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Morning markets: Wheat futures recover. But key tests for revival await...

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Wheat futures face a particularly interesting day.

 

It is anyway a bit of a nail-biter, when prices are around contract lows in Chicago, and not too far away in Paris either.

 

Will a fresh contract low be set, and if so, will this bring a further step down in prices, as happened to corn last week?

 

And there are influences which could force investors’ hands a bit.

 

‘Export activity crucial’

 

One is the weekly export statistics from the US Department of Agriculture and European Commission.

 

In the case of the US, export sales are expected to come in at 330,000-550,000 tonnes, allowing some retreat from the strong figure of 781,739 tonnes reported last time (and which was boosted by a hefty order by Iraq).

 

As for guidance on the EU figure, exports last time showed up at 335,000 tonnes, taking the total to 7.01m tonnes for far in 2017-18, down 25% year on year.

 

As Paris-based Agritel noted, “export activity remains crucial for number of exporting countries to limit the size of ending stocks.

 

“The rebound of the euro versus the dollar is definitely a further challenge for European operators.”

 

‘Well positioned’

 

And this comes as the next big battle for wheat exporters awaits, with a tender by Gasc, the Egyptian grain authority.

 

This will be scrutinised for further ideas on the relative competitiveness of origins – not that there is much doubt that former Soviet Union wheat is setting the pace in price terms.

 

“For sure, Black Sea origins including Russian will be well positioned” to win trade from Gasc, Agritel said.

 

(Indeed, there are rumours around that Russia may even be winning business from Brazil, typically the fiefdom of Argentine exports [which have a tariff advantage, as well a geographical one], or failing that North America.)

 

Still, at least currency markets are working in favour of other origins, with the rouble bouncing 0.7% against the dollar in early deals, falling back below 60 roubles to $1, and undermining the competitive dynamics of Russian exports a touch.

 

And there are other factors that traders are looking out for too, such as an indication of just how uncompetitive grain from other origins is, if tendered.

 

Ergot furore

 

The “if tendered” proviso is particularly significant this time, given a further layer to apply to analysis of the Gasc tender, which comes against a revival of the controversy over a zero tolerance policy by Egypt over contamination of cargos with ergot.

 

Ergot is a widely held fungus, which is very difficult to eradicate entirely from supplies, meaning that importers typically allow a tolerance level of some fraction of a percent, perhaps 0.05% - while Egypt last year rejected some cargos over contamination, and was effectively blacklisted by merchants.

 

Will many merchants stay away from the latest tender, after a court in essence ordered the zero tolerance policy to be reinstated?

 

Prices rise

 

Chicago wheat futures for December edged 0.5% higher to $4.22 ¼ a bushel as of 10:30 UK time (04:30 Chicago time), taking to $0.06 a bushel their distance from a contract low.

 

Not that all are convinced that prices will remain higher, with Tobin Gorey at Commonwealth Bank of Australia saying that it was “in two minds about whether” to revise a forecast for prices of $4.25-4.50 a bushel.

 

“US basis against Europe has been restored in the past few days as prices have fallen,” he said

 

“In our view that means our forecast range probably needs to drop a notch or two.”

 

‘A bad sign’

 

Corn futures managed minimal gains, adding 0.1% to $3.38 ½ a bushel for December, although that at least took the contract a full 1.5 cents above the contract low set in the last session, which preceded a marginally higher close.

 

Tobin Gorey saw corn futures in the last session as making “serious attempt to recover Tuesday’s sharp losses”, a factor which “we think that is a bad sign” for prices.

 

Still, as perhaps a more bullish signal, open interest data overnight showed yet a further rise in the number of live contracts, to 1.71m lots, up 88,843 lots in a week – which, given a falling market, is seen as representing fresh fund short positions.

 

And with these perhaps getting close to record highs, will this deter funds from selling further?

 

‘Bullish fundamental event’

 

Terry Reilly at Futures International said that “a bullish fundamental event could be a short crop in Brazil if second corn plantings fall more than 10% from last year and/or unfavorable Brazil second corn weather develops”.

 

But that is a while for corn bulls to wait, with second crop corn not planted until early in the calendar year, typically on land vacated by the soybean harvest.

 

More immediately, US export sales data for corn later are expected at 1.20m-1.70m tonnes for this season, and up to 200,000 tonnes for next.

 

Last time, the figure came in at 2.36m tonnes for 2017-18, and 574,180 tonnes for next season.

 

South America weather watch

 

As for soybeans export sales, they are expected at 1.10m-1.50m tonnes for this season, compared with 1.16m tonnes last time.

 

Benson Quinn Commodities said that while “Brazilian weather concerns have been placated as wetter pattern has evolved for key central production region….Argentine weather bears watching” for soybean investors.

 

Temperatures in major Argentine growing regions have been “well above normal and recent dryness is delaying some soybean planting.

 

“Like earlier Brazilian concerns, it is too early in production cycle to bear more than watching but non-the-less is a talking point if rains forecast for next week don’t materialise.”

 

Palm up

 

Soybean futures got less support this time from soyoil, which managed only a further 0.01 cent rise to 34.76 cents a pound for December delivery, after decent gains in the last session, on industry data showing a large drop in US inventories of the vegetable oil, indicating strong demand.

 

Still, Kuala Lumpur palm oil took succour in soyoil’s gains of last time, and added 0.3% to 2,739 ringgit a tonne, February basis, looking for its first winning session in six for that contract.

 

Weakness of late has been spurred by a decline in Malaysia’s export performance, with shipments for the first half of this month down 8.2% month on month according to SGS, although rival cargo surveyor ITS puts the rate of decline at a more modest 4.3%.

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