“Wheat” is the word for grain bulls.
Futures in the grain – having earlier this week touched its lowest level in Chicago in nearly nine years, on a nearest-but-one contract basis – aimed on Friday at a third successive days of gains.
The May contract stood at $4.63 ½ a bushel as of 09:30 UK time (03:30 Chicago time), a gain of 0.8% on the day, and of nearly 5% from the near-nine-year low touched on Wednesday.
The rally is, ostensibly, about dryness in the southern US Plains, with a lack of rain also an issue in a few other countries, such as Morocco, a major importer, and India, which is turning from net exports to net imports.
“The US southern Plains are too dry for these unseasonably warm temperatures,” said Tobin Gorey at Commonwealth Bank of Australia.
“And weather forecasters do not expect much relief in the next week or so.”
(Some forecasts do see a chance for rains in the southern Plains early next week.)
US broker CHS Hedging said that “US weather forecasts will remain at the forefront as we move into the critical spring water needs for new crop wheat, particularly given the early season growth seen to this point”, with warm temperatures encouraging an early break from dormancy.
Actual drought area…
The dryness worries have spurred particular gains in prices of Kansas City-traded hard red winter wheat, as grown largely in the southern Plains, as opposed to Chicago soft red winter wheat, which is grown mainly in the Midwest.
Kansas City hard red winter wheat for May in the last session took its premium over its Chicago peer to $0.07 ½ a bushel, the highest since September, although that eased back to $0.05 ½ a bushel on Friday, with the Kansas City contract up a more modest 0.6% at $4.69 a bushel.
However, to put the weather concerns in perspective, it has to be said that actual dryness remains very limited in its scope, to judge by the official weekly US Department of Agriculture drought monitor, released on Thursday.
That did put an increase in the spread of drought in the southern Plains – but of just 0.2 points to 0.6% for the southern Plains.
OK, 21% of Oklahoma of was rated “abnormally dry”, up 20 points week on week, but none yet was rated actually as being in drought.
Still, what is giving the recovery in wheat futures extra vim are technical factors.
The Chicago May contract in the last session closed above its 10-day moving average for the first time in two weeks.
And in early deals on Friday, it rose well above its 20-day moving average, which it has not closed above in a month.
The early gains also took the contract above the $4.62-a-bushel level which Benson Quinn Commodities named as a key chart point, trade above which “would trigger another round of short covering”.
‘The trade is too short’
And, indeed, short covering was seen as a key fuel for recent gains, with hedge funds having, as of last week, held close to a record net short position in Chicago wheat futures and options, and a record in Kansas City.
“Both trader and investor positioning are likely to be short not the right position for weather worries obviously,” CBA’s Tobin Gorey said.
“Cutting those shorts can continue for a time yet.”
Benson Quinn Commodities said: “The nuts and bolts of it, the trade is too short the winter wheat markets,” and with many shorts put in near contract lows, and already under water.
Still, CHS Hedging urged a note of caution saying that while, for now, “drier weather risk was the big story and allowed for shorts to rush to the exits, we remain with the same old fundamental story in wheat of too much supply worldwide and too little demand”.
The extent of short positions is a matter not just for wheat investors, but broader agricultural commodity markets too, with hedge funds overall net short close to a record short, so-called “commitments of traders” data last Friday showed.
Will data later show the record for net short positioning has been broken? And is this appropriate given the waxing weather worries, and positive factors such as some signs of demand, and the recovery in crude oil prices?
Thursday’s price gains were “a good indication it [shorting] might have gotten too popular of a position which could encourage another couple of days of buying should even mildly bullish sentiment continue”, Benson Quinn Commodities said.
“The prospect for record fund short in Friday’s commitments of traders report will support trade.”
And certainly, corn and soybeans managed headway too, by 0.4% to $3.57 ¾ a bushel and by 0.6% to $8.69 a bushel respectively, for May delivery. May soybeans bounced back over their 10-day moving average.
And this despite apparently decent weather in South America.
“Overall, weather remains good in South America, harvest continues to roll in Brazil and yields continue to be better than expected,” said CHS Hedging, thinking in particular of soybeans.
For corn, there are concerns over the pace of US exports forcing the USDA, in next week’s monthly Wasde report, to cut its estimate for shipments in 2015-16.
Still, “the trade has already pegged a 50-100m bushel reduction in next Wednesday’s Wasde report”, Benson Quinn Commodities said.
‘Neutral, at best’
In New York, cotton for May edged higher too, by 0.2% to 56.50 cents a pound, helped by its fellow row crops, but amid some debate over the read-through from a recovery in US export data last week, as unveiled in statistics on Thursday.
These showed sales of upland cotton up 57% week on week at 173,900 running bales, with pima sales up 45% at 15,600 running bales.
Actual exports amounted to 222,000 running bales, combined.
“Net sales were nearly double the weekly pace required to meet the USDA’s export target” for 2015-16, said Louis Rose at the Rose Report.
That said, actual shipments “fell a bit short of the pace requirement”.
And given the extent of price falls, which would be expected to spur gains in sales, the data were overall “neutral, at best”, Mr Rose said.
(Source – http://www.agrimoney.com/marketreport/am-markets-grains-gain-again-amid-nerves-over-fund-shorts–3530.html)