Wheat futures may be poised for a short-term bounce, amid uncertainty of how northern hemisphere crops fared over the winter, but prospects for cotton and sugar prices are less appealing.
Australia & New Zealand Bank said that speculators “may be reluctant to further short” the wheat market heading towards the northern hemisphere spring, when it will become apparent how well autumn-sown plantings have survived winter cold.
As of Tuesday last week, managed money, a proxy for speculators, had a net short of 32,238 contracts in Chicago soft red winter wheat futures and options, the biggest in four months, albeit well below the record net short of 78,928 lots reached in September.
In Kansas City hard red winter wheat, they reduced their net long – the extent to which long bets, which profit when values rise, exceed short contracts, which benefit when price fall – to a 13-month low of 5,912 contracts.
‘Key area of concern’
Most recent concerns over frost damage to winter wheat have centred mostly on the US, where cold temperatures on areas without sufficient snow cover have raised concerns of patchy, but not extreme, damage to crops in the Midwest and the Plains.
However, ANZ highlighted as a “key area of concern” the condition of crops in Russia, which thanks to autumn dryness were poorly established heading into winter, although relatively benign conditions since have eased concerns somewhat over losses to frost.
“Russian winter crops are in the worst condition in a decade, with the share of crops rated in poor condition heading into dormancy above 20%.
“Any further deterioration in the Russian winter crop increases the risk that Russian grain traders will have hindered grain access for export in the second half of 2015.”
Russian wheat concerns could prove “the potential catalyst for a reversal in the current negative sentiment pervading wheat markets”, the bank said.
“We view near-term risks to the upside for global wheat prices in the quarter ahead.”
However, ANZ was less upbeat over prospects for sugar prices, citing large stocks of the sweetener in exporting countries, and the weakness of the real, which reduces the value in dollar terms of assets in which Brazil is a key player.
“Both these factors look set to persist through at least the first half of 2015, leaving little chance of any strong recovery in sugar prices,” the bank said, proving particularly downbeat on prospects for the real.
“Consensus has moved for Brazil’s economy to stagnate further in 2015, while Brazil’s latest inflation reading in January jumped to 7.1% year on year.
“Given the poor fundamentals for the Brazilian economy, further real weakness through 2015 is likely to be a dominant, and negative, theme for the sugar market in the quarters ahead.”
Real weakness would also likely undermine the coffee market, another in which Brazil is particularly important.
For cotton, ANZ acknowledged the potential for short-term price support from thin US inventories and the prospect of the country, the top exporter of the fibre, seeing a sharp drop in plantings this spring.
However, the dent to values of synthetic fibres from lower energy prices has left lower-grade cotton in particular “overvalued”.
“Lower grade physical cotton prices look particularly vulnerable to a downward price correction given the poor relative value to synthetic fibres.”
(Source – http://www.agrimoney.com/news/wheat-prices-may-see-revival—but-not-cotton-sugar–8026.html)