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Morning markets: Is the wheat market's spell of underperformance over?

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Wheat futures have been under the weather of late.

 

Corn and soybean futures have recovered from a round of Covid-19-spurred selling in late February, to stand essentially flat in Chicago for the past two weeks.

 

In fact, “corn prices are now back in the middle of their pre Covid-19 range, brushing the epidemic off,” said Tobin Gorey at Commonwealth Bank of Australia, flagging the role of end-user demand in supporting prices.

 

“Buyers are clearly no longer sitting on their hands.”

 

Fund positions

However, wheat futures closed the last session in Chicago down 8.1% for the past fortnight.

 

The divergence is in part down to fund positioning coming into the coronavirus outbreak, with managed money holding a net long position in Chicago soft red winter wheat futures and options as late as mid-February - and a large one too, at an 18-month high of 64,715 lots.

 

That made the contract an obvious target for selling on virus worries, far more so than corn and soybeans, in which speculators already held significant net short positions – now looking less comfortable given price resilience.

 

Wheat vs corn

Benson Quinn Commodities, for instance, noted that “funds are short in corn and soybeans, and upward trajectory is triggering some short covering.

 

“Wheat conversely struggles lower as funds liquidate longs in Chicago wheat,” besides too getting out of long wheat spreads against short bets in other grains, which had been popular earlier in the year.

 

ADM Investor Services noted in the last session that “managed funds liquidated short corn and long wheat positions”.

 

Karl Setzer at AgriVisor said that “funds continue to buy corn and soybeans on market dips which is giving then much needed support”.

 

Russian recovery

Fund positioning is supported by some fundamentals too.

 

Returning to the demand side, while there have been plenty of reports of end-users buying wheat at lower prices, Russia is seen as a revived competitor in export markets, helped by weakness in the rouble (a reflection of the dent from weaker energy markets to such an oil-dependent economy).

 

And with stocks left to export, there are expectations of a revival ahead in the pace of Russian shipments.

 

To repeat comments from the Russian Grain Union on Wednesday, in the last four months of 2019-20, which ends in June, “15.3m tonnes of grain and leguminous crops could be shipped abroad, including 9.3m tonnes of wheat.

 

“The average monthly rate of exports could rise to 3.5m-4m tonnes, including 2.2m-2.4m tonnes of wheat,” compared with February figures of 2.46m tonnes and 1.88m tonnes respectively.

 

US premium

By contrast, as Mr Gorey noted, “US soft red winter wheat and Chicago futures prices have been at substantial premium to other markets for quite some time.

 

“Whether the premium was somehow justified or not, we suspect the investor positioning - both outright long Chicago and spread long against Kansas City hard red winter wheat - is being reversed and so is undermining the premium.”

 

Weakening that premium has meant marked losses, given that values in other markets, including Russia, have been on the decline too.

 

Paris soft milling wheat futures are down 4.7% over the past two weeks.

 

‘Risk of drought’

Furthermore, on the supply side, there are initial hopes of a decent 2020 world wheat harvest.

 

“Seasonally, wheat futures tend to trend lower as the world new crop winter wheat crops grow out of winter dormancy,” said ADM Investor Services.

 

While there are worries over low winter wheat sowings in the US, and wetness setbacks to European Union crop prospects this year, the former Soviet Union outlook is so far strong, with a mild winter meaning low levels of frost damage.

 

Not that this is cause for complacency.

 

In Russia,“remember that after a winter without snow, the risk of drought is still present,” said Agritel.

 

Furthermore, while “to date, the condition of winter crops is considered satisfactory on the vast majority of surfaces… Rosselkhoznadzor, the Russian phytosanitary control service, has already announced that due to abnormally high temperatures, the number of crop pests and diseases has increased”.

 

‘Short covering getting close to complete’

What wheat bulls have been waiting for is signs that at least some of these trends have washed through.

 

And there was some hope on Thursday that funds may have undertaken a large part of the adjustment to fundamentals adjusted for factors such as the above, as well as coronavirus.

 

For corn and soybeans, “short covering may be getting close to complete without a shift in fundamental to bullish outlook”, said Benson Quinn Commodities, adding that “I think we need demand to do that”.

 

Certainly, Chicago soft red winter wheat futures for May managed a 0.3% gain to $5.19 ¾ a bushel as of 09:45 UK time (03:45 Chicago time), and is indeed showing signs of at least stabilising after setting a three-month low of $5.12 ½ a bushel last Friday.

 

That, for once, outperformed soybeans, which for May edged the minimum 0.25 cents higher to $9.07 ½ a bushel, besides corn, which for May shed 0.6% to $3.82 ¾ a bushel.

 

‘Looks for sales to perk up’

Of course, how prices end the day will depend largely on US export sales data for last week, due later, which are expected to come in at 350,000-600,000 tonnes for wheat for 2019-20, compared with 381,799 tonnes last time.

 

For corn, US export sales last week are expected at 700,000-1.20m tonnes, compared with 864,635 tonnes the previous week.

 

And for soybeans, they are forecast at 500,000-1.00m tonnes, showing improvement on the minimal 339,309 tonnes last time.

 

Trade “looks for sales to perk up”, said Benson Quinn Commodities, while noting that “US soybean sales have been disappointing over the past two weeks with no new demand from China as Brazil steps up with cheaper offers”.

 

China factor

China is, of course, a key issue beyond the pure numbers, with the extent to which the country has been buying any particular ag a key dynamic for investors, as a sign of how (and when and whether) it will fulfil commitments laid down in January’s phase one trade deal with the US.

 

There has been rumour of late of Chinese interest in plenty of US ags – corn, distillers grains (DDGs) and wheat included – but confirmation only of a(nother) purchase of sorghum.

 

“Rumours of Chinese interest in US commodities has provided underlying support to the market all week,” Mr Setzer said, underlining that “trade is hoping for much more business” beyond sorghum, “including wheat and corn”.

 

Cotton revival

Similar factors are being watched in the cotton market too, with ideas in fact that the particular decline in prices of the fibre – which as an industrial commodity, is more vulnerable than food contracts to economic unease – has attracted strong demand for US exports.

 

“We expect [US export sales] data for the week ending February 27 will prove to be relatively strong,” said Louis Rose at Rose Commodity Group.

 

Cotton futures for May added 1.1% to 63.64 cents a pound in early deals in New York (although are still down 8.6% for the past fortnight).

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