- The week opens in weak mood with agri markets both sides of “the pond” displaying weaker tendencies. Pricing boards today are noticeable by the glare of red numbers staring back at traders as price levels decline once again. Little comfort to those who have physical cover in place, or is it? Cash basis levels, or the price one has to pay to secure physical delivery of grains and oilseeds when compared with corresponding futures markets, have increased markedly. CBOT vs. cash soybean prices are displaying a marked divergence, one which is creating a stir at the present time. $0.80 to $1.00/bu premiums for physical soybeans over futures levels are at the very top end of “normal” levels and leave huge question marks over the effectiveness of a deliverable futures contract where both cash and futures prices should converge and meet at the time of futures contract expiry. With big cash premiums in evidence it would be easy to suggest taking delivery of futures contracts to elicit best value; despite the administrative burden. There has been a suggestion that default might be a feature, we doubt that this could be the case otherwise the integrity of futures markets would be destroyed overnight. With this in mind it could well be that we see a massive squeeze on the shorts as the May ’13 contract approaches the end of its life; i.e. Prices could well push substantially higher as the shorts struggle to exit their positions. If this is a feature, it is highly likely that we could see a repetition in the July ’13 contract as that reaches expiry.
- In the news we hear that the Chinese bird flu situation is far from improving; at the weekend China reported over 100 cases of human H7N9 influenza with some 20 dead. In what appears to be a country wide reaction, the price of chicken meat has fallen over the last three weeks. In areas specifically affected by the virus price drops have been as much as 50%. There is now a strong expectation that corn and soybean imports will decline and prices are being pressured as a result. The potential impact could well extend to new crop northern hemisphere prices as Chinese commitment to imports extends forward some way; this will add to perceived “big US crop pressures” and the path to lower new crop is being discussed quite widely by the bears.
- Delayed US plantings, particularly in corn, are coming to the fore and raising the spectre of a late harvest, which will add pressure to the already tight old crop supply position. The previously mentioned record cash basis levels confirm this; added to net fund short positions in both wheat and corn as of last week, and a far from big net long in soybeans, we could be in position for a “perfect storm” should the funds decide to revert to more usual position size in coming days or weeks.