The grain market rally has entered a new phase.
After, at one point on Tuesday, corn futures posted their biggest three-session gains in seven years, the clamour for buying fading, and profit-taking on long bets was more the order of the day.
“A ‘correction’ following the hefty rise over the previous couple of days was perhaps inevitable,” said Tobin Gorey at Commonwealth Bank of Australia.
“Some profit taking and producer selling was uncovered,” said ADM Investor Services, with the former looking the more serious trend, to judge by a fall in open interest, ie the number of live contracts, of 4,478 lots in the last session.
That was in marked contrast to Tuesday’s 54,916-lot increase.
‘Slightly drier forecast’
As to whether this market chapter is, in fact, the last one, and a retreat, there are some fundamental factors to tax bulls.
ADM Investor Services noted that a “slightly drier longer-term forecast has given the market reason to pause”, in suggesting some progress in farmers’ quest to catch-up on sowings.
That said, “producers still have 39.0m acres of corn to plant,” and the ideal seeding window has closed in many regions.
Steiner Consulting said that “advances in technology now allow farmers to cover a lot of ground in a short amount of time.
That said, “here we are at the end of May and some parts of the country have not planted even half of the corn they intended,” adding that in its opinion investors had “somewhat complacent when it comes to the slow pace of plantings” in not sending corn futures higher earlier.
Benson Quinn Commodities noted that “more demand destruction occurs as higher US prices drive global buyers to South America from here on up”.
There is also the negative factor of the renewed setback in US-China talks, a dynamic that has been causing a retreat in many other risk markets of late, while helping a recovery in bond prices.
Asian shares eased, with Hong Kong stocks falling by 0.4% and Shanghai and Tokyo ones by 0.3%, after the 0.7% drop overnight in Wall Street’s S&P 500 index.
Still, there are reasons to think at least that a grain price collapse is not imminent, and maybe that further price gains lie ahead.
“Debate over prevent plant acres, yield impact of late planting, and all manner of other growing season risks may need to be priced in before this phase of price discovery ends,” Benson Quinn Commodities said.
Terry Reilly at Futures International said: “We think December corn is headed to the $4.75-a-bushel area if the US losses 5m+ corn acres” from those proposed in the US Department of Agriculture’s March sowings intentions report.
The contract stood at $4.32 ½ a bushel as of 10:05 UK time (04:05 Chicago time), down 0.8% on the day, with the spot July lot also down 0.8%, at $4.15 ¼ a bushel.
At First Choice Commodities, Mike Mawdsley said that, from a technical perspective, a chart gap from $4.20-4.22 ½ a bushel in the December lot last week was something to watch.
“If $4.20 is broken and closed below, the high could very well be in, even if the news/outlook is bullish.”
Conversely, noting that “the high for a December contract in the last 5-6 years was $4.54 ¼ a bushel in July 2015,” he said that a “close over the $4.54 area could excite traders/funds to higher levels… maybe $5.00?”
‘Increased weather concern’
Wheat futures also weighed on rival grain corn, falling by 1.6% to $4.82 ¾ a bushel in Chicago for July delivery, on further profit-taking, and pressure from the prospect of the US harvest ahead.
(Although how good that harvest will be…)
Benson Quinn Commodities noted “some talk of increased concern of weather in Kazakhstan, Ukraine and Russia as drying conditions with warming temperatures may limit crop potential could be viewed as supportive.
“Warmer drier air moving into Western Europe could also hamper wheat production.
“June weather will decide the fate of wheat there.”
And this time, soybean futures followed the grains lower, falling by 0.8% to $8.65 ¼ a bushel.
Futures International’s Terry Reilly said that “if it remains wet over the next three weeks, soybeans could tear higher”.
However, he also advised investors to “keep in mind regardless of what happens, only the US corn balance sheet should see the blunt of a decline in stocks.
“Soybeans should still see a large 2019-20 carryout regardless of planting changes from March Intentions,” with stocks set to end this season at a record high.
ADM Investor Services noted that, with soybeans having a later seedings window, “soy producers still have a few weeks before serious yield drag will take hold”.
Weather concern – from heat
Soybeans are of course also exposed in particular to US-China tensions – as is cotton, which eased by 0.4% to 68.20 cents a pound in New York for July delivery.
Still, CBA’s Tobin Gorey noted that “the hot, dry weather in the US south east that caused concern about crops in the region remains for now.
“A little relief from the heat is likely next week but that might not break the hotter pattern.”
Louis Rose at Rose Commodity Group said that “the breakdown of US-China trade talks and the issuance of new tariffs on items imported from China remain a bearish force for our market.
“However, the focus has shifted somewhat to a US crop that is shaping up to be relatively late, despite the USDA’s most recent planting progress estimates.”