Grains gain amid talk of long-awaited short-closing by funds

07.06.2017

Grain prices headed upwards, amid talk that funds were losing their nerve of their record net short position in the complex, at a time of growing weather threats in the US and elsewhere.

Spring wheat set the foundations for the grains rally, closing up 1.7% at $5.98 3/4  a bushel in Minneapolis for July delivery, its best close in nearly two years, after US officials overnight revealed a far-bigger-than-expected ratings drop in the domestic crop than had been expected.

The "good" or "excellent" rating dropped 7 points to 55%, matching the lowest for the time of year since 1988, in a decline reflecting spreading drought in the northern Plains.

In South Dakota, the reading of 25% was "the lowest spring wheat condition rating on record, lower even than the major drought years in 2006, 2002 and 1988", said Tregg Cronin at Halo Commodity Company.

Against the grain

However, the headway was also found among other grains.

Sure, oats soared 5.6% to $2.56 ј a bushel in Chicago for July. But then that might be expected, given that the northern US, and Canadian Prairies (which are also dogged with some dryness) are major growing regions.

But gainers also included Chicago corn, which saw a better-than-expected condition increase in the USDA data overnight, of 3 points to 68% of the US crop rated in good or excellent health.

That largely reflected warmer and drier weather for the eastern Corn Belt, where crops have been struggling against cold and excessively wet conditions.

"So the condition rating in corn is not supportive for corn prices," Darrell Holaday at Country Futures said .

Nonetheless, July corn futures gained 1.5% to close at $3.77 ј a bushel for July delivery.

'Funds a little spooked'

Mr Holaday said that "the strength has been some short-covering by funds, which are massively short" in grains, holding a record net short indeed of close to 500,000 lots in the major contracts, including the soy complex.

And the funds "are a little spooked by the dry conditions in northern areas and concerns that it will move south east" into more major corn-growing areas.

In fact, "weather models continue to indicate a significant weather pattern change next week that is actually very wet in the central and southern Plains and most of the Midwest.

Richard Feltes at RJ O'Brien said that in theory "weather leans negative for row crops and positive for hard red spring wheat" in price terms, with ideas of "incoming hot weekend temperatures and northern Plains rains early next week that will still leave portions of Dakotas, Montana and southern Canada dry"

'Fund positions at risk'

Still, talk of wetter Midwest weather ahead "is far enough out to prompt some weather buying".

It looked like answering the question of exactly what it would take to prompt funds into short-covering which looked brave to many investors, given that prices are already weak, and the potential for weather upsets to dent production hopes.

"Can we finally see some short covering?" Benson Quinn Commodities asked earlier in the session.

"Considering we are still in the early stages of the North American growing season, we would have to believe these fund positions remain at risk for a serious bout of short-covering on the first signs of inclement weather," said Halo Commodity Company's Tregg Cronin.

"Producers in the Northern Plains would posit the inclement weather is already here."

'Lots of problem areas'

Mr Cronin added that the northern Plains "are in dire need of moisture, and the western Corn Belt is about another week away from producers there really getting excited about how dry it's been since planting.

"While there is plenty of good corn out there, there are lots of problem areas for June 6, and it is very difficult to argue the US Department of Agriculture's 170.7 bushels-per-acre national trend line yield doesn't have a downward bias."

The strength slipped over into winter wheat too, in which the US harvest and the pressure of soaring supplies makes short bets look more sustainable, but which added 1.5% in Chicago to $4.35 ѕ a bushel for July, climbing back above its 50-day moving average.

"Strength in the spring wheat market is pulling our other wheat markets higher as continued dryness is reported in the Dakotas, Montana and parts of Canada," CHS Hedging said.

Other dryness threats

It should also be noted that dryness is an issue in other countries too, with MDA noting for instance, that "dryness will continue to build in central and eastern Ukraine and [Russia's] southern Central Region" this week.

And in the six-to-10- day outlook, "notable dryness will continue to stress wheat in central and eastern Ukraine, southern Central Region, and central North Caucasus," while "continued cool temperatures are maintaining slow wheat growth".

And the weather service also flagged that "dryness is becoming widespread across Australia wheat areas… particularly in Western Australia, South Australia, Queensland, and northern New South Wales.

"Showers are possible in eastern Queensland and eastern New South Wales this weekend and next week, but dry weather elsewhere will continue to increase dryness, stressing wheat germination."

Among smaller producers, South Africa's Western Cape, responsible for the vast majority of the country's wheat sowings, is grappling dryness too, as reported elsewhere on Agrimoney.com.

Such talk more than outweighed the negative of a fresh attempt by Egypt, the world's top wheat importer, to scare away trade, and put itself in line for a huge risk premium on prices, by potentially reinstating a zero tolerance policy on ergot contamination in imports.

(Eliminating even traces of ergot, a fungal residue which is more typically allowed at levels of up to 0.05%, is very difficult to achieve.)

Soy gains

Soybeans joined in the rally too, adding 0.3% to $9.27 Ѕ a bushel for July delivery, despite ideas that US sowings will prove even larger than had been thought, as producers prevented planting the oilseed earlier in the spring switch to the oilseed (which has a slightly later sowings window).

"Producers should be wary about lumping soybeans into the bullish discussion with wheat and corn, as acres are likely higher," and US soy crops are "weeks away from key development weather" when heat and dryness might be more deleterious, Mr Cronin said.

In fact, "private analysts estimate an additional 500,000 acres of beans will be planted this year as some corn acres remain delayed," CHS Hedging noted.

However, brokers also cited support from soybeans from ideas of stronger-than-expected US exports, given fears of Chinese order cancellations which sent prices tumbling last month, besides buying down to cross-contract short-covering.

Sugar star

The Brazilian real also did its bit by strengthening 0.6% against the dollar, so boosting the value in dollar terms of crops, such as soybeans, in which the South American country is a big noise.

Raw sugar managed to exploit this tailwind, settling up 0.7% at 13.98 cents a pound for July, after earlier touching 13.68 cents a pound, and coming 0.05 cents from the 15-month low set last week.

Interestingly, this gave the chart a pretty prefect, "doji star", where the opening and closing prices are the same, but the contract trades above and below that position during the day and which is often seen as a sign of a market reconsidering its direction.

Sucden Financial flagged that "funds still seem to be in sell mode" but flagged fresh long positions by commercial buyers too taking advantage of lower values.

"The gossip suggests that once the speculator community has added to the short to be transparently circa -90,000-100,000 contracts, the bottom will be close."

'Demand ideas remain weak'

However, arabica coffee, which in the last session rose despite a falling real, tumbled this time despite gains in the Brazilian currency.

July arabica beans dropped 2.3% to 125.55 cents a pound, in weakness attributed to harvest pressure, from the growing Brazilian harvest, and technical factors.

"Demand ideas remain weak as most roasters are still not buying much in world cash markets," added Jack Scoville at Price Futures.

That said, "many traders expect little overall increase in world production at this time as the growing conditions in many areas have not been that good".


agrimoney

Readers choice: TOP-5 articles of the month by UkrAgroConsult