There are positive signs around for agricultural commodity bulls.
Many risk assets are in demand.
And that does not just mean shares, which posted a record high in the US overnight (and expected to open higher later), gained in Asia and rose in early deals in Europe too.
Goldman Sachs restated an “overweight” recommendation on commodities based on factors including success by Beijing in stimulating economic expansion in China, a huge user (and importer) of raw materials, support to oil prices from production curbs, and a more positive outlook for European Union growth.
“It’s not what’s happening on the supply side but rather what’s happening on the demand side,” the bank said.
‘America First’ fallout
And there’s the rub, at least for prices of US ags, given the cloud over the country’s exports caused by worries over what Donald Trump’s presidency will bring, with withdrawal from the Trans-Pacific Partnership deal already ordered, and Nafta and trade with the likes of China under the spotlight too.
The future of Nafta and trade with China, the top importer of soybeans among many other crops, look particularly important, as CME Group senior economist Erik Norland has noted.
“Uncertainty over US ag, heavily dependent on free trade and access to foreign markets, looms large as a potential negative under the [Trump] administration’s new ‘America First’ trade mantra,” said Richard Feltes at Chicago broker RJ O’Brien.
There are notable fears over the direction of biofuels policy too.
Benson Quinn Commodities flagged the threat to ag market sentiment from “presidential executive orders, with President Trump officially withdrawing the US from TTP trade pact and signing of the Keystone and Dakota pipelines in support of big oil versus biofuels”.
“Concerns about potential impacts on ag trade due to the new administration’s policies are complementing the negative tone,” the Minneapolis-based broker added, thinking in particular of the market for soybeans.
The jitters were noted as far as Australia, where Tobin Gorey, at Commonwealth Bank of Australia, thinking of corn, flagged that the “market has some nascent concerns.
“A deterioration in US-Mexico trade relations for one. And uncertainty around US renewable energy policies is another.”
Not that such considerations were the only ones in bear’s palette with, for example, Argentina’s flooded soybean (and less so, corn) fields drying out.
“Hot/dry conditions are benefitting the bulk of Argentina,” said Benson Quinn Commodities.
“While the conditions may not be the best, they do seem to be improving,” a factor which “should help stabilise Argentine production”.
That said, there are expectations of a return of rains next month and, as influential crop analyst Michael Cordonnier noted, the amount of acreage lost to floods is still highly debateable, with production estimates varying from 48m-53m tonnes.
Dr Cordonnier himself left his Argentine soybean harvest estimate at 51.0m tonnes.
He also kept his estimate for Brazilian soybean output unchanged at 103.0m tonnes, despite a few rain worries there, with the precipitation slowing soybean harvesting in the top producing state of Mato Grosso (with a knock-on effect on follow-on sowings of safrinha corn too).
“Brazilian weather looks wet for the next 10 days and could delay soybean harvest in Mato Grosso, this could also delay the planting of the safrinha crop,” said ADM Investor Services.
At Chicago broker Futures International, Terry Reilly said that “Mato Grosso will see an additional 2-4 inches [of rain] over the next five days”.
Still, “at least one analyst looks for harvesting progress to reach 25% by the end of January”.
Oilseed price falls
There was not enough worry around to prevent investors withdrawing a bit more risk premium from prices, with March soybean futures shedding 0.6% to $10.52 ¼ a bushel in Chicago as of 09:30 UK time (03:30 Chicago time), falling back below its 10-day moving average.
Soymeal futures just managed to stay above their 10-day moving average, despite shedding 0.6% to $3.41 a bushel.
(The crop woes in Argentina have been a particular boost to prices of soymeal, of which the South American country is the top exporter.)
Futures in soyoil (of which Argentina is also the top exporter, but which is more substitutable with other vegetable oils) dropped by 0.6% to 35.06 cents a pound for March delivery, falling below its 100-day moving average.
Futures in rival palm oil weighed by dropping 1.3% to 3,108 ringgit a tonne in Kuala Lumpur, undermined by data showing a retreat in the pace of Malaysian export growth to 9.3% month on month as of January 25, from 17.5% as of January 20.
The drop could be linked to the prospect of the New Year holidays which start later this week in China, a big buyer of palm oil, besides soybeans.
‘No shortage of feed grain’
Sticking with China, corn futures on the Dalian exchange fell by 1.1% to 1,552 yuan a tonne for May delivery, a drop which undermined somewhat the spur to values from talk of a return of state buying.
Market rumour has it that Sinograin units in China’s key north east corn-growing area may buy up to 10m tonnes of the grain after the New Year holiday, in a drive to support farmer incomes.
With the Argentine weather improvements and US trade worries too – besides Rabobank overnight restating a somewhat bearish view on corn prices – Chicago corn futures dropped 0.4% to $3.61 ¾ a bushel, also dropping below their 10-day moving average.
“There is still no shortage of feed grain in the global market,” CBA’s Tobin Gorey said.
“[Corn] prices will need to remain reasonably low, and lower relative to soybeans, to encourage US farmers to plant less corn in 2017.”
Movement in corn prices later may depend on US ethanol production data, and whether output can maintain its winning run.
“Ethanol production has been making new records over the last three weeks,” Benson Quinn Commodities said.
However, consumption has not appeared so robust, as “ethanol stocks have been building while ethanol producer margins have turned negative.
“It will be interesting to see if ethanol industry can pull out another record pace this week.”
‘A lot of wheat to move’
This could be key to the wheat market too, given that the grain is still attempting to find feed demand to erode huge supplies, and so tending to move closely with corn in price terms.
Chicago’s March wheat contract dropped 0.6% to $4.24 a bushel, keeping its premium near the $0.60-a-bushel mark around which it has orbited for four months.
“The US still has a lot of wheat to move and will only do so competitive prices,” CBAs Tobin Gorey said.
“In our view that precludes any material, sustained rise in prices,” even if this dynamic is being helped somewhat by gains in values in Russia, the top exporter, thanks to an appreciating rouble, which is in turn being supported by more expensive crude oil.
‘New price floor’
Among soft commodities, cotton lost ground – but nowhere near as much as in the last session, when futures dropped 1.4%, their worst performance in a month, and which dragged prices down from amongst their highest levels in five months.
“Our view of the cotton rally is that the trade was being squeezed as they tried to buy back some of their short position,” Mr Gorey said.
“Tuesday’s action would suggest that, at 75 cents a pound, investors finally became eager sellers, which sent prices and spreads tumbling.”
However, the fact that futures in the last session recovered from a low of 72.53 cents a pound to end more than 1 cent higher may “suggest cotton is potentially establishing a new floor”.
The March contract eased 0.1% to 73.48 cents a pound in New York.
(Source – http://www.agrimoney.com/marketreport/am-markets-grain-prices-extend-losses-amid-us-trade-fears–3943.html)