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Morning markets: Will contract expiry provoke grain market fireworks?

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Is Paris, the fashion capital of the world, setting the vogue in grain markets too?

 

One notable trend of the dying days of the Paris March soft wheat contract is the strength in prices, up 7.1% over the past week, to last night’s close, even beyond the 5.2% gain recorded by its Chicago peer.

 

And this against a currency headwind too, with the euro up 1.1% against the dollar week on week, cutting the affordability of euro-denominated assets.

 

‘Scarce availability’

The Paris outperformance has been seen as down to a good old short squeeze, against a backdrop of open interest which at 23,185 lots remains reasonably sizeable, if down 83,000 lots for this week.

 

However, Agritel flagged too the idea that a demand pull may be involved too, noting that some investors may wish “to take delivery in a context of scarce availability on the physical market”.

 

As a sign of the push for coverage, enhanced by a dire French 2020 harvest, “It should also be noted that the E200-per-tonne level has been crossed on the harvest 2021”.

 

Futures for September 2021 to May 2022 now stand above E200 a tonne – although, in line with the short squeeze/ scarce short-term availability argument, it is the March 2021 lot which has outperformed.

 

It has expanded by 76%, to E12.75 a tonne, its premium over the next-in May contract week on week.

 

‘Flush with cash’

And will this be a pattern repeated in US markets too, for which Friday brings first notice day, ie the start of the expiry process, when futures taken on commitments to receive or deliver physical crop?

 

Benson Quinn Commodities said that the “dynamics of delivery markets have changed” with the shift to tighter supply and demand fundamentals.

 

“When you had large surplus inventories markets always faded into delivery.” However, now there is “the belief we do not have large surplus deliverable inventories, or at least ones that are easily replaced.

 

“Joe Farmer is flush with cash after taking his Donnie dollars,” ie agriculture handouts from the Trump administration, “and combining it with prior sales, he likely does not need the money, it becomes difficult to originate new bushels”.

 

Data later

Will this provoke some at-the-death buying in Chicago March contracts?

 

There was little evidence in early deals on Thursday, when March wheat lots fell in line with May ones, March corn futures fell harder than May ones, while March soybean ones rose less markedly than May futures.

 

But then, before getting to the heat of the expiry process, there are the weekly US export sales data for consider, which are expected at 250,000-700,000 tonnes for wheat, compared with 399,121 tonnes last time, and 500,000-1.30m tonnes for corn, compared with 999,165 tonnes.

 

For soybeans, US export sales for last week are expected to come in at 200,000-800,000 tonnes, compared with 455,944 tonnes the previous week.

 

‘Rally could be over soon’

That said, there is some scope for disappointment, with concerns that, for soybeans, orders may now be being directed at Brazil, where supplies are – at last – being replenished by harvest.

 

“Some fear the soybean demand-led rally could be over soon,” said Steve Freed at ADM Investor Services.

 

He noted ideas too that “Argentina could rob US June-August corn export demand”.

 

For the wheat market, meanwhile, in which the US faces more rivals than corn or soybeans, the “recent rally in world vessel freight rates has reduced US export competitiveness to North Africa and Middle Eastern buyers”.

 

The Baltic dry shipping index, while down a touch this week, is up 25% for 2021 so far.

 

‘Domestic fun begins’

That said, for soybeans especially, the “market has become very aware we [the US] do not need to push more into export channels”, said Benson Quinn Commodities.

 

And if “we see a continued slow ethanol grind and a fall-off of the soybean crush due to a scarcity of soybean supplies,” meaning less meal and distillers’ grains (DDGs) produced to put into livestock feed, “that must keep corn in rations through the summer.

 

“The export wars are over, now the domestic fun begins.”

 

Dalian price gains

Mr Freed added that looking further ahead, “there is talk of China beginning to buy 2022 feed grain imports especially barley.

 

“China may be adding to feed imports due to increased piglet numbers.”

 

Certainly, Dalian corn futures showed firmness out to the furthest away, January 2022 lot, with the best-traded May contract closing up 1.0% at 2,818 yuan a tonne on Thursday.

 

Still, on the Dalian, as elsewhere, it is oilseeds which are attracting more focus, with soybean futures for May, while up a modest 0.2% at 5,986 yuan a tonne, managing a fresh record high for a nearest-but-one lot.

 

May soyoil soared 1.8% to 8,684 yuan a tonne, an eight-year closing high for a nearest-but-one lot, while palm oil for May added 1.5% to 7,548 yuan a tonne, while May soymeal edged 0.4% higher to 3,602 yuan a tonne.

 

‘Lower-than-expected yields’

Oilseeds outperformed elsewhere too, helped by worries over fresh rains to stall the Brazilian harvest, and with ideas that results are not proving too upbeat either.

 

“Many sources in Brazil are reporting lower than expected yields as harvest progresses, but also claim they are improving,” said Karl Setzer at AgriVisor.

 

“While a slow harvest does not mean crop size will be affected, we are hearing of lower-than-expected yields in some regions of the country, which could end up being a factor.”

 

And with rains provoking fresh worries over Indonesian and Malaysian palm oil output too, the vegetable oil supported the oilseeds complex by adding 3.6% to 3,784 ringgit a tonne in Kuala Lumpur for May.

 

“Soybean harvests in Brazil and palm oil in Malaysia continue to face difficulties, combined with sustained international demand,” Agritel said.

Argentine rains?

 

Back in Chicago, grains underperformed soybeans, as in the last session, indeed with some suspicion of short grain-long soybean spreading.

 

Corn futures for May eased by 0.3% to $5.55 ¼ a bushel.

 

At Commonwealth Bank of Australia, Tobin Gorey noted that for Argentina, “weather forecasters, for now, are expecting a little rain in the [dryness] affected region in the middle of next week.

 

“If that rain is realised then any escalation of worries will likely be delayed.”

 

Winterkill losses

Chicago wheat for May slipped a more modest 0.1% to $6.85 a bushel, with some debate remaining over the extent of the US winter crop damaged by last week’s freeze.

 

“Market chatter continues to mention potential winterkill in hard red winter wheat regions of the US,” Mr Gorey said.

 

“Virtually any crop losses are material given the market’s supply state.”

 

Mr Setzer noted “mixed production reports following recent cold snaps” in other parts of the northern hemisphere too.

 

In the US, “all interest is on the Texas crop where reports indicate up to 16m bushels of production may be totally lost”.

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