While investors are waiting for the main event – next week’s huge crop report – vegetable oils are providing quite a side show.
Of course, what is really on traders’ mind is Monday’s US Department of Agriculture Wasde briefing on world crop supply and demand, and in particular what it will come up with in terms of corn area, and yield, after the historically dismal spring sowings season.
But if anxiety over the data kept grain prices tethered in early deals, vegetable oils had more of a free rein, gaining on worries over dryness in South East Asia and especially over strong ideas for Chinese imports.
These are being boosted by the implications of the country’s African swine fever epidemic, which in prompting a large decrease in its hog herd, means lower demand for meal for livestock rations.
That in turn has slowed the Chinese oilseeds crush – meaning lower domestic output of vegetable oils too.
‘Highest since 2012’
Against this backdrop, China is proposing to ditch import quotas on palm oil, rapeseed oil and soyoil.
(OK, imports are unlikely to come from the US for now, but there would be knock-on effects from increased purchases from other origins.)
Already China’s imports are proving strong.
“Edible vegetable oil imports by China during the month of July were a large 917,000 tonnes, the highest since December 2012,” noted Terry Reilly at Futures International.
In the January-to-July period, imports soared 50% to 4.9m tonnes.
Palm oil for October stood up 2.0% at 2,178 ringgit a tonne in Kuala Lumpur as of 09:45 UK time (03:45 Chicago time), earlier touching a three-month high of 2,183 ringgit a tonne.
In Chicago, soyoil for December stood 1.9% higher at 29.95 cents a pound, earlier topping 30 cents a pound for the first time in nearly four months, and continuing to boost its technical credentials by busting above another major moving average, this time the 200-day line, which it has not closed above in nigh on five months.
These gains were supported by an enthusiastic performance overnight by vegetable oils on China’s Dalian exchange.
There, soyoil for January, the best-traded contract, soared 2.4% to 6,068 yuan a tonne, earlier touching a contract high of 6,162 yuan a tonne, a 4.0% gain on the day – ie up the exchange maximum.
Palm oil for January settled up 2.0% at 4,740 yuan a tonne, having earlier touched 4,826 yuan a tonne, a gain of 3.8% (ie just short of limit up).
‘Large amount of fund short covering’
Back in Chicago, soyoil’s strength continued to provide support to soybeans themselves, which for November gained 0.6% to $8.88 ½ a bushel, continuing to outperform grains.
In part, that outperformance is seen as fuelled by observations of the position closing going on ahead of the Wasde, with combined open interest in Chicago corn, soybean and wheat futures down a further more than 17,000 lots in the last session.
Hedge funds have retained a substantial net short in soybeans, unlike in corn or wheat, meaning the position closing is more likely to mean short covering, putting upward pressure on prices.
Futures International’s Terry Reilly said that in the last session, “soybeans saw a large amount of fund short covering.
“The trade has been bearish leading up into this USDA August update.”
‘Risk premium added’
Furthermore, as Karl Setzer at AgriVisor noted, “we are starting to see a shift in the market’s interest when it comes to weather.
“Until now all attention has been on the weather impact on corn.
“Now that we are in August this attention will shift to soybeans, as this is when weather can be more influential on soybean development.
“As a result, we are starting to see risk premium added to the soy complex,” although he added that “given the near burdensome soybean reserves the US has this buying may be more limited than in recent years”.
ADM Investor Services flagged a National Weather Service 8-14 day outlook “which shows above-normal temperatures and below-normal precipitation for most of the Midwest from August 15-21.
“This would coincide with a majority of the growing region pod-setting stage.”
Grains, meanwhile, posted more marginal gains, with corn futures for December adding 0.2% to $4.19 ¼ a bushel.
CHS Hedging noted support to prices from a “drier forecast” for the Midwest, although flagged too “less-than-ideal [US corn] weekly export sales” revealed by the USDA on Thursday.
ADM Investor Services flagged concerns in particular about conditions in “the eastern Corn Belt states of Illinois, Indiana and Ohio as moisture stress is starting to develop with producers reporting crops that are rolling with shallow roots.
“The 14-day percent-of-normal precipitation continues to worsen across the eastern belt with many areas at 25% or less” of typical rainfall levels.
Chicago soft red winter wheat futures for September added 0.3% to $5.00 a bushel, keeping track with corn, for which wheat is trying to compete stronger than normally for US feed use.
US export sales of wheat for last week were decent, USDA data on Thursday showed.
Still, most comment in the wheat market in the last 24 hours has actually been over a decision by Saudi Arabia’s grain organisation, Sago, to expand its tolerance for insect damage to 0.5%, from zero.
Often, this might be seen as a bullish sign, showing an importer more desperate for wheat, but in this case the move looks bullish only for Black Sea values, with the lowered hurdle more easy for them to beat, and allowing their competitively-priced supplies in on tenders.
“Essentially, this allows Black Sea origination to participate,” said Benson Quinn Commodities, adding that “German/Baltic origination has had a stronghold” historically on Saudi Arabian business.
‘Germany especially could suffer’
ADM Investor Services said that “Russian wheat could soon be heading to Saudi Arabia after the grains agency relaxed their import rules on bug damage.
“Larger supplies and competitive prices have helped Russia expand across the Middle East and North African as they are the number one supplier to Egypt.
“The move could open the door for Russia to break into the Saudi market which was the second largest buyer of European Union wheat last season.
“Germany especially could suffer as they were the top EU nation that supplied wheat to Saudi Arabia.”
In the EU itself, Paris-based Agritel said that the Saudi move came “in a context of strong lobbying by Russians, and [Russian President Vladimir] Putin, to increase its influence in this region.
“This opens the door to a new and significant competitor for European origins.”