Soyoil started the week where it left off the last one, feeling support. But can it last?
A small rise in the dollar, with a US interest rate increase expected next week, didn’t make it so easy for dollar-denominated commodities to gain, in rendering them less affordable as exports.
But for soyoil, it is a matter of potentially reduced US imports which is helping the vegetable oil, besides the El Nino concerns which gave a boost to futures in rival vegetable oil palm oil, up 2.7% at 2,430 ringgit a tonne in Kuala Lumpur as of 09:15 UK time (03:15 Chicago time).
El Nino typically causes dryness in South East Asia, the major palm oil-producing region, and indeed analysts, including at the US Department of Agriculture, have been cutting forecasts for output in the likes of Indonesia.
February palm oil futures, also gaining support in turn from soyoil, are now within striking range of the level of 2,460 ringgit a tonne hit in September, on a benchmark contract basis, which was the highest since June last year.
Blenders vs producers
Back to soyoil, and there is increasing focus on the legislative element behind the vegetable oil’s rally – ie moves by the US to switch a biodiesel tax credit from blenders of the biofuel to producers of it.
“The market is pricing in legislation that would restructure the biodiesel incentive,” said Minneapolis-based Benson Quinn Commodities.
“In the past, the tax credit went to the blender of diesel fuel and was largely seen as subsidy to import soy and palm diesel,” the broker said.
“This legislation would give the credit to the domestic producer.”
In Chicago, Terry Reilly at Futures International said that the legislation, due to be presented to the House and Senate, “likely ends credits on imported biodiesel.
“If the credit makes the bill, this is a major step in bringing back the biodiesel credit after it won support from the Senate Finance Committee back in July.”
And this on top of the Environmental Protection Agency’s move a week ago to lift the level of biodiesel output that must be blended into US fuel and, according to Benson Quinn, “is expected to increase US biodiesel production by 200m-300m pounds”.
“If the tax credit legislation goes through as a producer credit, production of US biodiesel is expected to expand exponentially and could quickly tighten US soyoil balance sheet to unsustainable levels,” the broker said.
Terry Reilly restated a forecast made earlier that March soyoil “has the potential to test the 32.50-32.65 cents-a-pound area”.
In fact, the contract touched 32.54 cents a pound earlier, a gain of 0.9% and a four-month high, before easing back to 32.38 cents a pound a gain of 0.4%.
The better-traded January lot fell back from a four-month high of 32.37 cents a pound to stand at 32.14 cents a pound, also a gain of 0.2%.
And price movement looks set to remain a feature for now.
“The House and Senate are not expected to vote on biofuel tax credit legislation until just ahead of holiday recess on December 10, so look for volatile trade in week ahead as market gyrates with each rumour on whether legislation will pass or not,” Benson Quinn said.
‘Sceptical of the numbers’
The strength in soyoil and palm oil fed through into prices of canola, an oilseed heavy in oil rather than meal, and which edged 0.1% higher to Can$483.50 a tonne in Winnipeg for Mach delivery.
This despite the Statistics Canada data on Friday showing the Canadian canola crop at 17.2m tonnes, well ahead of the 16.4m tonnes that the trade had expected, besides the previous official estmate of 14.3m tonnes.
“The report suggested that late season rainfall had greatly boosted canola yields so Canadian output is thought to have increased 5% year on year,” said Tobin Gorey at Commonwealth Bank of Australia.
“Analysts and investors alike were shocked. This would be the second largest Canadian canola crop on record.
“And just last month Statistics Canada was predicting a 13% decline in this season’s production.”
The resilience in canola prices may in fact be “perhaps because the market is sceptical of the numbers”, he added.
However, back in Chicago, soybeans for January themselves eased 0.1% to $9.05 ¾ a bushel, feeling some pressure from concerns over a flood of Argentine supplies on to the market, after the government of president elect Mauricio Macro over the weekend put as a priority the ditching of policies propping up the peso.
“A lower peso, if that is the forex market response, would make Argentinean soybeans more competitive,” CBA’s Mr Gorey said.
“The market might not take kindly to this in early trading today.
“All the more so if a depreciation speeds Argentinean farmers’ placing more of their swollen inventories onto the market.”
‘Should get more concerned’
However, the market received some reassurance from a report from US Department of Agriculture staff in Buenos Aires which introduced only a modest increase in the forecast for Argentine soybeans this season.
The report said: “Local sources and reports indicate that such a substantial sell-off is unlikely at this point” by farmers of soybeans hoarded as a dollar-denominated hedge against a falling peso.
Furthermore, some observers continue to see problems in Brazil’s soybean harvest potential, after a sowings period marked by excessive rains in the south and too little precipitation further north.
“If the soybean trade is going to get more concerned about drier weather in centre west Brazil – as I think they should by the end of this month – then this weekend’s weather model shift to a drier bias should lay some groundwork on this,” said Mike Zuzolo at Global Commodity Analytics.
“It would continue to appear to me that their newly-planted bean crop is less than 100m tonnes,” he said, adding that “most analysts still see this number closer to 101m-102m tonnes and I think the market is starting to wonder”.
South American crops will be in the spotlight on Wednesday when the USDA unveils its Wasde crop report which will not include revisions to domestic production (December editions don’t).
“I am really focusing a lot of attention on the global numbers this month,” Mr Zuzolo said, in grains as well as soybeans
“I continue to see global wheat and corn ending stocks shrinking, given problems in India and Australia are more than offsetting potential smaller increased the USDA may throw at us for Canada.”
While December Wasde reports are “normally not very interesting to the market… this month could be different because of southern hemisphere weather and also because of the trade seems to be very much on the more price-negative side of the boat”.
Overloaded short position?
Indeed, on wheat, hedge funds hiked their net short in Chicago futures and options to more than 77,000 lots, an unusually high level.
(Indeed, it would have been a record until this spring, when it briefly rose above 100,000 lots.)
“Managed money has only pushed their position size past 80,000 on one occasion,” in the spring, Benson Quinn Commodities said.
“There is no fundamental reason for wheat to rally, but in the past similar instances of speculative selling have led to bottoming price action.
“I wouldn’t be shocked to see more short covering headed into Wednesday’s report.”
Indeed, Chicago wheat for March added 0.6% to $4.87 ¾ a bushel.
It also helped that the pace of deliveries against the expiring December contract continued to slow, to 101 lots on Friday night, well below the 2,343 lots a week before.
Corn vs wheat
Corn for March eased, however, by 0.6% to $3.79 ¼ a bushel, with hedge funds already having covered a stack of net short positions in the grain, and with some idea that a move in the contract’s discount to Chicago March wheat below $1 a bushel last week was not warranted.
The discount stood above $1.08 a bushel on Monday, well above Tuesday’s low of $0.94 ¼ a bushel, which was 0.5 cents from a contract low, March basis.
(Source – http://www.agrimoney.com/marketreport/am-markets-soyoil-palm-extend-rally.-wheat-joins-in-too–3411.html)