China data adds to cloud over ag markets

So if the last session of January brought the selling it often does in grain markets, will the first trading day of February bring buying?

There is an idea in Chicago that just as funds withdraw cash at month ends, they inject new funds at month beginnings.

But such a trend was difficult to discern in early deals, when grain futures traded lower at the start of what is a crucial month for US farmers, with the average price being used to set corn and soybean insurance payout rates.

"We now enter into the spring price discovery period for federal crop insurance," one US broker noted.

"This is the average of December corn futures and November soybean futures for the 19 trading days in February."

Chinese retreat

And one factor working against bulls in early deals was weak Chinese economic data, which showed that China's factory sector shrank in January for the first time in more than two years.

The government's official manufacturing purchasing managers' index dropped to 49.8 in January, down from 50.1 in December, weekend data showed. That was down from 50.1 in December.

The index has not been below the neutral 50.0 level since September 2012.

China is a huge importer of commodities including many ags, such ascotton, rubber and soybeans.

That said, rubber managed to overcome initial weakness at the data, ending up 3.2% at 202.30 yen a kilogramme in Tokyo, helped by data showing a decline in Japanese inventories of the tyre ingredient below 13,000 tonnes in the last 10 days of January.

Stocks dropped 0.5% to 12,976 tonnes from January 20.

Hedge fund shorts

But cotton made a soft start in New York, easing 0.4% to 59.12 cents a pound for March delivery as of 09:30 Uk time (03:30 Chicago time).

This despite data late on Friday showing a further decline, of 1,181 lots to 8,512 contracts in hedge funds' net short in New York cotton futures and options, the highest in more than two years.

Unusually high hedge fund net short, or net long, positions tend to ring alarm bells in questioning whether the appetite for such holdings is near its end.

That said, the net short reached 19,000 contracts in 2012, and topped 28,000 lots in 2006.

'Should improve moisture'

And as for soybeans, they eased 0.3% to $9.58 a bushel in Chicago for March delivery.

One of the big negatives for the oilseed is an accelerating South American harvest which, while potentially not looking as large as it was a couple of months ago, will still send world soybean inventories soaring.

In Brazil in particular, analysts have trimmed harvest estimates following dryness in major growing areas, but kept them, in the main, well above 90m tonnes and comfortably in record output territory.

Besides, the dryness looks like being to some extent resolved.

MDA said that, this week, "expected rains should improve moisture in central areas, as well as Minas Gerais," Brazil's top coffee-growing state.

Exchange rate factor 

As an extra negative for the oilseed, Brazilian producers are hedging crop too, with the weakness in the real protecting them somewhat from recent declines in Chicago's dollar-denominated prices.

Kim Rugel at Benson Quinn Commodities noted that on Friday "the Brazilian farmer took advantage of a sharp drop in the value of the real currency versus the dollar to increase new crop sales, which have been running behind last year and average pace to date.

"The value of the real to the dollar neared 2.7:1 which, with the Brazilian producer selling his beans at dollar values but being paid in local currency, is best exchange rate for the Brazilian producer in several years."

'Could slow selling'

Still, investors need to have an eye here too to the hedge fund position, which at a net short of 33,021 lots, is amongst the weakest in recent memory, although the balance did top 55,000 lots in 2006.

"Funds are nearing a record short position which could slow selling with start of the new month," Ms Rugel said, if adding that "I would expect one more week of selling before finding a bottom".

Important to soybeans' price prospects was that soymeal eased, down 0.5% at $328.20 a short ton in Chicago, after a soft performance overnight on China's Dalian exchange, where the May contract settled down 0.8% at 2,671 yuan a tonne.

Chicago soyoil for March was up 0.3% at 30.08 cents a pound, although in the absence of leads from the Kuala Lumpur palm oilmarket, closed for a holiday.

SGS said that Malaysia's palm oil exports fell 14.6% last month from December, which is at least an improvement on the 19.0% decline at the first-25-days stage.

'Self-fulfilling weakness'

Back in Chicago, hedge funds are raising their net short position inwheat too, by more than 9,500 contracts in the latest week, although at some 12,000 lots, it remains well short of past highs of approaching 80,000 contracts.

At Commonwealth Bank of Australia, Tobin Gorey said that the "step-up in short positions" suggests that "possibly, weak price momentum is attracting new sellers. 

"Weakness in this case can become self-fulfilling."

Export hopes?

Still, the news is not all bearish, with ideas that low prices are having an impact on both the supply and demand sides of the balance sheet.

On demand, Terry Reilly flagged the potential for improved US exports, saying that "lower prices should trigger activity in the export market and bring the US to the table as it becomes more competitive".

He added: "The strong US dollar is one feature keep US wheat out of the export market now," and the greenback was stable in early deals against a basket of currencies.

Saudi Arabia revealed it bought at tender 690,000 tonnes of wheat, of which some came from North America, but with Australia, the European Union and South America also sharing the order.

'Added uncertainty'

On the supply side, CHS Hedging noted that as the "US spring wheat farmer debates spring planting intentions, it appears sunflowers, canola and barley acres will increase.

"Spring wheat acres are expected to be close to last year's total but the recent price slide has added uncertainty."

Many have been forecasting an uptick in spring wheat acres, after official data revealed a sharp drop in winter wheat sowings.

More on winter wheat prospects will be revealed later (after the market closes) with monthly US Department of Agriculture reports on crop condition in some states.

For now, wheat for March fell 0.5% to $5.00 ½ a bushel in Chicago, fighting a battle to stay above the psychologically important $5-a-bushel mark.

Corn falls

That was better than corn could manage, falling 0.7% to $3.67 ¾ a bushel, with hedge funds in selling mode too – cutting their net long by more than 27,000 contracts in the latest week – but still retaining a relatively ample net long position, giving ammunition for more liquidation.

Furthermore, wheat's fall of nearly 15% last month has questioned the relative strength in corn, which dropped less than 7%.