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Morning markets: Questions on inflation trade overshadow ags


It looks like one of the main tailwinds to agricultural commodity prices, and indeed values of raw materials in general, is losing some of its strength.


“Some traders think the inflation story is starting to die down,” said Terry Reilly at Futures International.


“Concerns about inflation have been put to rest for the time being,” said CHS Hedging.


While inflation did this month knock Covid-19 off the top spot of fund managers’ list of “tail risk”, a Bank of America showed two weeks ago, traders may have got ahead of themselves in betting on this eventuality.


There has been a reminder of late of comments last month by Jay Powell, chair of the US Federal Reserve, that “inflation dynamics do change over time, but they don’t change on a dime”.


Data ahead

In a sign of the waning appeal of commodities, viewed as prime hedges against inflation, the Bcom commodities index last week saw its first closes below its 50-day moving average since October.


The Bcom ag subindex recorded its first finishes below its 50-day moving average since August.


And the declines continued on Monday, as the more cautious atmosphere heightened nerves ahead of a key event on Wednesday, in terms of a brace of key US Department of Agriculture reports.


One is on US farmers’ sowings intentions for 2020, with the key focus on planting prospects for the likes of corn, cotton, soybeans and spring wheat, and the second a quarterly briefing on US grain stocks as of March 1.


‘Better global weather’

The inventory report, in showing the reduction in stocks since the previous briefing, gives a rare insight into overall consumption dynamics, beyond those gained by reports on the likes of exports, milling and crushing.


And both have a history of causing major price swings, often prompting some pre-data retreat by investors anyway.


But especially this time, with commodities losing some of their polish, and reduced weather worries over crops in the likes of South America.


“Managed funds have reduced their net grain longs due to better global weather and before the USDA report,” said Steve Freed at ADM Investor Services.


“Some doubt they will buy grain futures until there is a good reason either tight US supplies or weather.”



Furthermore, the stakes on the inventory report have been raised by the thin levels the USDA is currently forecasting for the close of 2020-21 for corn and, especially, soybeans.


Ie, a relatively small move either way in Wednesday’s inventory figure, from levels that investors expect, could have a major impact in altering the tightness of the end-2020-21 stocks forecast.


Benson Quinn Commodities, terming the stocks report “the main event” on Wednesday, noted that forecasts for the soybean stocks figure as of March 1 were spread from 1.44bn-1.825bn bushels, with a consensus of 1.543bn bushels.


“Having a better handle on current stocks will be imperative,” the broker said, viewing that the figure “could be twice what we thought or a negative number near -140m bushels”.


‘Farmers will lowball intentions’

Meanwhile for corn, a consensus forecast that the USDA will show March 1 US inventories at 7.767 bn bushels, with a range of 7.573bn-7.98bn bushels, also has some bullish potential.


Such figure, if it confirmed, “with half of the crop year done, and large US exports expected for the second part of the crop year, may suggest USDA is underestimating the carryout for 2020-21 by 100m-150m bushels”, said Terry Reilly at Futures International.


(The current USDA forecast for close-2010-21 US corn stocks is 1.502bn bushels.)


By contrast, there is some idea that even if the sowings report (which is based on a farmer survey) does produce bullish, ie low, acreage numbers, they will be treated with suspicion.


“Some in the trade suspect farmers will lowball corn, soybean [planting] intentions on Wednesday’s crop report,” said Richard Feltes at RJ O’Brien.


Corn vs wheat

Whatever, in early deals on Monday, bears just about held the balance of play in grains, when the Chicago May corn contract stood down 0.7% at $5.48 ½ a bushel, although staying above its 40-day and 50-day moving averages.


Wheat did fare better, in adding to $6.15 ¾ a bushel for May, to reverse some of its underperformance of late, which in the last session saw its premium over corn erode to as far as $0.60 a bushel.


This down from $2.14 a bushel in October.


The extent of the narrowing in the gap is spurring ideas of some buyers substituting corn with wheat, with Mr Feltes noting the potential for “more June, July, August wheat feeding”.


Soyoil lead

Soybean futures for May eased 0.25 cents to $14.00 ¼ a bushel, holding – just – above their 40-day moving average, as well as the psychologically important $14.00-a-bushel mark.


Key for bolstering soy market sentiment was hope that soyoil futures have stabilised, after back-to-back limit-down closes for the first time since 2008.


The last time soyoil closed limit down at all was a decade ago, Mr Reilly noted, flagging that “since 1961, there have 11 trading days nearby soyoil [futures] closed down 250 points”.


‘Due for a correction’

As to what has caused the soyoil slide, Brent crude has certainly not helped, in reversing some of its rally, so undermining hopes for values of ags such as vegetable oils used in making biofuels.


Meanwhile, Benson Quinn Commodities noted that “talk of Argentine bean oil working into the US may have started the ball rolling downhill”.


However, the broker added that “few believe it could actually pencil at current values”, in terms of US impots from Argentina, seeing simple profit-taking as more of a driver.


“Most global vegoil values had run hard and fast to the upside, so some large and volatile corrective price action is warranted.”


Mike Mawdsley said that “new multi-year highs were made mid-week” for soyoil futures.


“Thus, soyoil was due for a correction - and got one.”


In Kuala Lumpur, rival vegoil palm oil gained 0.7% to 3,719 ringgit a tonne. This despite a tumble of 2.4% to 7,510 yuan a tonne in May palm oil futures on the Dalian exchange in key importer China.

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