhile, bear spreading has also been evident this week, but with the December lot retaining a discount of 8 cents or so,
Corn futures for December added 0.6% to $3.91 a bushel in early trading, with the March lot adding 0.4% to $3.99 a bushel.
The grain is, by the way, seen at the moment as something of a follower of the other two, which are gaining more support from dryness concerns in Russia (for wheat) and Brazil, for which the lack of rain is currently viewed as more concerning from a soybean perspective than a corn one.
(That might change if soybean sowing delays really impact on prospects for the safrinha corn crop sown after the soybean harvest early in the calendar year.)
“Corn seems to be along for the ride,” said Benson Quinn Commodities.
That said, with the US Department of Agriculture having last week revealed surprisingly low estimates for US corn stocks, “the corn balance sheet is looking tight especially with US farmer a reluctant seller”, Benson Quinn Commodities said.
Furthermore, the “market is looking for USDA to raise China imports and US exports” when it on Friday unveils its October Wasde report on world agricultural supply and demand.
The broker noted that investors expect the Wasde to show a 2020-21 US corn carryout of 2.113bn bushels, “far cry from the 3.323bn-bushel forecast” the USDA released in June.
But returning to Thursday, and the USDA will later release weekly US export sales data, expected for corn to come in at 700,000-1.50m tonnes, compared with 2.03m tonnes last time.
For soybeans, export sales are expected 1.50m-2.50m tonnes, compared with 2.59m tonnes the previous week.
For wheat, sales are expected to show between 250,000-600,000 tonnes, compared with 506,284 tonnes last time.
For cotton, investors will be hoping for something close to the decent figure of 233,800 running bales for upland fibre as released last time, although the latest run higher in prices may raise demand questions further ahead.
Countering that are concerns over Hurricane Delta, still expected to “grow in size as it approaches the [US] Gulf coast” around Louisiana, according to the National Hurricane Center.
Wind speeds over land have been reduced from last night, and are expected to drop be less than 40mph by the time Delta reaches Mississippi, although whether that is a good thing from a cotton perspective if it means slower storm progress…
December futures gained 0.5% to 678.92 cents a pound, setting a fresh seven-month high for a nearest-but-one contract.