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Morning markets: Where should ag investors turn after USDA 'kicks the can'?


“Passing the buck”, “kicking the can down the road”, “a bust” – these were just some of the brickbats thrown at the latest Wasde report.


The US Department of Agriculture’s flagship briefing - termed more politely “uneventful” by CRM AgriCommodities – made few changes to supply and demand estimates for domestic crops, and not that many to international balance sheets either.


“There were basically no changes from last month, with world soybeans supplies a tad higher thanks to increased Brazilian and Argentina production estimates,” as Mike Mawdsley at First Choice Commodities put it.


This despite the potential boost to US ag exports from January’s phase one trade deal with China, and from Covid-19 – although separately, UDSA chief economist Robert Johansson did tell US politicians that Chinese purchases had been “shifted out further” due to shipping and port slowdowns.


As Benson Quinn Commodities put it, “USDA left corn, bean and wheat export demand forecasts unchanged making no comment to China phase one demand or impact of coronavirus to US and world demand”.


‘Weather, funds, the Dow, and emotions’

So where does that leave grain investors?


“We think all three ag markets [ie corn, soybeans and wheat] look cheap,” factoring in the known extent of coronavirus damage, said Richard Feltes at RJ O’Brien.


However, he added that he could “not rule out the possibility that the potential for expanding US quarantines may trigger further panic selling in equity/crude markets, pushing ag markets to new lows”.


“Traders since early March have been fooled by an apparent bottoming action that succumbs to another tidal wave of negative corona news.”


Mr Mawdsley said: “It is now back to demand, spring weather, funds, the Dow, and emotions.”


External market moves

Share markets exerted a bit of a positive influence, with the late rally in Wall Street stocks to 4.9% gains on the S&P 500, helped by hopes for US stimulus, spurring a solid start on European markets, where London’s FTSE 100 stood up 1.2% in early deals, and Frankfurt’s Dax up 1.9%.


That said, Asian shares fell overnight.


And oil markets, also in the spotlight after Friday-Monday price collapse, eased a touch after Saudi Aramco announced it would increase its oil production capacity by 1m barrels per day to 13m barrels per day.


Brent crude stood 2.3% down at $36.38 a barrel as of 09:50 UK time (04:50 Chicago time).


The haven of gold added 0.7% to $1,661 an ounce, while the dollar was 0.2% easier against a basket of currencies.


Palm oil revisions

And against that, mixed, backdrop agricultural commodity markets lacked a clear trend too, although buyers were just about outnumbering sellers overall to send the Bcom ag subindex 0.2% higher.


Palm oil - vulnerable to energy market moves thanks to its use largely in making biodiesel – eased 0.4% to 2,332 ringgit a tonne.


Also unhelpful was a downgrade by the USDA of 300,000 tonnes in its forecast for Chinese imports of the vegetable oil – one of the few changes it did make in the Wasde (and associated documents) attributed to Covid-19 – with smaller downgrades to figure for Bangladesh and Pakistan too.


On the other side of the balance sheet, it was Malaysia which took the export hit, with its 2019-20 shipments now pegged at 17.35m tonnes, a downgrade of 650,000 tonnes.


That said, with other revisions including an 800,000-tonne downgrade to the production estimate, to 19.0m tonnes, the USDA ended up lowering its forecast for Malaysia’s palm stocks at the close of the season – and by a sizeable 1.0m tonnes to an 18-year lwo of 1.22m tonnes.


‘Planting big acres’

In Chicago, corn was also lower too, by 0.3% at $3.76 ¼ a bushel for May, although remaining just above the 10-day moving average regained in the last session.


With focus turning to US sowings, Benson Quinn Commodities noted that “right now there is no world crop weather risk.


“US will start planting soon and planting big acres,” the broker said, advising investors to “be vigilant selling rallies.


“Given world economic fears, a sharp increase in planted acres does not bode well for next year’s balance sheets.”


‘Wet Midwest April weather?’

ADM Investor Services backed the idea of decent prospects for US spring plantings, saying that “US spring weather calls for normal weather across most of the Midwest”, although “above-normal rains could continue across the Delta, Ohio river valley and south east”.


Still, on the more supportive side, the broker added that a “lack of US farmer selling continues to offer support to basis and spreads. This offers support to futures”.


Meanwhile, Mr Feltes noted a comment from Commodity Weather Group which “underscored the importance of monitoring the prevailing trend toward cooler ocean temperatures near Alaska along with warmer ocean temperatures near Hawaii.


“A continuation of both would reinforce fears of a wet Midwest April pattern.”


He added that “US weather will increasingly set the daily tone in ag price discovery in weeks ahead - if and when corona-induced chaos subsides”.


Brazil currency bounce

Soybean futures for May, meanwhile, edged 0.3% to $8.78 ¾ a bushel, moving the opposite direction to corn as is often the case around this time of year.


Decent prospects for US corn sowings progress cut the chances of land being switched to soybeans, which have a slightly later planting window.


Furthermore, there was support from currency markets, given the 1.7% recovery on Tuesday in the real against the dollar – reversing a downward trend in the Brazilian currency to record lows which has accelerated soy (and corn) selling by the country’s farmers – even of crop which will not be harvested for more than a year.


Terry Reilly at Futures International said that “with little changes to go on” from the Wasde, “traders should move forward monitoring US export developments and currency fluctuations”.


The USDA has already made two announcements this week through its daily alerts system of large export sales of US soybeans, of 123,000 tonnes and 123,500 tonnes, both to “unknown”.


‘Spring rallies’

Meanwhile, Chicago soft red winter wheat futures for May stood up 0.2% at $5.23 ½ a bushel, in line with a seasonal trend.


Richard Feltes, noting that a “critical portion of the 2020 US winter wheat growing season lies ahead” flagged a seasonal trend for gains in Chicago wheat prices (actually of the July contract).


He noted “spring rallies of $0.50-1.30 a bushel in each of the last 10 years, including the $1.30-a-bushel rally last year.


“Traders may be reluctant to press wheat market lower from current levels given beginning of spring next Thursday.”


‘Unhelpful mix’

In New York, cotton futures for May edged 0.4% higher to 61.65 cents a pound, adding to their narrow gains of the last session, after a Wasde which cut the forecast for US cotton stocks at the close of 2019-20, but raised that for world inventories.


Tobin Gorey at Commonwealth Bank of Australia termed that “an unhelpful mix”, although added that “in our view the USDA’s numbers are an elaboration of what the cotton market has been anticipating and pricing”.


Louis Rose at Rose Commodity Group, noting the that the “USDA now has one of the lowest [world] consumption projections for the current marketing year” from a respected commentator, said that “overall, the data are bearish,


“But the domestic balance sheet, per our thinking, has potential to tighten” further, with the group seeing the forecast for 16.5m bales in US cotton exports this season as “too low”.

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