|Tuesdays are renowned in Chicago’s grain futures market for bringing turnarounds.
That is, reversing a strong price trend of the previous session.
But futures struggled for a decent reversal this time.
Monday’s poor performance by Chicago’s main contracts was followed by for corn and soybeans only modest gains, and in wheat further losses this time.
That said movement was not large – ahead of the slew of agricultural data expected later.
Hedge fund shorts
The prospect of such statistics – with the US Department of Agriculture unveiling its monthly Wasde world crop supply and demand report, and grain stocks and winter wheat sowings data, besides Brazil’s Conab unveiling a domestic crop briefing too – often leaves traders tinkering with their portfolios.
The surprise perhaps is that the prospect of the data has not spurred more significant short-covering rallies, given the extent of hedge funds’ bearish positioning on ags revealed by regulatory data released late on Friday to spur some short covering.
(Extreme positions, bullish or bearish, have a habit of spurring the closure of some of these holdings, and contrary price moves.)
“There’s a portion of the trade that is looking for a rally based on managed money being too extended on the short side,” said Benson Quinn Commodities.
“But this will likely not come to fruition until a bullish catalyst is noted.”
Lesson from history
Will the data later produce one?
There is in fact decent reason to expect that the winter wheat
sowings number that analysts expect, of 39.32m acres, may prove too large, with the low price of the grain potentially having spurred farmers to cut sowings by more than the 141,000 acres implied.
“Analysts expect only a modest decline, but we think there is a risk of a more significant decline,” said Tobin Gorey at Commonwealth Bank of Australia.
And, as Richard Feltes at Chicago broker RJ O’Brien noted, history shows there is a “strong tendency for the trade to overtestimate winter wheat area” compared with the USDA’s January estimates.
In fact, on data going back 27 years, the average trade guess has been above the actual number 23 times, by more than 500,000 acres on all but four of these occasions.
On 13 occasions, traders were too optimistic by more than 1.5m acres.
By contrast, they have been caught out as significantly pessimistic only once, in 2012, when they pegged the USDA figure 1m acres below where it actually came out.
Still, Chicago winter wheat for March fell by 0.2% to $4.68 a bushel, hurt in part by a weak technical performance in the last session, when it exhibited what is termed an “outside day, lower”.
That is, the contract traded beyond the price range of the previous session, and recorded a lower close – seen as a negative signal for values.
And overhanging all markets is the continued worrying signals coming out of China, the world’s second largest economy.
If it was good news that Shanghaishares closed higher on Tuesday, the extent of the gain was less impressive, at 0.2%, hardly much of a bounce from the 5% slump the session before.
Tokyo shares closed down 2.7%, with small declines seen in Seoul and Sydney, although London stocks staged a 0.5% bounce in early deals.
And in commodity markets, Brent crude extended its decline, dropping 2.3% to $30.83 a barrel, and at one point touching $30.43 a barrel, its lowest since April 2004.
A drop in oil prices is of course a negative sign for the likes of corn, used largely in making bioethanol, although Chicago corn futures for March did manage a 0.25-cent gain to $3.52 a bushel.
“The deterioration in the crude market has certainly been a bearish catalyst on the corn market as ethanol margins have been compressed,” said Benson Quinn Commodities.
While China also announced it had started an anti-dumping investigation into imports of US distillers’ grains (DDGs), the corn-based feed ingredient, that was little surprise, with the rumour having been rumoured for weeks.
Analysts expect the Wasde to keep the estimate for US corn stocks at the close of 2015-16 at 1.785bn bushels.
While the harvest is seen has having been overstated by 8m bushels, a weak export performance is worrying investors.
The 550,000 tonnes of US corn exports last week, as reported officially on Monday, “is just half of what the market needs to be doing right now” to meet the USDA;s current target for 2015-16, said Benson Quinn Commodities.
“Totals are running at 22.6% of the marketing year-end estimate versus the five-year average of 32.6%.”
Soybean futures managed modest price gains too, adding 0.2% for March delivery to stand at $8.63 a bushel.
There are expectations that the Wasde will cut the estimate for Brazil’s production of the oilseed, following dry weather in major central and northern producing areas.
That said, a downgrade would hardly be surprising, after the USDA bureau in Brasilia last week cut its forecast by 2m tonnes to 98m tonnes, while consultancy AgRural earlier this week cut its estimate by 1m tonnes to 98.7m tonnes.
Investors are expecting little change to the Wasde estimate for world soybean stocks of 82.6m tonnes, at the close of 2015-16, with the forecast for US inventories seen being upgraded by 3m bushels to 468m bushels.
Still, the US soybean stocks figure for December 1, revealed by the separate USDA grain inventory report, could well come in below investor expectations if history is a guide.
Investors have overestimated the actual USDA figure in 17 out of the last 27 years.
‘Pressure on vegetable oil markets’
Where worries in China continued to be felt more keenly was in thepalm oil and soyoil markets, with the country a major importer of edible oils.
“China equity markets continue to sag,” said Terry Reilly at Chicago-based broker Futures International, flagging “pressure on vegetable oil markets around the world”.
Furthermore, palm oil futures on China’s Dalian exchange dropped 1.1% to 4,662 renminbi per tonne for March, with soyoil for March settling down 0.9% at 5,550 renminbi per tonne.
Kuala Lumpur palm oil for March stood down 0.8% at 2,380 ringgit a tonne, dropping below its 40-day moving average on a continuous chart for the first time in nearly a month.
Chicago soyoil for March was 0.4% lower at 29.14 cents a pound.
‘Waning global demand’
Meanwhile, in New York, cotton futures for March edged 0.2% higher to 61.59 cents a pound, putting a little more distance between itself and the three month low of 61.15 cents a pound touched in the last session.
“Waning global demand remains an issue for cotton, and current concerns over the health of China’s economy only add to that,” with the country the top importer, Commonwealth Bank of Australia’s Tobin Gorey said.
“Investors are still heavily long cotton which leaves the market vulnerable to this type of bad news.”
The Wasde is expected to trim the forecast for US production of the fibre, by 50,000 bales to 12.98m bales, according to a Wall Street Journal survey.
But the export figure is seen being reduced too, by 70,000 bales to 9.93m bales.
The estimate for carryout stocks for 2015-16 is forecast seeing a small upgrade, of 80,000 bale to 3.08m bales.