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Morning markets: Muted start for ag markets, as US inflation ideas examined

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Is the honeymoon over already for funds’ rekindled love of ags?

 

The revival in agricultural commodity prices over the last month or so - to their highest levels since March, as measured by the Bcom ag subindex - has been attributed largely to buying by funds worried over inflation, with the likes of grains offering a hedge against price rises.

 

But there was some mixed news overnight for that bet from the Federal Reserve, the US central bank, whose announcement last month of a more relaxed view of inflation was viewed as a key support to fund ideas of buying into commodities.

 

Yes, the Fed underlined its new stance, saying that US interest rates would not rise until the country sees “maximum” employment and inflation hits 2%, while remaining on track to “moderately exceed” that target “for some time”.

 

However, as for how significant the inflation threat really is… Core personal consumption expenditures (PCE) inflation will stay below 2% anyway until 2023, according to according to the median forecast of Fed policymakers, as published on Wednesday.

 

Dollar reaction

As one indication of what investors thought of the overnight guidance, the dollar – whose fall to two-year lows heading into this month was fuelled by ideas of a weak monetary policy response to inflation – edged 0.1% higher against a basket of currencies in early deals.

 

(The greenback in fact gained 0.8% against the rouble, a poor signal for wheat futures.)

 

The Bcom commodities index shed 0.6%, remaining below its high on September 1 (which, satisfyingly for chart followers, featured a doji star formation, viewed as a sign of a market pausing for thought, and perhaps a change of direction.)

 

The Bcom ag subindex stood little changed, with some firmness in the oilseeds complex balancing out some softness elsewhere.

 

China order talk

So Chicago soybean futures for November added 0.1% to $10.12 ½ a bushel as of 10:00 UK time (04:00 Chicago time), heading into fresh two-year high territory, helped by further talk of Chinese purchases of the oilseed from the US, and elsewhere.

 

CHS Hedging overnighted noted that “market chatter suggests 8-20 cargos of US soybeans have been sold”.

Steve Freed at ADM Investor Services noted “word that China had bought 15-20 US soybean cargos”, a rumour heard by Benson Quinn Commodities too.

 

“There is also talk that China bought additional new crop cargos from Brazil.

 

“It all points to China needing more beans. How long this buying spree lasts is pure speculation, but it doesn’t feel like it is over yet.”

 

an eight-month high for a nearest-but-one contract.

 

Palm up

More on US export sales will be known later, of course, in weekly US Department of Agriculture data, expected for soybeans at 1.50m-2.80m tonnes, a hefty figure, if below the 3.16m tonnes the week before.

 

Still, supporting soybean bulls’ confidence early on was strength in the soyoil market, which added 0.7% to 35.16 cents a pound in Chicago for December delivery, setting an eight-month high for a nearest-but-one contract.

 

While the talk of higher Argentine soy export taxes that supported the complex the last session faded in this one – “most of the trade thinks this [rumour] is unfounded,” Terry Reilly at Futures International said – palm oil did its bit to support sentiment.

 

Kuala Lumpur’s December palm oil contract gained 2.9% to 2,993 ringgit a tonne, setting an eight-month high for a benchmark contract.

 

Chinese palm oil restocking ahead of next month’s Golden Week holiday was seen as supporting the move, chiming with improved Malaysian export data, as measured by cargo surveyors, and a 1.7% gain to 6,214 ringgit a tonne in the January contract on the Dalian exchange.

 

‘Yield reports are pretty good’

But corn found gains harder to come by, falling by 0.2% to $3.71 a bushel in Chicago for December.

 

(Less satisfyingly for chart investors, this followed an outside-day-upwards close to the last session, ie when the contract trades beyond the range of the previous session and ends higher, viewed as a positive signal. Soybeans had one too.)

 

The US harvest, and potential pressure on prices from the seasonal surge in supplies, remains in focus.

 

“Anecdotal yield reports are pretty good from I have seen,” said Benson Quinn Commodities, if adding that “the reports I have seen are from areas that did see good weather”.

 

This when the market has factored in some further yield loss from dryness and high winds.

 

According to ADM’s Steve Freed, it “feels like market is trading a US corn yield closer to 174-176 bushels per acre”, below the 178.5 bushels per acre the USDA is currently factoring in.

 

Area downgrade?

That said, John Walsh at Walsh Trading said that “it is also probable that the US will see further declines in production numbers in the reports to come,” with some ideas of a reduction in area too.

 

JP Morgan noted earlier in the week that Farm Services Agency planted acreage data released on Friday, shortly after the Wasde, for farmers enrolled in subsidy programmes “indicated that there may be some downside potential for US planted acreage, as the numbers are finalised in the months ahead”.

 

Mr Walsh also flagged “concerns over the Chinese corn crop” after losses thanks to inundations, worries that “could lend more support in days and weeks to come” to Chicago prices.

 

Dalian corn futures for January added a further 1.0% to 2,429 yuan a tonne on Thursday, a fresh five-year high for a nearest-but-one contract.

 

US corn export sales data later are expected at 800,000-1.90m tonnes, compared with 1.82m tonnes last time.

 

‘Drier-than-cared-for soils’

Wheat futures, meanwhile, outperformed those in their rival grain by adding 0.1% to $5.42 ½ a bushel in Chicago for December delivery.

 

They were in turn helped by December futures in Kansas City hard red winter wheat, the main US export type, adding 0.5% to $4.77 ½ a bushel, continuing its recent outperformance against its lower-protein Chicago peer.

 

Wheat market sentiment is being supported by higher prices in top exporter Russia, as confirmed by Wednesday’s tender by Egypt’s Gasc, amid ideas of tight holding by farmers of their strong 2020 crop, and with dryness marring early sowings in parts of the former Soviet Union.

 

“While planting of winter crops is starting to get underway in the Black Sea, they are going into drier-than-cared-for soils,” said Karl Setzer at AgriVisor.

 

‘Worst in the last 50 years’

For Ukraine, Agritel pointed to a Ukrainian Agrometeorological Centre report that “the country is currently experiencing the driest autumn for last 10 years.

 

“Water reserves in the upper layers of the soil (0-10 cm) are missing or nearly missing in 70-80% of Ukraine. In some regions, the meteorological centre specifies that the current conditions are the worst in the last 50 years of observations.”

 

Agritel added that “the drought has intensified since mid-July when last significant rainfall was observed,” yet “few improvements” in the rainfall situation are expected in the next two weeks.

 

Mr Freed noted “continued dryness” in parts of Europe and Argentina, as well as Russia, as a support for prices.

 

That said, “US wheat export prices remain a premium to Black Sea and east Europe”.

 

US wheat export sales data later are expected at 300,000-700,000 tonnes, compared with 484,419 tonnes last time.

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