China sales help cotton to 3-year top. Dry Plains lift wheat

07.03.2017

Chinese demand, or US dryness, proved strong cards for agricultural commodity bulls to start the week.

Without the support of one or the other factor, well, the prevailing trend for prices was downwards, little helped by strength in the dollar, which gained 0.3% against a basket of currencies to recoup some of its losses of the last session.

(A firmer dollar cuts the competitiveness of dollar-denominated assets, such as many agricultural commodities.)

Chinese auctions

Still, hopes for demand for US cotton remain alive, after a promising start to China's season of auctions of the fibre from its huge state stockpiles.

All 30,200 tonnes of cotton offered at the event were sold, underlining the strong demand by China's mills for the lots – which, given they are thought to be of low quality, will typically require blending with better quality supplies from the likes of the US.

Furthermore, the sales price, at 15,476 yuan a tonne, was decent, equivalent to a little over 100 cents a pound.

Cotton futures on China's own Zhengzhou found support in the auctions, helping New York futures rise too, with the May contract there rising by 1.4% to 79.11 cents a pound – the best finish for a nearest-but-one contract in nearly three years.

'Strong sales should continue'

The risk is, of course, that US cotton begins to get priced out of the market nonetheless.

Still, Jack Scoville at Price Futures offered some reassurance, reminded of the strong results from the latest weekly data, which showed the US selling 481,400 running bales of upland cotton for 2016-17 - the biggest week for current-year sales since January 2015 – plus 62,900 running bales for next season on top.

"US export demand remains solid as the strongest weekly sales report of the marketing year was posted last week," Mr Scoville said.

"There is no reason for the strong sales not to continue as the US has cotton and is willing to sell.

"Other big competitors such as India remain mostly out of the market."

'Remains dry'

As for the US dryness factor, that referred to the dearth of rain on the US Plains, which is again beginning to attract attention, now that winter wheat crops are breaking dormancy, lifting their moisture requirement.

"The wheat market continues to be supported by the lack of rainfall in the Plains," said Darrell Holaday at broker Country Futures.

"The increased dryness is in the western one-third of Kansas and eastern Oklahoma," states in which 37% and 73% of area, respectively, are rated in drought by the US Department of Agriculture .

There is "no indication of a [weather] pattern change in the next couple of weeks", Mr Holaday said

While the latest GFS weather model run "is projecting a large amount of rain in the Midwest and South East in the next couple of weeks, the western Plains remains dry".

CHS Hedging said: "We're into March and the dryness across the winter wheat areas will garner talk each day as moisture will be needed."

'China was in the market'

Wheat futures certainly rose, adding 0.6% to $4.74 ѕ a bushel for Kansas City-traded hard red winter wheat, as grown in the US Plains.

But there was more to wheat's strength than that, with Chicago-traded soft red winter wheat, as grown in the Midwest, where moisture is not a concern, gaining more, settling up 1.2% at $4.58 Ѕ a bushel, just below its 200-day moving average.

The movements tallied with data showing that hedge funds extended their net short in Chicago wheat futures and options last week by more than investors had expected – raising scope for some short-covering.

A forecast by Abares of a drop in Australian wheat sowings for 2017-18 was also helpful to broader wheat prices, as were further signs of end-user demand.

CHS Hedging noted that "Turkey will tender this week for EU milling wheat.

"The Philippines will tender for feed wheat this week, and US cash traders were hinting that China was in the market for small amounts of US wheat."

Brazil safrinha headway

However, the strength in grain prices did not extend to corn, which finished down 0.6% at $3.78 Ѕ a bushel for May delivery, undermined by growing ideas for Brazil's safrinha, or second, corn crop, which is currently in the last stage of plantings.

Indeed, after the close, Agrural said that 75% of safrinha seedings had been completed, compared with 68% as of a year ago.

Meanwhile, Paul Georgy at US broker Allendale flagged that "timely rains in Brazil will keep second crop developing above normal".

Furthermore, there were some worries on the demand side too, to take some of the plaudits away from sold US export data for last week for corn, at 1.44m tonnes, down only marginally from the 1.47m tonnes the week before, and the 1.46m tonnes for the same week of 2016.

"Ethanol margins remain weak," CHS Hedging said, while Country Futures Darrell Holaday flagged the potential for the bird flu outbreak revealed in Tennessee over the weekend to have implications for feed demand, should it spread.

"It would be unusual to see the bird flu increase in intensity this time of year, but certainly not impossible," he said.

'Excessive rains'

Soybeans fared a little better, in easing just 0.1% to $10.37 ј a bushel for May delivery, with South American rains not seen as an unmitigated positive factor.

"Excessive rains are delaying harvest progress in South America," CHS Hedging said.

Allendale's Paul Georgy said that the Argentine weather forecast "is for heavy rains in the eastern half of the nation, causing some concern for crop later this week", given that inundations have been a periodic problem this growing season.

Furthermore, workers at Argentine's Rosario port initiated a 24-hour strike on Monday, boding ill for export prospects if the industrial action spreads.

'Drastic consumption fall?'

Among soft commodities, New York raw sugar was notably lower, shedding 1.9% to 19.15 cents a pound for May delivery, despite some upbeat price forecasts from Australia's official Abares bureau.

On the downside, there remain some concerns about demand, with Marex Spectron flagging that "the large tonnage of Centre South Brazilian sugar delivered" against the expiring March contract last week "raised the question whether Brazilian consumption may not have fallen, perhaps drastically".

Furthermore, the market is encountering some negative technical signals, with shorter-dated moving averages crossing down through longer-dated ones – a potential sell signal for funds which regulatory data showed were certainly in liquidation mode last week.

'Coffee on offer'

New York arabica coffee for May shed 1.3% to 141.45 cents a pound, extending its decline of the last session.

"There is coffee on offer in the market, so prices have not been real strong in arabica producing countries even with the very strong robusta prices," said Price Futures' Jack Scoville.

Trader I&M Smith flagged the dent to sentiment from "evidence of good stocks" in coffee consuming stocks, besides the lack of "any striking nearby negative weather forecasts for any of the main producer blocs.

There appears "presently no reason to fear problems for medium-to-longer term coffee supply".


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