OK, Pimco may have made a name for itself for calling bond markets right, but how good is it on grains?
The asset management group, one of the biggest bond investors in the world, revealed that its commodity fund was bullish on the prospect of corn futures outperforming those in soybeans.
“We think that soybean prices will decline versus the prices of corn based on our valuations and the fact that we’ll probably see a really big switch of acreage in soybean planting in the US this year,” said Nic Johnson, portfolio manager of Pimco’s commodity fund.
‘Buy corn, sell soybeans’
And he is not the only one believing in that bet, with Terry Reilly at Futures International flagging Thursday’s US Department of Agriculture’s crop estimates – which cut the forecast for US corn stocks at the close of 2016-17 while, unexpectedly, keeping the soybean figure the same – as cause for corn-soybean spreading.
Mr Reilly said: “We like buying corn/selling soybeans over the short term after USDA cut corn ending stocks for the US by 35m bushels” in the monthly Wasde report on world crop supply and demand.
Rabobank was marginally in the same camp, in terming the Wasde “slightly bearish-neutral” for soybeans while just “neutral” for corn.
And corn supporters received another piece of ammunition from supply and demand fundamentals when the Buenos Aires grains exchange nudged higher by 1.3m tonnes to 54.8m tonnes its forecast for the Argentine soybean crop, over which extremes of dryness and flooding raised doubts last month.
That took the exchange above its Rosario peer, which on Wednesday restated an Argentine soy crop estimate of 54.5m tonnes.
(The USDA, in the Wasde, cut its estimate, but to 55.5m tonnes, remaining more optimistic than most other commentators.)
Still, it was soybean bulls which claimed the spoils in early deals, with Chicago futures in the oilseed up 0.4% to $10.54 ¾ a bushel for March delivery as of 10:00 UK time (04:00 Chicago time), gaining some help from technical factors.
While futures did fall in the last session on the Wasde data, “the close back above the 20-day moving average could be viewed as a positive,” said Benson Quinn Commodities.
“I get the impression that the funds are going to continue to defend their length in the near term.”
That said, the broker added that “rallying back to the highs is going to be a challenge unless they want to add” to their long position.
Sign of a slowdown?
That is a factor which could yet depend on whether the USDA’s caution in the Wasde – over a seasonal switch by importers to South America lasting even into the summer – is realised.
In fact, while the US has put in a cracking pace of soybean exports so far in 2016-17 (which ends in August), the outlook for next season is not so hot, as Joe Lardy at CHS Hedging highlighted.
“Even though bean commitments are running at a very high level, sales for next year are not doing nearly as well.
“The US has 1.2m tonnes currently on the books for next year, but the five-year average is 2.2m tonnes.
“The best level for new crop sales at this point was 3.9m tonnes in 2014-15.”
Speedy safrinha sowings
Corn futures, meanwhile, stood flat at $3.69 ½ a bushel for March, although this was enough to keep them above their 200-day moving average, while remaining too close to the six-month high set in the last session.
One of the more negative aspects for the grain is the strong progress that Brazilian farmers are making with sowings of their second, or safrinha, crop (planted on ground vacated by the soybean harvest).
Brazil’s Conab bureau on Thursday raised its forecast for the safrinha crop to 58.8m tonnes, backed by expectations of seedings hitting a record 11m hectares.
Just how bullish?
It was also not a help for corn that rival grain wheat stood flat at $4.43 ½ a bushel, after apparently emerging relatively well, in price potential terms, from the Wasde, with the USDA making bigger-than-expected downgrades to estimates for both US and world inventories at the close of 2016-17.
Rabobank termed the Wasde “bullish” for wheat futures.
That said, the back also said that “we caution against the longevity of this bullish sentiment. Global stocks remain record large, at 249m tonnes.”
Indeed, Tobin Gorey at Commonwealth Bank of Australia pondered whether markets had not overreacted a bit in gains in the last session.
“We are somewhat sceptical that news is worth an extra 2.5-3% on wheat prices,” he said.
“The lower inventory estimate ‘moves the needle’ of course, but the needle remains deeply in the ‘too much’ zone.”
‘Hard wheat to outperform’
Still, Kansas City hard red winter wheat fared better, gaining 0.1% to $4.51 ¾ a bushel for March delivery, having underperformed in the last session – even though the Wasde was, on the face of it, more bullish for this variety than Chicago-traded soft red winter wheat.
The downgrade to the USDA estimate for US wheat stocks at the close of 2016-17 was centred on hard red winter wheat (seen now ending the season at 567m bushels, compared with a previous estimate of 597m bushels).
US exports of hard red winter wheat have been particularly strong of late, coming in at more than 270,000 tonnes last week, official data on Thursday showed.
Total commitments – ie exports and unfulfilled orders combined – at nearly 9.5m tonnes are running above most recent years bar 2013-14.
“Kansas City wheat may have a chance to gain on Chicago, despite massive US hard red winter wheat stocks,” Terry Reilly said.
While the Kansas City premium over Chicago, “narrowed from the January Wasde report”, from $0.18 ½ a bushel to $0.07 ¾ a bushel on Thursday, “we believe it has the chance to rally back up to around 15 cents premium before the end of this month”.
Also under the microscope are prices of palm oil, after official data on Malaysian supply and demand for last month.
If the production data were bullish, coming in at 1.28m tonnes, some 60,000 tonnes below expectations, the actual stocks statistics was not.
At 1.54m tonnes it was 50,000 tonnes above forecasts, a reflection it appears of higher imports and weak domestic consumption.
Palm oil futures for April shed 0.8% to 3,072 ringgit a tonne in Kuala Lumpur.
(Source – http://www.agrimoney.com/marketreport/am-markets-soy-returns-to-pole-position.-but-for-how-long–3968.html)