10-03-2014 06:10 AM | Arable, Cereal, Crops, Finance, Market Reports, News

Speculative money 'flooding' into grains sector



EU grains finished mostly higher on the day, with the exception of rapeseed, and sharply higher for the week across all commodities on Ukraine uncertainty and a sudden huge rush of speculative money flooding back into the sector.

Mar 14 London wheat ended the day GBP3.05/tonne higher at GBP164.65/tonne, and with new crop Nov 14 GBP2.50/tonne firmer at GBP155.75/tonne. Mar 14 Paris milling wheat jumped EUR7.00/tonne to EUR215.25/tonne, Jun 14 Paris corn was EUR1.25/tonne firmer at EUR184.00/tonne and May 14 Paris rapeseed fell EUR2.25/tonne to EUR411.75/tonne.

This was the highest close for a front month on London wheat since before Christmas. It was Paris wheat's best finish since the old crop May 13 contract expired last spring, and similarly Paris corn's highest front month close since the Aug 13 contract went off the board last summer. For Paris rapeseed yesterday's close was the best since last June.

It's interesting how the unforeseen Russian invasion of Crimea, which has a landmass roughly the size of Belgium, could cause such a rapid change of wind direction in the grains market.

In Chicago, fund money had been not just pulling out of wheat, but actively shorting it for well over a year until recently. It had also built up a sizeable short in corn throughout the second half of 2013.

Today's Commitment of Traders report shows fund money reducing their net short in CBOT wheat by over 14,000 lots for the week through to Tuesday night, to hold a net short of just 6,000 contracts. The same community were short more than 100,000 futures and options combined at the end of 2013. For corn, fund money has re-positioned from being short approaching 250,000 contracts last November to now long over 158,000 lots, of which a whopping more than 70,000 was added in the week through to Tuesday night alone.

Note, that these positions are based on Tuesday night, it seems likely that the funds have been further net buyers subsequently too.

Whilst I and others, didn't ever doubt for one minute that fund money had gone away forever, never to return to the grain markets, most of us didn't see it coming back quite so soon. The question now has to be how long is it going to hang around this time? Because you can be sure that something will happen left of field to entice them to fall out of love with the grains sector again, we just don't know what it will be and when it will happen. Welcome to the casino!

Fundamentally nothing that much has changed to justify London wheat now being more than fifteen quid, or 10%, higher than it was at the end of January.

Grain is still moving out of Ukraine, almost unhindered, save with the exception of shipments out of the Crimean port of Sevastopol which require "special permission" to leave (although this is not a major exporting port accounting for only 3.6% of the country's grain exports in February).

Indeed, APK Inform say that grain shipments in February were a record volume for the month at 2.3 MMT, of which 85% (nearly 2 MMT) was corn. Odessa (58%) was the main exporting port, followed by the terminals of the Nikolayev oblast (32.2%), they say.

This takes Jul/Feb grain exports to 24 MMT, versus an APK Inform estimate for full season shipments of 31.7 MMT.

If we ignore the argument that the dispute will harm exports, the other main area of concern is how might it affect production prospects in 2014. Informa Economics this week forecast a Ukraine wheat crop of 20.5 MMT, versus 22.3 MMT last year, with Russia's output declining from 52.1 MMT to 49.5 MMT. Both seemingly on reduced winter plantings, the result of the wet autumn in the region. Kazakhstan's wheat crop however will rise from 13.9 MMT to 16.3 MMT. The net end product being 88.3 MMT of wheat coming out of the three main FSU producing nations later this year, which is only 2 MMT less than last year.

That's hardly a cataclysmic disaster, but when the fund elephants are stampeding around the room it's maybe best to stand to the side and let them get on with it. Note carefully though, that not one ounce of actually real end-user demand is created by fund buying. There are already rumblings of discontent across the Atlantic that the difference between these new sharply higher wheat, corn and soybean futures prices aren't being fully reflected in the cash market.

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