Grain futures were “due for a break and got one” with their falls in the last session, said Mike Mawdsley at First Choice Commodities.
“The question is do we see more selling pressure this week?”
It is an issue that many investors were debating on Wednesday and the answer in early deals was, “yes, we do”, with futures in all three Chicago majors – corn, soybeans and wheat – showing sizeable declines.
The topic then is whether the declines herald a deeper correction - as being seen in the palm oil market, where Kuala Lumpur futures have plunged 17% from their early January highs - or even the end of the grains rally completely.
Palm oil futures, by the way, stood a further 1.4% lower at 3,222 ringgit a tonne for the benchmark April contract in late deals, on course for what would be a two-month closing low.
The latest decline followed cargo surveyor data on Malaysian exports which showed their pace of month-on-month decline remaining severe, albeit at least stabilising.
ITS pegged Malaysian palm oil shipments in the first 20 days of January at 607,900 tonnes, down 43.1% from those in the same period of last month. That compared with a pace of decline of 42.0% as of January 15.
AmSpec Agri put the January 20 figure at 41.1%, compared with a 41.8% pace of drop as of January 15.
Earlier, in key importer China, palm oil futures for May closed down 1.4% at 6,578 yuan a tonne on the Dalian exchange.
If it was some comfort for bulls, at least palm oil futures managed to find some support close to their 100-day moving average on a continuous chart, bouncing from allow of 3,160 ringgit a tonne touched earlier.
It is a theme which Richard Feltes at RJ O’Brien advises investors to look out for in Chicago too.
It is “important to watch for the penetration of key moving averages that would trigger a fund stampede to exits”, he said, adding that an “open interest plunge” was another potential trigger, in indicating bulls giving up on the rally and closing positions.
On the open interest point, corn, soybean and wheat market are all currently not ringing too many alarm bells.
Open interest in corn futures, while easing to just under 1.90m lots in the last session, remains up nearly 146,000 lots for 2021, and some 13,000 lots below Thursday’s high, exchange data show.
For soybean futures, the number of live contracts, at 942,791 lots as of Tuesday, was down 6,737 contracts from the 2021 high set in the previous session, and remains up 53,563 lots for this year.
And for Chicago soft red winter wheat, the last session saw an increase of 6,540 contracts in open interest to 441,273 lots, the highest of 2021.
For corn and wheat futures, the moving average point is not such a concern either, with March contracts in both, while down notably in early trading, finding support at 10-day moving averages.
Chicago corn futures for March stood 2.1% down at $5.14 ¾ a bushel as of 10:30 UK time (04:30 Chicago time), while soft red winter wheat futures for March shed 1.8% to $6.60 ¼ a bushel.
What may be making bulls more nervous is the fall in soybean futures, which for March stood down 2.2% at $13.55 a bushel, losing touch with their 10-day moving average, at just under $13.88 a bushel, and some other technical pointers too.
Besides the psychologically-important $14.00-a-bushel mark, these include a Fibonacci points at $13.68 a bushel or so, in terms of the 23.6% retracement of the rally since early December.
Furthermore for soybeans, the MACD, or moving average convergence divergence, indicator “is starting to fade – the market is losing momentum”, said Mr Mawdsley.
‘Not enough evidence of rationing’
What relation this bears to fundamental factors is another matter.
While, on the bearish side, there is a widespread appreciation of improved South American weather, to help soybean and corn production potential, “I haven’t seen enough evidence of demand rationing to believe the top is in”, said Benson Quinn Commodities.
Unlike the palm oil market, there is little solid evidence – yet – of the market having done enough to cut demand to fit supplies which may face further downgrades yet.
“Most still feel the Brazil soybean crop could be 3m-5m tonnes below the USDA’s forecast of 133m tonnes, and Argentina could be 2m-4m tonnes below the USDA’s 48m tonnes,” said Steve Freed at ADM Investor Services.
Corn stocks downgrade ahead?
For corn, meanwhile, Sean Lusk at Walsh Trading said that the USDA’s estimate last week of US stocks of the grain ending 2020-21 at 1.55bn bushels, while a figure lower than investors had forecast, was yet vulnerable to further downgrades.
“That number is being debated as prospects of future demand may require a drop here of 200m- 300m bushels in the months ahead,” Mr Lusk said.
“That would put corn ending stocks possibly revised down to a 1.2bn-bushel or 1.3-bn bushel carry.”
As to whether that is “ample enough to provide a cushion until South American corn harvests come June and July… keep in mind that 70% of Brazil’s secondary corn crop goes into the ground after their massive soybean crop is harvested”, and a return of dryness could yet shrink yield potential.
The inference looks to be that significant risk premium in prices is still warranted.
Battle for acres
In New York, cotton futures weakened this time too, shedding 0.4% to 80.77 cents a pound for March.
While there remain hopes for US cotton demand, and worries that the fibre will get muscled out of US spring planting programmes by corn and soybeans, this concern eases as prices of the rival row crops fall, eroding their relative appeal.
“If that competition is less intense, cotton prices will suffer accordingly,” said Tobin Gorey at Commonwealth Bank of Australia.