Even so, the long-term relationship between corn and soybeans suggests current soybean yields remain relatively low in comparison to corn yields, which also look set to hit a new record following a good growing season throughout the Midwest, Mid-South and Northern Plains.

Indeed, the latest USDA estimates would place soy yields at their lowest relative to corn since 2009, which would go against the broad narrative told lately by yield monitor readouts of both crops across the country’s most productive regions.

Were the USDA to rectify this soybean/corn imbalance while keeping corn estimates steady, it would have to boost the soybean yield to close to 49 bushels an acre, marking a roughly 4 percent increase from its last estimate, and surpassing even the loftiest trader projections.

A more likely scenario would be for the USDA to trim its corn yield slightly, while nudging soy closer to the 48 bushel mark, although that would still likely be a bearish shock to most of the soybean market.

Uncharted territory

With both corn and soybean yields already at all-time highs, no traders, agronomists or crop forecasters are familiar with the true scale of the crops now being harvested. So we are having difficulty making a fair and sensible estimate of the likely yield per acre for each crop.

For corn, crop assessors were able to determine in July that the combination of high plant populations and hefty ear weights would set the stage for a final yield above the 170/bushel mark – a threshold never before breached.

So when the USDA lifted its corn yield projection to 171.7 in September from 167.4 in August, most market participants had already braced for it and in some regards had expected an even higher number.

That higher total emerged the following month as widespread early harvest readouts became available and confirmed that a true bumper crop was on our hands.

Yet in the weeks since that last report, it has become clear that overall corn yields are not quite as uniformly massive as projected, leaving the door open to a potential corn yield reduction come the release of the final crop balance sheet in January.

Soybean crop forecasters have had less time to assess the abundance of the 2014 crop. Widespread bean maturity was not reached until mid to late August, a full month after corn. The first time the true record-setting yield potential was incorporated into USDA crop reports was in September (46.6 bpa), just as the earliest harvest runs were taking place.

The USDA followed up with a 0.5 bushel per acre yield increase in October – the first national average above 47 bushels an acre – but a lingering sense of further potential remains as the market awaits the USDA November release.

Some of that upside potential is reflected in trader estimates ahead of Monday’s crop report, with a third of the 24 entities polled by Reuters estimating a 48.0 yield or higher. And the highest estimate recorded in the poll – 48.7 – does come close to what history suggests the soybean yield average could be if the corn yield remains unchanged from a month ago.

Yet the fact that most estimates remained below 48.0 suggests trepidation among crop forecasters about pushing yield expectations even deeper into uncharted territory.

Whether the USDA feels the same trepidation next week remains to be seen, but its own data suggests that, if its corn yield projection is correct, the soybean crop has plenty of room to surprise on the upside come the final yield assessment in January.

The author is a Reuters market analyst. The opinions expressed are his own.

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More than 3,600 put options were bought at the $4.80, $4.90 and $5.00 March strikes since October 15, just as March futures climbed from around $5.20 to above $5.40 and six-week highs. Concerns about the diminishing competitiveness of U.S. wheat versus other international origins, as well as against corn in the domestic feed market, have fuelled the pick-up in defensive strategies, which may intensify if wheat prices continue to edge higher.

Drifting along for the ride

While wheat traders and market commentators have pointed out wheat crop concerns in the Southern hemisphere as the main reason for wheat’s recent recovery, it is likely that wheat also borrowed strength from the rising corn and soybean markets in recent weeks. Chicago soft wheat prices have rallied roughly 11 per cent, or more than 40 cents a bushel, since October 1. This more or less matching the advances seen in both the corn and soybean markets over that period.

Corn and soybeans have gained as the U.S. harvest of both crops nears completion and end-user demand for those commodities picked up. Chicago wheat’s rally, however, came despite brisk advances in U.S. winter wheat sowings as well as a well-known global surplus of feed-grade wheat stemming from large global harvest earlier in 2014.

As such, many traders viewed the price strength with skepticism, with some establishing fresh short positions in the market on the expectation that those positions can be bought back at lower prices in due course.

Other traders, however, were reluctant to swim against bullish tide in the futures market, and instead opted to put on their bearish bets in the options arena, where the price of put options declined steadily as the underlying futures markets advanced.

Open put positions at the $5.00 March strike increased by over 56 per cent or 1,355 contracts between October 15 and November 3, while open interest at the $4.90 strike climbed by 36 per cent and 1,470 lots. Additional gains were also evident at the $4.80 strike.

Diminishing demand

The steady erosion in the projected demand for U.S. wheat has also fuelled bearish posturing in the Chicago market lately.

Since beginning its monthly balance sheet projections of U.S. wheat for the 2014-15 crop year in July, the U.S. Department of Agriculture has dropped its demand assessment by 30 million bushels on the back of heightened competition for domestic feed demand by corn and an aggressive export arena characterized by abundant supplies in both Europe and the Black Sea region.

This reduced usage tally was already more than 300 million bushels smaller than the demand total for the 2013/14 crop year, and so the extra consumption cuts seen in recent months have been viewed as additional bearish fodder for traders.

What’s more, the recent rally in low-grade U.S. wheat values is unlikely to reverse the weak demand environment, especially after the price of U.S. feed wheat for export rallied to its largest premium to Black Sea supplies since May in recent days, effectively ruling the U.S. out of any serious wheat export consideration over the near-to-medium term.

Combined with an historic tendency for Chicago March wheat to lose ground to March corn over the November-to-February period (as corn demand picks up when winter wheat enters its dormancy period), the recent diminished competitiveness of U.S. wheat has heightened trader expectations for a period of declining U.S. wheat prices later in 2014 and early 2015.

This should bode well for those players who used the recent unexpected rally to establish bearish downside protection through put options.

Gavin Maguire is a Reuters market analyst. The opinions expressed are his own

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But due to stuttering harvest progress and bottlenecks in rail capacity many options traders are rolling their bearish bets into the January 2015 contract, indicating that any meal market meltdown may now be delayed until the New Year.

Inevitable wave

The record-large soybean crop currently being harvested across the U.S. has long been viewed as an inevitable wave of fresh bean and soy product supplies destined to descend on domestic and international markets before the end of the year.

But while more than 70 per cent of the U.S. crop has now been gathered, a mix of harvest delays and a push by many farmers to store rather than sell their soy crop has meant that U.S. soy processors have not been inundated by fresh supplies to the degree or as quickly as expected.

This stall in availability has put some meal suppliers and exporters in a bind, and fueled a roughly $90 per short ton rally in front-month soymeal futures since Oct. 1 as processors stepped up competition for those cargoes that were available.

The meal market rally in turn widened December 2014 crush margins from $1 a bushel to more than $2 a bushel so far this month, triggering even more competition for spot soybean supplies.

And while the more urgent tone of buyers and higher bid prices have unearthed larger waves of fresh supplies being offered by growers, slow freight movement from the farm to the processor means there is a continuing lack of fresh soymeal supplies throughout the country.

And judging by the forward rolls of defensive options positions from December to January, traders don’t expect that tightness to be alleviated any time soon.

Finding a floor

While December soymeal prices have rallied nearly 30 per cent since the start of the October from around $300 to close to $400 a short ton, they remain off their 2014 highs as the impressive scale of the 2014 soybean harvest curbs overall market momentum.

That said, the recent advance in meal futures has given growers and suppliers of the market a chance to lift their selling price, which many seem to be doing via the options arena.

For the December time slot, savvy meal suppliers have used the recent meal strength to lift put positions from the $320-340 a ton area to the $360-370 region.

For the January time slot, buying flows have been strongest at the $330 and $340 strikes, although more than 1,600 open positions are also in place at the $350 mark.

Indeed, January put option purchases have aggressively outpaced that seen in December options lately, suggesting that a majority of participants anticipate the current spell of meal market tightness to persist for the next several weeks, before dissipating early in 2015 once processor pipelines eventually get replenished.

Gavin Maguire is a Reuters market analyst. The opinions expressed are his own.

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But instead spring wheat’s discount to HRW has widened even further, flying in the face of expectations that the end of the spring wheat harvest would lift pressure off spring wheat values while strong winter wheat crop ratings would dent Kansas City prices.

Several traders have been losing money as a result, but will be hoping that this week’s update on trader positions from the U.S. Commodity Futures Trading Commission will reveal more bullish trading patterns in spring wheat, as well as profit taking in winter wheat that will set the stage for what many view as a long overdue spread correction.

Against the grain

Since 2006, the Minneapolis December futures contract has averaged a more than 25 cents per bushel premium over Kansas City December prices due to the broadly higher level of protein contained in spring wheat which helps it command a higher price at the wholesale and retail level.

But for more than a month, Minneapolis futures have been persistently locked at a discount relative to HRW, which is the longest stretch in negative territory for that spread since 2007.

Further, the discount has actually widened lately rather than contracted to confound wheat traders who have been compiling positions designed to pay off only when spring wheat prices resurface at a premium to HRW.

A combination of price pressure from the recent spring wheat harvest coupled with sturdy export demand for HRW wheat accounted for the unusual price development to occur near the end of September, and expectations were for that discount to quickly unravel once the spring wheat harvest wrapped up and the 2013 winter wheat growing season got fully underway amid broadly crop-friendly conditions.

However, the discount has instead continued to widen, alarming traders sitting on opposing positions and raising questions about why this breakdown in traditional price relationships has managed to persist for so long.

No news is bad news

One of the chief factors likely helping to sustain the recent unusual price pattern has been the absence of trader position data reported by the CFTC.

The U.S. government shutdown brought about a cessation in the reporting of commodity positions held by various participants. These weekly Commitments of Traders reports offered a regular update on how various traders are adjusting their exposure in the various wheat classes, which can then tracked against the price movement of the markets concerned.

In the run-up to the shutdown, large speculative traders sharply increased their long exposure to the Kansas City wheat market on the back of robust export demand for that commodity during September.

Meanwhile, after having amassed their largest net short position in Minneapolis wheat futures since 2005, demonstrated only limited interest in buying back those short positions.

This divergence in trader actions impacted prices accordingly, buoying Kansas City futures and constraining any rallies in Minneapolis wheat.

But with those reports due to resume in the weeks ahead – and offer updates on how those positions have changed since late the start of October – there is a good chance that the new data will reveal some profit taking in the Kansas City market, as well as some additional short covering in Minneapolis wheat that will suggest a change in tone among the speculative community with regard those markets.

Such actions would be in keeping with the seasonal trends of non-commercial positions in those markets: Kansas City non-commercial length has routinely been reduced over the final months of the year while Minneapolis net positions have been increased.

That behavior would also be consistent with the price action seen, as although Kansas City prices maintained a premium to Minneapolis, HRW wheat encountered notable scale-up selling interest lately that snuffed out price rallies and can often be the hallmark of a wave of profit taking from the speculative community.

If upcoming CFTC reports reveal that to be the case, those traders who are short Kansas City wheat will breathe a sigh of relief, as that would indicate a decline in buying interest for that market. At the same time, the updated CFTC data will likely reveal at least a reduction in short exposure to the Minneapolis market, as there have been signs of broad-based buying in that market in recent weeks.

For those traders sitting on the wrong side of the Minneapolis/Kansas City spread, that data release can’t come soon enough, as it could just be the impetus they need to bail out of a position that has been underwater for over a month.

Gavin Maguire is a Reuters columnist. The opinions expressed are his own.

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But this year’s critically low levels of domestic corn supplies have forced commercial players to whittle down their physical and futures market exposure to unprecedented lows, while the prospect of a record-large haul of fresh supplies this fall has spurred speculators to build up their largest short position in over a decade.

As a result, speculators may for the first time build up an even larger short stance in corn than commercials in the widely followed ‘supplemental’ Commitments of Traders report.

MIRROR IMAGE

Since the inception of the supplemental CFTC report in 2006 the net positions of commercial and non-commercial traders have etched a mirror image of each other, with the commercial net position permanently residing on the short side of the market with non-commercial exposure typically on the long side.

But while that pleasing symmetry remains in place, non-commercial net exposure has swelled so aggressively to the short side lately that the lines charting those net positions are close to crossing for the first time, indicating a potential reversal in the typical position patterns within the corn futures and options realm.

BIG EXPECTATIONS

Broadly friendly growing conditions across the U.S. Corn Belt are fuelling expectations for a record large corn crop from U.S. farms this year, which is why speculative traders have been so keen to establish and grow short positions in corn futures in recent months.

At the same time, the relatively poor returns posted by commodities market investments relative to the equities arena over the past year or so have sparked a general reduction in long exposure to nearly all raw material markets.

The end result has been a swing in the net corn position by the non-commercial contingent from long to short – a trend that looks set to extend in the weeks ahead as long as the emerging 2013 corn crop continues to thrive amid yield-friendly growing conditions.

Meanwhile, the steady erosion in the size of the commercial trader’s net short position also looks set to continue as processors, ethanol plants and other end users continue to have difficulty sourcing sufficient quantities of physical corn.

If the pattern of both commercial and non-commercial positions is extended in the weeks ahead, it is likely the speculative crowd will end up sitting on a larger net short position in corn than the actual physical end users of that commodity, which would be a rare development indeed, having not occurred at all since the supplemental report was launched in early 2006 and only on a handful of occasions, according to other Commitment of Traders reports which measure positional exposure in a slightly different manner.

SNAP BACK?

While the establishing of a speculative net short stance in corn is not altogether unprecedented – having occurred roughly 15 percent of the time over the past 6-1/2 years – it remains an unusual situation for non-commercial traders to be in.

Further, the duration of those periods of net short speculator exposure has tended to be far shorter than the spells of net length, which tend to last for several months at a time.

Finally, the switches in non-commercial positions from short to long tend to be quite sudden and aggressive and usually bring about a reversal in the direction of the corn price as the speculative traders attempt to buy back previously sold contracts at roughly the same time.

A similar switch cannot be ruled out once again this year, as speculators are already sitting on their largest short position in years and new-crop corn futures prices are already at their lowest levels since 2010. Indeed, in order to secure any paper profits from their short exposure non-commercial traders must buy back those positions at lower prices than where they were sold, so it is inevitable that a wave of non-commercial buying will take place as that position-squaring occurs.

So it is only a matter of time before the currently net short speculative community reverses its bias in the corn market and starts to buy rather than sell – if only to secure the profits established by that short exposure.

The timing of that buying wave remains the only major unknown. But it is likely to materialize before too long as traders are fully aware of the potential risk from any early frost, which could cause substantial damage to overall crop prospects, or from any large scale end-user buying interest sparked by the prevailing low new-crop prices, which would boost overall market sentiment even if crop prospects remain historically large.

So while the speculative community may currently appear to be on course to building a net short position that overshadows that of the commercial arena, it may not remain so committed to the short side of the market for long as the risks are growing that an unexpected crop problem or end user buying spree may suddenly reverse corn prices and wipe out any potential profits those speculators may be currently sitting on.

Gavin Maguire is a Reuters market analyst. The views expressed are his own.

The post Analysis: Speculators, commercials in rare corn position tango appeared first on Farmtario.

Frost and heavy rains shaved millions of tonnes off the Chinese wheat crop this year and traditional number one importer Egypt finally regained access to sufficient financial resources to resume wheat imports following two years of only limited trading activity amid the ‘Arab Spring.’

This potential flare up in aggressive import activity may disrupt trade flows to other large scale importers, due to a drawdown in exporter reserves. In doing so, it could spark a complete change in tone in the wheat market at large which until recently had languished in the shadows of other crops such as corn and soybeans.

BACK IN THE GAME

China looks set to bring in close to 9 million tonnes of wheat this year after frost during pollination and heavy rains during harvest cut the amount of wheat suitable for human consumption by around 15-20 million tonnes.

This marks an aggressive step up in wheat import activity from recent years. Between 2005 and 2010 the country brought in less than 2 million tonnes per year and was well outside the top five ranking of wheat importer countries.

Though China is likely to rival Egypt as the World’s top importer for the 2013/14 marketing year, it is not the first time it has played a dominant role in wheat trade. During the first half of the 1990’s China was routinely the top importer of wheat, often bringing in nearly twice the amount sent to Egypt and other top locations.

Though China’s emergence as a top wheat buyer may have the appearance of a new phenomenon, it is not unprecedented and not anything Chinese traders are unfamiliar with.

What is new is China’s aggressive play for wheat is occurring just as Egypt looks set to return to the wheat import game. Egypt underwent a protracted absence due to trade disruptions during social and economic upheaval in the wake of its 2011 ‘popular uprising.’

Egypt’s economy was devastated by the aggressive change in leadership seen in 2011, which disrupted credit markets and drove several established trade partners away as the new regime took over the running of the country. Many grains analysts are hoping the change in leadership last month will bring about a speedier resumption of commodity flows to the country.

Some promising developments have already taken place in recent weeks. Egyptian authorities secured multi-billion dollar loans from the United Arab Emirates and used that windfall to start financing talks with major wheat suppliers such as Russia.

With loan agreements and wheat supplier contracts in place, wheat market traders expect Egypt to embark on a purchasing drive that will cater to near-term consumption requirements and start to replenish domestic reserves driven to their lowest levels in close to a decade.

This clash of a rejuvenated Egypt with an aggressive China on the world import stage stands to be one of the most potentially disruptive demand-side developments in the wheat market in years. It could well set the tone for a period of better-supported and more volatile world prices in the months ahead.

STOCKS RECALIBRATION

This impending swell in import interest will sharpen market focus on the degree of any fresh purchase agreements conducted by Egypt, China and other top importers over the coming months. It will also draw greater scrutiny to the amount of wheat inventories available for consumption.

At face value, world wheat inventories of more than 172 million tonnes appear to be relatively abundant. The world stocks-to-use ratio (a measure of relative supply tightness) of more than 24.5 percent is above last year’s reading and sharply higher than the 21-22 percent levels that prevailed during the 2007-2008 wheat market rally.

However, when you subtract those inventories that are locked away in Chinese silos and are thus highly unlikely to become available to any other consumer nation, the stocks picture is dramatically tighter at just over 115 million tonnes. It highlights the degree to which China’s substantial crop holdings can often paint a misleading picture of global crop availability, as such reserves are effectively off limits to any other import countries.

A fairer measure of supply availability is to track the inventories located within the top exporting countries — Australia, Canada, The European Union, The Former Soviet Union, and the United States. Combined, these countries are estimated to hold roughly 51 million tonnes of wheat, or roughly 29 percent of total inventories.

Following the recent and projected Chinese and Egyptian import deals with Australia, Russia and elsewhere, those inventories can be expected to decline notably, which should exacerbate any sense of emerging tightness in this market

On the one hand, such a drawdown in available stocks bodes well for other exporters such as the U.S. and Canada, which due to proximity reasons often lose out to Black Sea and European suppliers on Middle Eastern and Asian trade deals.

For other large importer nations, the impending reduction in available stocks due to higher import demand from China and Egypt will be cause for concern. It could potentially trigger a wave of more competitive import bidding among those other countries as they try to avoid being outmaneuvered by their larger-scale peers.

Gavin Maguire is a Reuters market analyst. The views expressed are his own.

The post Analysis: China, Egypt import tussle could reignite wheat market appeared first on Farmtario.

But judging by the fact that there are nearly four times as many option bets that prices will fall roughly $2.50 from current levels than will climb by that amount, most traders at this juncture appear convinced that the developing U.S. crop will get the rains and growing conditions it needs to fulfill its potential and meet current output projections.

PUT YOUR MONEY DOWN

Record-high estimated plantings combined with broadly favourable weather thus far in the growing season have spurred U.S. Department of Agriculture crop forecasters to project a record 3.42 billion bushels of soybeans to emerge from U.S. farms this fall.

Given that domestic inventories would more than double under that scenario, such a massive haul of fresh supplies would likely have a negative influence on prices.

But given that we are still weeks away from the U.S. soy crop’s most critical period, all crop forecasters admit that forthcoming weather conditions during the first half of August remain the chief determinant of crop-size potential.

As such, most traders have adopted a wait-and-see approach with regard to price forecasting, and will adjust expectations based on updated weather forecasters nearer that critical time frame.

That said, some traders have already laid down their bets for prices to jolt one way or the other out of the currently tight sideways trading band.

Some clearly expect prices to push higher, and have purchased call option contracts that will only appreciate in value should the underlying futures market veer sharply above current price levels ahead of the November contract expiration. Such a scenario would likely only occur if the August weather conditions turn hostile toward the developing crop and deprive the emerging soybean pods with sufficient moisture to fill out to their potential.

And these bullish positions are not merely confined to strike prices modestly above current levels. More than 7,000 contracts are in place at the $17 strike price, which would require a more than 30 per cent advance in November futures prices before having a chance of entering “the money” in terms of option payout potential.

But a greater number of traders seem to be banking on the U.S. crop getting all the rain it needs, with more than 35,000 put options in place at the $10.00 strike and a further 17,000 in place at the $9 strike, which is close to 30 per cent below current futures values.

Additional pockets of potential selling interest reside at regular price intervals below current prices, which could well add waves of additional bearish market energy to any downward grind in prices over the coming weeks.

CAUGHT SHORT

As bearish as the concentrated clusters of bearish put options located under current market prices may seem, they could also be viewed as potentially bullish should market sentiment reverse and prices push higher.

Options market positions can often reflect the prevailing sentiment and positioning in the futures realm, and so the bearish strategies being deployed in options could well indicate a preponderance of short positions in the futures arena.

And the recent trend in open interest in the November futures contract does indicate that traders have been building short exposure to the market, with open positions climbing over the latter half of June as prices declined from more than $13.20 a bushel to roughly $12.70.

This build in November futures open interest is counter to the trend seen in soybean futures open interest as a whole, which declined by more than 100,000 contracts from mid-June to mid-July as advances in soybean planting progress were made and traders opted to exit long positions in old crop soybeans ahead of the July contract expiration.

But the fact that new positions have been initiated in the November contract as prices have been on the defensive suggests a growing number of traders are anticipating new crop soybean prices to drift lower as the growing season rolls on. Should those traders be proved wrong, and prices instead push higher, then a round of short covering will likely unfold as those traders scramble to buy back those previously sold contracts, which would naturally help to propel prices higher still.

For now, options market activity suggests most traders are confident that the U.S. soybean crop will encounter broadly friendly growing weather for the remainder of the growing season, and that new-crop prices will follow a downward path as harvest approaches in the fall.

But any change in weather conditions towards a more intense and dry heat could spark a change in options market strategies and bias, which in turn could be a leading indicator of what may unfold in the futures realm soon after.

Gavin Maguire is a Reuters market analyst. The views expressed are his own.

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But even as harvest progress continues to weigh on near-term market sentiment, wheat prices are at risk of pushing higher as global demand prospects pick up and jittery short-biased speculative traders try to buy back positions before crop prices regain much upside momentum.

SHORT BIAS

The approach and onset of the winter wheat harvest in the U.S. traditionally spurs speculative traders to establish short positions in those markets as the cutting and delivery of millions of tons of fresh wheat typically pressure prices going into the early summer months.

And that price pattern has certainly unfolded again in 2013, with CBOT wheat futures slumping from more than $7.05 a bushel in early June to below $6.50 at the start of July. This erosion in wheat prices in turn encouraged an escalation in short selling by speculative traders, with non-commercial traders sitting on their largest collective net short positions in the Chicago and Kansas City winter wheat markets in five-year highs as of late June.

Now that the U.S. wheat harvest has passed the halfway mark, and global wheat is being projected to pick up in response to the more attractive price levels, at least some of the traders who had previously sold wheat futures at higher prices are expected to start to look to buy those positions back in order to lock in profits.

DOLLAR TREND

In addition to concerns about increases in global consumption rates, short-biased wheat traders will also be mindful of the recent change in the outlook for the U.S. dollar, which has strong influence over commodity price action.

For most of 2013 the U.S. dollar has trended generally higher on the assumption that the upbeat tone of U.S. equity markets will spur the U.S. Federal Reserve to ease off its quantitative easing program that has flooded the U.S. economy with cheap funds designed to stimulate growth. Expectations for an eventual rise in U.S. interest rates have also been supportive for the greenback.

Following a recent pronouncement by the U.S. Federal Reserve Chairman that ‘easy money’ policies would remain in effect for the foreseeable future, the U.S. dollar has trended lower, and forced commodities traders to brace for a renewed period of U.S. dollar softness that should generally be supportive for most commodities.

For traders holding short exposure to wheat, this development has likely provided another reason to start buying back some of those positions, especially given wheat’s clear tendency to respond to dollar moves in recent months.

SEASONAL SWING

The unwinding of speculative short positions over the summer months is actually a fairly common occurrence, with clear trends being evident in each of the past three years around this time in the season.

In 2010, wheat production problems in Russia drove global buyers towards the U.S. for supplies, and so prompted a historically quick swing in speculator sentiment from broadly bearish to aggressively bullish in the early summer of that year.

A similar swing occurred last year as the hot and dry conditions unfolding in June and July ensured crops would struggle to reach their yield potential and ultimately leave supplies tighter than originally expected.

This year the overall outlook for crop development remains broadly favorable, so there is less urgency at this stage for speculators to switch their view from bearish to bullish just yet.

Still, the projections for global wheat demand to climb in the months ahead should be enough to spark a collective trimming in short exposure by the non-commercial community, which tends to act in unison once acknowledged trend changes have taken place. The USDA’s recent projections for a tightening in World wheat stocks – largely due to higher Chinese imports – should offer an additional incentive to reduce short exposure.

Furthermore, should wheat prices gather sustained upside momentum, and a consensus emerge that additional gains look likely, the temptation for speculative traders to reverse their bias from short to long will increase to potentially add even further thrust to any upcoming wheat price advances.

So while the recent and near-term price bias in wheat may be to the downside as harvest continues at pace, prices may start to veer higher before too long as firmer global demand rates chew through inventories and net short speculative traders begin to trim or verse their positions.

Gavin Maguire is a Reuters market analyst. The views expressed are his own.

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But the shortage of supplies in Brazil and Argentina following this year’s drought in that region has forced the world’s top buyer China to start the current quarter with a six-year-high purchase of U.S. soybeans for the month of July and show continued solid demand so far in August.

Record high domestic soy prices suggest China may have further import buying to do in the weeks ahead, and should that buying occur amid fresh fears of potential U.S. crop shortages, could prove enough to push U.S. soy prices beyond the $20 per bushel mark.

Scraping the barrel

The primary factor underpinning the soybean price in recent months has been the fact that supplies of the crop have dwindled sharply following steep production losses in both South America and the U.S. — the top exporting regions of the crop — just as global consumption of soybeans hit record heights.

Large end-users such as China were somewhat forewarned of and prepared for the prevailing supply tightness after having tracked the drought-hit South American growing season carefully throughout late 2011 and into 2012.

But with the subsequent U.S. crop also getting hit by crop-threatening growing conditions, soybean buyers are starting to grow concerned about the diminishing reserves of the crop.

So far China and other major importers have not started to deviate too much from normal purchasing patterns in terms of export market activity, as top suppliers Brazil and Argentina theoretically remain ‘open for business.’

Indeed, China’s total soybean imports for the month of July were at their highest level since June of 2010 to confirm that supplies were indeed still available for those willing to pay the prevailing price.

However, there have been some subtle adjustments in China’s soy purchasing patterns that will be worth closer inspection in the weeks ahead after total soy imports from South America fell short of previous highs for the month of July just as imports from the U.S. hit a multi-year high for that month.

Indeed, Chinese imports from the U.S. in July were more than 10 times larger than for the same period in both 2011 and 2010, revealing that Chinese purchasers were forced to break with recent traditions in order to secure the desired amount of soy coverage last month.

And given that anecdotal evidence suggests South American soy supplies have declined further in recent weeks on additional Chinese purchases and domestic use, a further uptick in Chinese buying from the U.S. looks likely in the weeks ahead.

Coming to America

Indeed, there is evidence that Chinese traders have already picked up the pace of purchases from the U.S. in recent weeks, and are closing in on the record-setting levels of 2011 over the final weeks of the 2011/12 marketing season.

It will be several more weeks before the official commodity import tallies for the month of August are known, but in the interim the usual weekly crop export sales reports will be closely followed for signs of continued strength in Chinese demand.

Domestic strife

Some commodity market analysts are projecting that Chinese soy purchases from the U.S. and elsewhere are bound to slow over the coming weeks in response to prevailing high global prices.

But as high as the export price tags may be from origins such as Argentina, Brazil and the U.S., they remain below the domestic price of soybeans for many users within China, often by more than $100 per tonne.

And these high domestic prices prevail despite a recent record-large sale of Chinese government soybean reserves to domestic soy processors. The reserve program is part of an initiative designed to fend off inflation in food and feed staples, and is centred on the notion that state-level traders go to the export market to acquire and build inventories of key consumer and industrial crops which can then be sold into the domestic arena in order to dampen interior price rises of those commodities.

But it is clear from the inexorable climb in interior soy prices that such sales are so far having only a negligible effect at best.

Further, the fact that the recent record weekly sale of more than 400,000 tonnes has already been made ensures that Chinese traders will now have to replenish those reserves in addition to conducting their usual hand-to-mouth purchasing procedures.

As a result, additional strong Chinese interest in U.S soybean supplies looks likely in the weeks ahead, and could well prove to be the catalyst that fuels U.S. soy prices deeper into uncharted territory and potentially beyond the $20 mark.

Gavin Maguire is a Reuters market analyst. The views expressed are his own.

The post Chinese buying could push soybeans over $20 appeared first on Farmtario.