Morning markets: China drags on soybeans. Grains fall more

by Agrimoney.com

It's a big few days for agricultural commodity data.

Today will bring the US Department of Agriculture's monthly Wasde crop report, giving fresh supply and demand estimates for world grains, cotton and oilseeds and domestic meat and dairy.

On Wednesday, Conab, the Brazilian crop bureau, releases its latest estimates for domestic grains and oilseed crops - whose fate is being closely watched given setbacks in harvesting in some areas, besides the typical logistical hiccups, are viewed as part of the strength behind US soybean prices.

"With South America's persistent production issues as well as harvest delays, it shifts the focus to US soybeans in this period of time when the focus should be on South American soybeans," Vanessa Tan at Phillip Futures said.

Palm oil data

The first round of data has already been.

Actually, for markets as a whole there were some key data over the weekend in terms of Chinese trade data, broadly viewed as negative in showing exports down 18.1%, year on year, last month in dollar terms.

This apparent evidence of a not overly healthy Chinese economy sent shares down 2.9% in Shanghai, with Hong Kong stocks down 1.8% and Tokyo shares closing down 1.0%.

But for palm oil investors specifically, there has already been some statistics with the Malaysia Palm Oil Board estimating domestic inventories of the vegetable oil falling to 1.66m tonnes last month, down 14.3% from January.

That was viewed as a bullish figure, in coming in below the 1.76m tonnes that investors had expected, and with the data showing in particularly a poor showing for production, underlying concerns over prospects for supplies given the dry weather testing plantations in Indonesia and Malaysia.

Palm oil for May stood up 0.7% at 2,905 ringgit a tonne as of 09:30 UK time (04:30 Chicago time, remember clocks went forward in the US at the weekend), having earlier hit 2,910 ringgit a tonne for the first time since September 2012.

Dalian soybeans tumble

That was some help to prices of rival vegetable oil soyoil, which gained 0.4% to 44.51 cents a pound in Chicago for May delivery.

This was, technically, unexpected, given that the contract in the last session recorded an outside day (ie trading beyond the range of the previous session) but closed lower, viewed as a negative chart signal.

Still, reversal was a bit of a theme, with soybeans themselves for May standing down 0.5% at $14.50 ½ a bushel, little helped by sharp drop in prices in China, the top importing country, where Dalian soybeans for September, the best-traded contract, settled down 2.3% at 4,367 remninbi a tonne.

China imported 4.81m tonnes of soybeans last month, down 18.6% month on month, the Chinese trade data showed.

Indeed, Chicago markets have been alive with rumours of Chinese crushers having trouble swallowing what soybeans they have already ordered, with talk of backlogs at pots.

And this when, in Chicago, speculators have built up a large net long position in soybean futures and options already, of 208,000 contracts, the biggest since September 2012, and offering plenty of scope for profit-taking at prices amongst their highest since July.

'Diminishing supplies'

The temptation was further enhanced by the prospect later of the Wasde, expected to show a small downgrade in the US stocks estimate - but with plenty of uncertainty about how the balance sheet will be made up, and at a crucial time given the tightness of US supplies.

Indeed, one factor mitigating against a tumble in prices is a reluctance among US producers to sell at these elevated prices, unlike in corn.

"Producers continue to offer diminishing supplies into this rally," Brian Henry at Benson Quinn Commodities said.

"Despite being overbought, old crop soybean futures continue to gain support from the prospects of tighter old crop supplies, while the technical structure of the market remains supportive."

CHS Hedging noted, as another supportive factor, that "it still doesn't pencil to bring soybeans or meal into the US from South America, keeping our balance sheets tight".

Phillip Futures' Vanessa Tan said that unless rival exporting countries in South America were able to "get supplies to the overseas market effectively, we remain bullish on US soybeans as the focus on US soybeans will continue tapping on the tightening US supplies".

'Weakening basis levels'

On grains, there is less reason for thinking of worryingly tight supplies, in the US or elsewhere.

Not that sentiment is bad, as shown by the increase by hedge funds in their net long in Chicago corn futures and options by 71,000 contracts in a week to 158,000 lots, the highest in nearly a year.

"We expect prices to continue being supported by robust export demand and ongoing turmoil in the Black Sea region as it does not seem like the tensions between Ukraine and Russia will be ending anytime soon," Ms Tan said.

Still, Luke Mathews at Commonwealth Bank of Australia flagged talk that "farmer selling has reportedly increased sharply over the past week in response to the firmer prices on offer.

"This, in turn, has contributed to weakening US basis levels. "

And, with the uncertainty prompted by the Wasde later, Chicago corn for May eased 1.4% to $4.82 ¼ a bushel.

'Back in the market'

Wheat posted a similar decline, dropping 1.0% to $6.47 ¾ a bushel in Chicago for May delivery, undermined by Wasde uncertainty, and no apparent rise in Ukraine export uncertainties.

Indeed, there is talk now that farmers, rather than holding off sales with the hryvnia weakening, may be accelerating them to exploit what decline there has been and raise cash for spring plantings.

"Farmers are back in the market and are currently selling their production before the sowing period starts," Agritel said.

As an extra pressure, Canada has acted to boost its grain exports, demand that Canadian Pacific Railway and Canadian National Railway increase the volumes carried each week over a period of four weeks to move 1m tonnes of grain each week, or face a penalties of up to Can$100,000 a day.

Indeed, oats, for which Canada's logistical problems have caused a particular rise in prices, given US needs for imports, extended a decline on Monday, dropping 5.8% to $4.20 ½ a bushel for May.

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Ukraine woes supercharge hedge fund buying in ags

by Agrimoney.com

The Ukraine crisis, coupled with concerns over Brazilian dryness and an outbreak of porcine epidemic diahorrea virus, prompted hedge funds to make their second-biggest ever bullish shift in agricultural commodity bets.

Managed money, a proxy for speculators, raised by more than 158,000 contracts its net long position in futures and options in the main 13 US-traded agricultural commodities in the week to last Tuesday, according to data from the Commodity Futures Trading Commission (CFTC) regulator.

The increase in the net long - the extent to which long positions, which benefit when prices rise, outnumber short bets, which profit when values fall – was the second biggest on records going back to 2006, exceeded only by a week in July 2010.

And it came as Russia's invasion of Crimea added to the concerns over Brazilian dryness, US cold and a North American outbreak of porcine epidemic diahorrea virus (PEDv) which had already driven a marked recovery in sentiment on agricultural commodity prices.

"Managed money's rapid return to agri commodity markets continued," Rabobank said.

Clamour for corn

Indeed, hedge funds - which entered 2014 amid their longest unbroken stretch of bearish positioning in agricultural commodities on record – have now rebuilt a net long of nearly 900,000 contracts, the highest in 18 months.

Speculators' net longs in grains and oilseeds, Mar 4, (change on week)

Chicago soybeans: 208,493, (+5,497)

Chicago corn: 155,122, (+70,606)

Chicago soymeal: 70,132, (-3,456)

Kansas wheat: 28,19, (+4,772)

Chicago soyoil: -3,983, (+13,784)

Chicago wheat: -6,040, (+14,271)

Sources: Agrimoney.com, CFTC

The swing in the latest week was driven by a jump of more than 70,000 lots in the net long position in Chicago corn futures and options, the second-biggest bullish switch on record, spurred by fears for export supplies from Ukraine, the third biggest exporter of the grain.

US corn export sales have already exceeded expectations, reaching 93% of the total the US Department of Agriculture expects for the whole of 2013-14, with half the season left.

Many investors forecast that the USDA will, later on Monday in its much-watched monthly Wasde crop report, raise its estimate for US corn shipments this season.

'Robust job on pricing in risk'

However, managed money also cut its net short position in Chicago wheat futures and options, by more than 14,000 contracts, with Ukraine a major shipper of this grain too.

Speculators' net longs in New York softs, Mar 4, (change on week)

Cocoa: 80,376, (+1,063)

Raw sugar: 64,740, (+42,922)

Cotton: 54,337, (+1,135)

Arabica coffee: 27,872, (+6)

Sources: Agrimoney.com, CFTC

"Funds have moved to limit short exposure, which is understandable given that a [Crimea] resolution isn't around the corner and the implications of the Black Sea region suddenly unable to supply wheat to the world," Jonathan Watters at Benson Quinn Commodities said.

In fact, there has been little disruption to shipments from the Crimea turmoil, although buyers are believed to be shifting demand elsewhere in case of setbacks ahead.

"Unrest in the Ukraine has seen this market do a very robust job on pricing in risk and accounting for the potential increase in both intra-European Union demand for wheat along with international demand," said Jaime Nolan Miralles at FCStone, referring to price gains in particular in Paris, where futures hit a 10-month high on Friday.

"However, it must be noted that despite the fractured nature of Ukraine/Russia, trade flow until now has not been impacted."

'More questions being asked'

Raw sugar futures and options also attracted a surge in buying interest, on concerns for the impact of Brazilian dryness on cane, with the managed money net long rising by nearly 43,000 contracts, to some 65,000 lots.

Speculators' net longs in Chicago livestock, Mar 4, (change on week)

Live cattle: 132,073, (+3,839)

Lean hogs: 77,077, (+7,435)
Feeder cattle: 11,564, (-4)
Sources: Agrimoney.com, CFTC

However, the extent of the increase, which was more than some investors had expected, has begun to raise questions of whether hedge funds will have appetite to raise further their net long.

"The increase, and rain arriving in Centre South Brazil sugar areas over the weekend, was enough to prompt some early selling this morning on the opening in New York," said Sucden Financial, as raw sugar futures for May eased 1.0% to 17.83 cents a pound in early deals.

At Commonwealth Bank of Australia, Luke Mathews said that "more questions are being asked regarding the sustainability of the recent rally in prices.

"Speculative investors have now built a net long position, a significant contrast to the imposing net short position which had been accumulated a few months ago."

'Massive drop'

In arabica coffee, also the subject of concerns over Brazil's dryness, the managed money net long rose by just 6 contracts to 27,872, if still setting a fresh high since May 2011.

That increase was less than many investors had expected, helping arabica coffee futures for May rise 1.7% to 200.20 cents a pound in New York.

Still, Chicago lean hog futures performed best of any of the major agricultural commodities in the week in question, soaring 11%, as concerns over the North American outbreak of porcine epidemic diahorrea virus (PEDv) will curtail pork supplies.

"The trade is extremely concerned that the slaughter will plummet due to the increased cases of PEDv reported in December through February," US Commodities said, noting that "futures now have a huge premium" to hog cash prices.

Indeed, the broker urged caution over lean hog futures saying that "the trade is now dialling in summer production down 10-20% - this is a massive drop.

"The market remains positive but stretched out and overbought. The PEDv fear has pushed sellers to the sideline and is dialling in massive premiums."

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Shanghai Index about to reach a “Tipping Point?”

by Chris Kimble

CLICK ON CHART TO ENLARGE

Is it important what one sixth of the worlds population does? I believe its worth paying attention too for sure! The Shanghai index has had a rough go of it since the highs of 2009, losing over half its value. So far this large decline HAS NOT seemed to impact the majority of stock index's in the States and Europe, as most are at or near all-time highs.

The Shanghai index looks to be creating a multi-year descending triangle pattern, which is bearish the majority of the time. This pattern suggests that if sellers break support line (A), the decline is the size of the height of the triangle (B) in the chart above. If this would come true, the Shanghai index would lose almost half of its value.

Is this pattern read correct? Too soon to tell!  Odds are high that should this support line break, selling pressure in this weak index, would increase. Should the Shanghai index fall this percentage, would it impact stock markets in the States and Europe? So far it hasn't. Could a decline of that size could create a tipping point for the global macro economy? Stay tuned!

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Corn Extends Drop From Six-Month High as Ukraine Concern Eases

By: Bloomberg

Corn extended its retreat from a six-month high before a government report today that may show ample global supplies. Wheat and soybeans declined.

Corn jumped 14 percent this year in Chicago on concern that exports from Ukraine, the third-biggest shipper, would be disrupted amid political unrest. Prices also rallied on signs of increasing demand for U.S. exports and dry weather in South America. The U.S. Department of Agriculture is set to release its monthly crop report today that may peg global inventories at 156.61 million metric tons at the end of the 2013-14 season, 17 percent higher than the prior year, a Bloomberg survey showed.

"The big export sales, the problems in Ukraine and issues with South American production all in isolation have bullish connotations, but when you bring them into context of global supply and demand, they’re far less relevant," Chris Gadd, an analyst at Macquarie Group Ltd., said by telephone from London. "The market instantly priced in the worst-case scenario, and now there is an element of reality coming back in."

Corn for May delivery fell 1.6 percent to $4.8125 a bushel by 7:09 a.m. on the Chicago Board of Trade, heading for the biggest drop for a most-active contract since Jan. 8. Futures reached $5.025 on March 7, the highest level since Aug. 27.

Ukraine may export 18.5 million tons of corn in 2013-2014, placing it behind the U.S. and Brazil, according to the USDA. Global production is set to reach a record 966.6 million tons this year, the agency estimated last month.

Ukrainian Exports

Unrest in recent weeks saw the ouster of former-Ukrainian president Viktor Yanukovych and an incursion by Russia into Ukraine’s Crimean peninsula. Still, Odessa and four other Black Sea ports, which handle 87 percent of Ukrainian grain exports, are a long way from Crimea and corn shipments are unlikely to be disrupted, Morgan Stanley said in a March 4 report. Western Bulk ASA, which operates more than 120 commodity ships, said last week cargo movements were unaffected.

Soybeans for May delivery declined 0.6 percent to $14.485 a bushel, after rallying 3.1 percent last week. The USDA may say production in Brazil, the world’s top exporter, may be 88.1 million tons, less than a previous forecast of 90 million tons, according to Bloomberg’s survey. The agency may also cut its forecast for the country’s corn crop, as well as production of both crops in Argentina, analysts said.

Wheat for May delivery dropped 1.2 percent to $6.46 a bushel in Chicago, after touching a three-month high on March 7. In Paris, milling wheat for November delivery declined 0.6 percent to 198.75 euros ($276) a ton on NYSE Liffe.

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Back to the Future in Ukraine and Asia

by Jamie Metzl

NEW YORK – With Russian troops occupying Ukrainian territory and the Chinese Navy inhabiting Philippine territorial waters in the South China Sea, the world is now entering a dangerous time warp.

In geopolitical terms, Russia and China are reenacting the norms of the nineteenth-century, when states competed by amassing hard power in a system of unbridled nationalism and rigid state sovereignty. Indeed, Russian President Vladimir Putin seems to be trying to reassemble the nineteenth-century map of Czarist Russia by holding on to Crimea, Abkhazia, South Ossetia, and other parts of the old empire at all costs.

Similarly, China is staking its claim to the South China Sea in full violation of the United Nations Convention on the Law of the Sea on the basis of vague histories of bygone empires. Both countries are now behaving as if power is a zero-sum game dictated by the old rules of realpolitik.

But, despite US Secretary of State John Kerry’s admonition that Russia’s occupation of Crimea “is not twenty-first-century, G-8, major-nation behavior,” the United States and its allies are struggling to hold on to the postwar twentieth-century world.

For the US, the destruction wrought by Europe’s rapacious nationalisms, reflected in colonialism and two world wars, had to end in 1945. America’s postwar planners concluded that if excessive nationalism was the problem, transnationalism was the answer. The US took the lead in building a system of international law, creating the UN, and fostering free trade and open markets around the world, while maintaining the security umbrella that allowed transnational institutions like the European Union and the Association of Southeast Asian Nations to develop.

The US was far from consistent or perfect in this process, sometime to murderous effect in places like Vietnam. But its steadfast defense of an international system that was more mutually beneficial than any that had preceded it ushered in seven decades of the greatest innovation, growth, and improvement our species has ever known.

Now, however, with China rising, global power rebalancing, and the US worn down by two decade-long wars that have eroded its credibility, the postwar international order is under intense strain.

Contemporary Japan, a stalwart supporter of the US-led postwar system, was also transformed by it. When US Commodore Matthew Perry blasted his way into Tokyo harbor in 1854, he found a weak, isolated, and technologically backward country. Fourteen years later, Japan began a massive modernization drive under Emperor Meiji; thirty-seven years after that, its victory in the Russo-Japanese war shocked the world. Rapidly appropriating the lessons of nineteenth-century Europe, Japan in 1894 launched a brutal five-decade effort to dominate Asia and secure its resources, stopping only when America’s atomic bombs flattened Hiroshima and Nagasaki.

After the war, under America’s protection and initial guidance, Japan emerged as a champion of a rule-based international system. It financed the UN to a greater degree in relative terms than any other country, engaged meaningfully in other international institutions, and supported the development of its Asian neighbors, including China.

But, with China’s leaders now aggressively demonizing Japan and pressing disputed territorial and maritime claims more assertively than ever before, the country is being thrust in a direction that Prime Minister Shinzo Abe, with his penchant for historical revisionism and highlighting Japan’s nationalist past, may in some ways have already favored: back to the nineteenth century.

Europe, too, embraced the postwar international system. With security outsourced to America, European governments shifted their focus and expenditures to social welfare and set about building a twenty-first-century post-sovereign utopia that has blurred national divisions and replaced aggression and hostility with negotiation and compromise.

The EU’s twenty-first-century dream now confronts the nineteenth-century Czarist bear, flashing its atavistic claws on the Russia-Ukraine border. And, just as ASEAN has been unable and unwilling to stand up to China over its encroachment in the South China Sea, the EU is already discovering the limits of its soft-power, consensus-driven approach to Russia.

If a twenty-first-century post-sovereign system remains an unreachable dream in our Hobbesian world, and reverting to nineteenth-century norms by acquiescing to aggressive behavior by Russia and China is unpalatable, defending the postwar international system may be the best option we have.

Ironically, a nineteenth-century response, featuring balance-of-power politics and the rearmament of Europe and Japan, may be part of what is required to do it.

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Asset Class Performance During the Current Bull Market

by Bespoke

Last week we posted a number of charts to note the 5-year anniversary of the current bull market for stocks.  Below we take a further look at asset-class performance during the current bull market using our key ETF matrix, which regular readers have seen here a number of times.  In the matrix, we highlight each ETF's performance over the last week, year-to-date, and since the close on 3/9/09, which was the bear-market low for stocks during the Financial Crisis. 

As you can see, US equity ETFs have posted the largest gains since March 9th, 2009.  The Consumer Discretionary ETF (XLY) is up the most of any ETF in our matrix with a 5-year gain of 318%.  The Smallcap Growth ETF (IJT) is up the second most with a gain of 288%, followed by the Smallcap 600 ETF (IJR) with a gain of 272%.  Of the country ETFs highlighted, Mexico (EWW) is up the most over the last five years with a gain of 180.6%.  The Brazil ETF (EWZ) is up the least at just +22.9%. 

Looking at the commodity ETFs, silver (SLV) is up the most over the last 5 years with a gain of 57%, followed by gold (GLD) at 42.5% and then DBC at 37.7%.  Oil (USO) is up 28% since 3/9/09, but natural gas (UNG) is down sharply with a decline of 79.8%.  Finally, the fixed income ETFs are all up in price since 3/9/09, but not by much.  The aggregate bond ETF (AGG) is up 8.5% during the current bull market for stocks, while the TIPS ETF (TIP), providing inflation protection, is up 15.5%.

We've certainly had a nice run over the last five years, but as always, the question remains -- where do we go from here?  Sign up for a 5-day free trial to our Bespoke Premium service to find out where Bespoke thinks the market is headed.  For the next few days, you can use "birthdaybull" in the coupon code section of our Subscribe page to receive a 10% discount on your membership!

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