China soybean demand 'remains strong'

Jonathan Lane, Gleadell’s trading manager, comments on grain markets:

Wheat

The story remains the same – the market continues to firm!

A further reduction in US winter wheat crop ratings, (down another 1% point to 33% good/excellent).

Lower Argentine crop estimates and reports that an increased proportion of the Australian wheat crop will be only of feed quality have allowed the market to strengthen.

Over the week, LIFFE has risen £9, with MATIF up €7 and CBOT up $12 (MAY13 position) as a further tightening of Global stocks looks likely.

The EU market remains supported, even with the rumour that the Ukraine may extend their export limit on wheat from the current 5.5mlm t (5.2mln t already shipped). Overall, grain stocks in the Black Sea region are seen falling 55% from last year to only 18.4mln t, and with export interest still apparent from North Africa, and even South America, European and latterly in the season, US prices should continue the firm trend.

In the UK, the initial supply and demand estimate for 2012/13 released this week projected imports at just over 2mln t (although we believe this too low), and with an increase in domestic demand (ethanol plants) leaving an exportable surplus of just 0.75mln t.

Also, a lot of grain has been moved from farms over the past month and farmers have generally been disappointed with their balances left to sell, or indeed more disappointed still by significant shortfalls.

This would bring into question the DEFRA crop figure of 13.3mln t and the reality could be much lower. With talk of only approximately 70% of the winter grain planted to date and the adverse weather providing no opportunities to begin drilling again, the likelihood for next season of a much reduced acreage and again, below average yields, becomes more of a reality and, in this context, it is not difficult to understand the strength of both the old and new crop futures markets. The drop - when it comes - could be dramatic and markets never look so bullish as when they are their top … but, we may have a few £’s to go on the upside yet.

Oilseeds

This week has seen the MATIF February rapeseed contract gain around €10/tonne (£8), closing slightly higher on a daily basis with ex farm prices trading around £378 per tonne. Again, the price driver has been the soybean market with prices reversing the recent downtrend and staging a small rally throughout the week, primarily on technical buying as opposed to any change in fundamentals.

There has been little fresh news this week, but South American weather continues to be a prominent feature of market commentary and, it is fair to say at present, there aren’t any obvious problems which will drive prices near term.

Chinese soybean demand and export sales remain strong, there is also a problem developing with low water levels in the Mississippi river which could hamper soybean logistics.

The macros continue to influence markets with a new, Greek deal bringing some confidence, all eyes are now on the US government to see whether an agreement can be found on the impending “fiscal cliff” (tax and spend policies of the US government).