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Morning markets: Grain markets balance La Nina onset against demand shortfalls

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Is normal, somewhat downbeat, service being resumed in grain markets?


After a positive start to December, bears regained a grip in the last session, sending corn and wheat futures lower, and dragging down soybeans to a close well beneath their intraday high.


And they had the balance of play in early deals on Tuesday, the third trading day of the month, too, although their advantage hardly looked conclusive.


One factor going against them was the declaration by Australian weather forecasters saying that La Nina is no longer a probability but an actuality, declaring the weather pattern “established in [the] tropical Pacific”.


Sure, “climate models suggest this La Niña will be weak and short-lived, persisting until early southern [hemisphere] autumn 2018”, the bureau added.


But it is hardly helpful to world grains output (although can be a positive for eg palm oil output, in bringing rainy conditions to South East Asia).


‘Fears of quality degradation’


As the bureau noted itself, “La Niña typically brings above-average rainfall to eastern Australia during late spring and summer”, an eventuality actually occurring, and which has troubled wheat harvesting, ironically after a too-dry growing season.


As Agritel said, “rains are raising fears of quality degradation for the wheat remaining to harvest in the South East of Australia”.


Eastern Australia wheat futures added 0.9% to Aus$272.00 a tonne in Sydney overnight, for January delivery, although not all contracts closed higher, with the March lot for instance, down 2.5% at Aus$268.00 a tonne.


But a bigger worry for international markets is whether La Nina will bring, further, overly dry conditions in parts of South America which are already needy of rain, with Argentina being particularly in market focus.


“Worries are more about South America due to the hydric deficit in Brazil and Argentina suggesting that corn and soybean yields could drop in these regions,” Agritel said.


‘Hot and dry conditions’


“In Argentina, weather forecasters expect hot and dry conditions to persist into mid-December,” said Tobin Gorey at Commonwealth Bank of Australia.


“Soybean crops in several regions of Argentina are likely to be dry and stressed by that time.”


CHS Hedging, noting that Argentine soybean sowings were estimated at only 50% complex, said that “the newly-seeded beans are hungry for moisture, and farmers are trying to get the balance of their bean crop planted”.


Benson Quinn Commodities flagged a market focus on “subpar precipitation” in Argentina and southern Brazil”.


The broker added that “it is important to realise that these areas do not have a problem yet”, although adding that with Argentina the top exporter of soymeal “some risk premium in that market is warranted”.


Soymeal rally stalls


In fact, Chicago soymeal futures for January eased 0.3% to $336.60 a short tonnes of 09:05 UK time (03:05 Chicago time), on profit-taking after a 3.4% surge over the previous two sessions.


This undermined soybean futures themselves, which edged 0.25 cents lower to $9.98 ¼ a bushel for the January contract, which had gained 1.2% over the previous two sessions.


Also a worry in the soybean market is the level of demand.


OK, US export inspection data for last week, released on Monday, showed shipments at 1.80m tonnes, up from 1.72m tonnes the week before, and ahead of market expectations of 1.20m-1.50m tonnes.


But the pace of shipments so far this season, at 22.85m tonnes, remains well behind the 26.11m tonnes a year ago.


‘Need to see fresh demand’


And that is a worry, with 2017-18 now three months old, and the Brazilian harvest not far away, bringing the prospect of fresh competition.


“Weekly inspections are running 12% behind last year’s pace, with the US Department of Agriculture forecasting export demand to be up 2.5% year-on-year” over 2017-18, Benson Quinn Commodities said.


Indeed, there are expectations that the USDA will, in next week’s flagship Wasde report on world crop supply and demand, cut its forecast for US soybean exports this season.


“With market looking for USDA to lower exports in next week’s Wasde, soybeans will need to see fresh demand to resume upward momentum,” the broker said.


‘Notably down’


Demand is an issue for grains too, with Chicago corn futures sunk in the last session in part thanks to a US export figure for last week of 586,213 tonnes, well below trade estimates of 700,000-1.0m tonnes, and down some 50,000 tonnes week on week too.


Indeed, CBA’s Tobin Gorey said that “the most worrying sign for the [corn] market is the downward trend of this year’s US exports.


“Inspections were notably down from last week and are nearly half of last year’s figure,” with a “stronger US dollar” undermining demand.


“The hefty losses on Monday was a clear sign that the market is placing greater importance on US exports over any pick-up in domestic demand,” Mr Gorey said, adding that “we believe corn prices will need to fall further if the US are any chance of reaching this season’s export target”.


US vs Argentine prices


Still, there appears hope, again in part thanks to Argentina, with Benson Quinn Commodities reporting that prices of the South American country’s corn exports are “on the rise as weather concern and slack producer movement push prices higher.


“US fob corn should now be a discount to Argentina corn, opening the door to advance business done here through the winter.”


There are also a number of reports of farmers being unwilling to sell at current price levels.


Corn futures for March stood unchanged at $3.53 ½ a bushel.


‘Running to slowly’


That was better than wheat could do, in shedding 0.5% to $4.33 a bushel in Chicago for March delivery, again with demand for US supplies a worry in a world with ample inventories.


OK, US exports last week of 409,569 tonnes were within the range of trade estimates.


But shipments, at 12.75m tonnes so far this season, remain below the 13.66m tonnes a year ago.


“The USDA’s export inspections report continued to show, in our view, that US exports sales are running to slowly to meet current targets,” Mr Gorey said.


Benson Quinn Commodities downplayed weather worries for wheat, saying that could not “see anything in global weather that would raise any major concern”, despite flagging “excessively wet conditions in eastern Australia and dry conditions for the bulk of the US hard red winter wheat crop”.

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