There’s a cartoon doing the round among grain brokers, illustrating what many investors believe is the primary cause of the April rally which has driven cotton futures to two-month highs, corn prices to a 2016 top, and soybeans to their most expensive in eight months.
It shows a hedge fund manager, representing the renewed speculator clamour for grains, saying “buy, buy” on grains, while a US Department of Agriculture official, representing supply and demand fundamentals, waves “bye, bye” to higher prices.
The two contrasting forces – of bullish interest in ags from speculators, and scepticism among fundamental investors flagging heavy world supplies of the likes of corn, cotton, soybeans and wheat– seemed in early deals on Wednesday to be in a bit better balance than of late.
‘Buying momentum will continue’
Not, it has to be said, is the wave of fund buying in commodities, including ags, necessarily over.
“I suspect ag buying momentum, largely on macro drivers, will continue short term,” said Richard Feltes at Chicago broker RJ O’Brien, noting the support to commodity prices from factors such as “improving Chinese economic indicators, a weaker dollar and a crude oil recovery”.
Commodities are also gaining support from “heightened concern” among equity investors that the recovery in share prices has overrun, given a “tepid” company results season and ideas that stocks are trading on “overextended” price-earnings ratios.
“Concern over an imminent equity market correction may be accelerating investor interest in diversifying into individual commodities showing even a glimmer of upside potential,” Mr Feltes said.
At CHS Hedging, Joe Lardy said that “I’m not naпve enough to say this [ag rally] is 100% spec driven, but it’s close”.
‘Past the worst’
Meanwhile, Australia & New Zealand Bank on Thursday issued a report saying that “we think the macro background is broadly supportive” to commodity markets.
“Activity in advanced countries remains on a gradually improving track… A pick-up in manufacturing activity in China’s housing sector also raises the prospect of a recovery in steel and iron ore demand in the short term.
“More broadly, signs that global economic activity is past the worst are emerging.”
Ag specifically, Benson Quinn Commodities said that “there has been new capital coming into grain and oilseed futures, which could continue into the end of the week
On soybeans, the flagship of the April rally, “funds continue to buy any and every offer in front of them”.
Open interest record
Indeed, this looks a big factor as to why open interest in soybean futures (ie the number of live contracts) has apparently hit a record high, another being potentially talk of an uptick in farmer sales into the market buoyancy.
“US producers have been good sellers of corn and soybeans with this rally,” said Terry Reilly at broker Futures International.
And the ag market flagship was indeed rising a touch less high in early deals on Thursday, when Chicago’s May contract was standing down 0.4% at $9.52 ј a bushel as of 09:00 UK tiem (03:00 Chicago time), aiming at its first negative session in a week.
‘Water causing beans to sprout’
Not, it has to be said, that talk on supply and demand factors is all negative for the oilseed, with growing worries over the impact of rains on Argentine production, and indeed export supplies.
“The widely-talked-about fundamental story is the excess rain in Argentina,” CHS Hedging’s Joe Lardy said, flagging talk the “almost 1m hectares are at risk” of not being harvested, thanks to rain damage which has, even if not flooding fields, caused quality damage.
“The water is causing beans to sprout or pop out of the pods.”
Futures International’s Terry Reilly noted that the “number of trucks dropping off soybeans this at Argentina ports is down sharply from this time last year and two years ago.
“Heavy rains have made it difficult for producers to deliver soybeans to processors and ports.”
‘Quickly losing soil moisture’
Still, with significant price gains already dialled into soybean futures, investors were reluctant in early deals to inject more.
The same went for corn futures too which have, besides winning from the broad appeal of commodities, gained some fundamental kudos from dry weather testing Brazil’s safrinha crop.
“Dry conditions in Brazil have been helpful for the final weeks of the first corn crop’s harvest, but second season corn, outside of Mato Grosso, is quickly losing soil moisture,” said Tobin Gorey at Commonwealth Bank of Australia.
Benson Quinn Commodities added: “It does look like rainfall will be limited for the next 10 day to two weeks, which would increase stress levels on portions of the second crop corn.”
Terry Reilly noted that late last night, after the close of Chicago markets, “consultant Agr Brazil reduced its estimate for the Brazil corn crop to 81.2m tonnes, down 3.87m tonnes”, and well below the 84.0m tonnes that the USDA has factored in.
Still, May corn futures, having already made significant headway, gave back some of the 6.2% they have gained this month as of last night’s close, easing back 0.4% to $3.72 a bushel.
‘Excellent growing conditions’
In fact, wheat, the laggard of late among Chicago’s big three contracts, fared best of all, gaining 0.3% to $4.63 a bushel for May delivery.
That allowed for some recovery in its premium over corn which, May basis, had plunged 22% so far this month to $0.88 a bushel as of the close of the last session.
Indeed, the revival did appear based more on factors such as hedge fund “bargain hunting”, or profit-taking on long corn-short wheat spreads, rather than fundamentals, with Nidera Australia issuing a reminder of the strong prospects for the world crop.
“Reports received at our office show excellent growing conditions and yield potential across the Ukraine, Russia, Romania, and the EU,” the merchant said.
“It is also expected the crop is slightly ahead of schedule,” suggesting an early harvest.
In the US, “recent concerns in the US over dryness across hard red winter producing regions have been largely alleviated by forecast timely rain”, Nidera Australia added.
Still, price movement later may also depend on the outcome of US export sales data for last week, expected for wheat to come in at up to 400,000 tonnes for the current marketing year, and 100,000-300,000 tonnes for 2016-17.
For corn, export sales for old crop are seen by the trade coming in at 900,000-1.1m tonnes, with 2016-17 orders put at 50,000-200,000 tonnes.
And for soybeans, the 2015-16 figure is forecast at 100,000-300,000 tonnes, and new crop at 250,000-200,000 tonnes.
US export sales data will also be key for cotton, which last time saw bumper orders.
“Sales and shipment figures put forth last week were higher than average market expectations with China emerging as a significant buyer,” said Louis Rose at the Rose Report.
“Such could be the case again,” given that China has yet to begin the latest round of sales from its huge reserves, meaning buyers must look elsewhere for supplies.
Still, investors were not in early deals banking on a large figure, driving best-traded July futures down 1.0% to 60.65 cents a pound in New York, back below their 100-day moving average.
Prices of the fibre at this time of year tend to a have a higher correlation with those of corn and soybeans, competitors for attention in US farmers’ spring sowings programmes.
If growers can get any crops planted, of course, in the sodden cotton belt.
“Conditions for cotton planting had reportedly improved this week, though significant rain is expected for parts of the Delta and southern Plains over the next few days,” CBA’s Tobin Gorey said.
(Source – http://www.agrimoney.com/marketreport/am-markets-ag-rally-stalls-as-investors-await-fund-signals–3577.html)