AM markets: how will wheat futures answer 'key question'?
09:48 UK, 19th Jun 2017, by Mike Verdin

The "key question" for wheat investors is whether world prospects are better or worse than in 2015 at this time.

At least, according to Mike Zuzolo at Global Commodity Analytics, flagging not just the dryness in the northern US spring wheat belt, but moisture shortfalls in the likes of the European Union and parts of the Black Sea region too.

"The key question relating to the wheat is whether or not weather fundamentals are as potentially damaging to the crop as back in 2015 at this late stage," Mr Zuzolo said.

In 2015, wheat futures also saw a late-June rally, of some 26% over two weeks, although that time fuelled largely by excessive wetness slowing the US harvest.

'Astounding turnaround'

Chart factors were certainly moving in wheat's favour, he said, flagging that "some key technical support levels held in what appeared to be a very tough day in the wheat on Thursday.

"With those technicals holding, the speed at which the market turned around was astounding...and a hallmark of algo-related trading systems in my view."

Mr Zuzolo's conclusion was the combination of European and Black Sea dryness on their crops, coupled with the problems here [in the US] in both the spring and hard-red winter crops, I think that weather can help take the wheat higher.

However, with bigger world wheat stocks around now than two years ago, futures may not go "as high as in 2015", when Chicago soft red winter wheat futures, the world benchmark, peaked at $6.15 a bushel (on July 1).

'Most supportive fundamentals'

That said, overall, "we have the most supportive fundamentals from wheat for the corn market that we've had in two years in my view", Mr Zuzolo added.

Not that you might have thought that in early deals, when Chicago wheat for July dropped 0.7% to $4.62 a bushel as of 09:40 UK time (03:40 Chicago time), although still remaining comfortably above all its major moving averages.

The problem was not so much a shift negative in the weather outlook.

In fact, in the northern Plains, while some areas did receive rainfall over the weekend, it was not extensive, and there does not look much more precipitation on the horizon.

"The weekend has probably not changed the dry conditions either side of the Canada-US border," ie the North American spring wheat belt, according to Tobin Gorey at Commonwealth Bank of Australia.

"Forecasters are not looking for that to change in the next week or so either."

World worries

Meanwhile, "Europe's western grain regions are hot and that is rapidly depleting already limited soil moisture," Mr Gorey said.

"Ukraine is also facing similar issues in some regions. 

"Australia is on the radar here too," with "continued worries about dry conditions," and expectations of "still only expect a smattering of rain in the drier crop regions for at least another week or so".

East coast wheat futures for January on Sydney's ASX market rose 1.1% to a one-year high of Aus$270.00 a tonne overnight.

Winter vs spring

No, the problem for grain bulls was the amount of short-covering that showed up in regulatory data late on Friday, revealing that in the week to last Tuesday, hedge funds slashed their net short in futures and options in the main US-traded grains (including the soy complex) by 176,502 contracts.

That was the biggest shift bullish in positioning in grains in 14 months, and negative for prices in that it meant that a large amount of potential buying pressure, ie short closing, had already been spent.

In Chicago wheat, the net short fell by 23,277 contracts to a three-month low of 82,859 lots.

And with the US harvest ongoing too, bringing pressure from the boost to supplies, winter wheat futures found it hard going to find the buoyancy of Minneapolis spring wheat, which did actually manage some headway thanks to the ongoing US weather worries.

Minneapolis wheat for July added 0.2% to $6.45 a bushel, returning within an ace of last week's two-year highs.

'Negative structure'

But Chicago corn particularly struggled un the weight of the US regulatory data, which showed hedge funds slashing their net short in futures and options in the grain by more than 120,000 lots - the second biggest such swing bullish in positioning on data going back to 2006.

And that would appear a negative for prices, in terms of so much short-closing ammunition having already been fired.

"If the funds have a very manageable net short, which they do, and rains keep interrupting the drought in the Corn Belt, it would seem holding these values is going to be tough to do," Benson Quinn Commodities said.

"The structure of the market is a negative" going into this week.

'Large gaps in the rain shield'

Indeed, corn futures for July dropped 1.2% to $3.79 a bushel, despite a not-perfect weather outlook for the US Midwest.

In the five-day-outlook, "overall, things look fairly quiet  over the Midwest and the eastern Plains with no major events in terms of rainfall going on during this time frame," said

"The European GFS and Canadian models shows areas of light to moderate rain over 40 to 50% of the Midwest."

However, there are "large gaps in the rain shield over portions of Iowa Illinois Indiana and Missouri". 

That said, the six-to-10 day outlook has turned wetter in the western Midwest, MDA said, adding that "widespread shower activity in the Midwest and Delta will improve moisture for corn and soybeans".

'Better pricing opportunities ahead'

Soybeans themselves found it easier to tap into weather worries, in part thanks to the fact that hedge funds cut their net short position by a relatively low 15,000 lots in the latest week, leaving it at close to 80,000 contracts.

Water Street Solutions said: "Large old crop supplies in the US and the big South American crop will continue to weigh on price, but funds have begun covering their shorts and better pricing opportunities on the summer uncertainty are likely still ahead.

"If July looks warm/dry, look for price to be supported at least into the $9.80-10.00 a bushel area."

Palm rebounds

In fact, the July contract added 0.4% to $9.24 a bushel, also receiving further support from the larger-than-expected US industry crush data unveiled by Nopa last week.

This pegged the US soybean crush for last month at 149.246m bushels, the second busiest May on record, up from 139.134m bushels in April, and ahead of a market forecast of a 143.192m-bushel figure.

It was also a help that, elsewhere in the oilseeds complex, Kuala Lumpur palm oil futures added 0.6% to 2,498 ringgit a tonne, helped higher by a Reuters poll showing that traders believe Indonesian stocks the vegetable oil dropped last month, sapped by pre-Ramadan export demand.

Palm oil futures are now showing something of a recovery after last week hitting a 10-month low of 2,425 ringgit a tonne.

Cotton up

In New York, cotton managed a bounce too, after last week hitting a 2017 low.

The December contract this time added 0.7% to 69.86 cents a pound.

The US regulatory data were more helpful here, in showing that hedge funds closed more than 11,000 long bets in the latest week, cutting their net long position to a seven-month low.

Not that Ecom traders were all bullish on the fibre, saying that "with fundamentals showing a large percentage of the [US] crop has been planted and is starting to show signs of a possible high yield high volume crop, all of this news is starting to support the down trend ideas of the December futures market and making down side levels more possible every day".

Still, on a demand side, "market is expecting to look for interest around the 68 cents a pound area".