China’s agriculture futures may draw speculators

Investors may be looking to the weather to judge the market.

PUBLISHED : Monday, 09 May, 2016, 4:08pm
UPDATED : Monday, 09 May, 2016, 4:08pm

Commentators said risks will rise in the next two months from speculative trading in China’s agriculture futures because traders see the market as a new casino on expectations harvests will fall because of bad weather.

To be sure, there are some tailwinds to support China’s agriculture commodity prices in June or July. China may meet supply pressure on importing agriculture commodity when changes in weather patterns pose a big risk to global agricultural supplies.

The highly possible advent of La Niña — fluctuations in temperature between the ocean and atmosphere — will bring drier-than-usual weather to some states in the US and South America, locations of key growing regions of grain and soybean. There are echoes of the US drought in 2012 that devastated grain and oilseed crops struck during a La Niña year. The opposite effect is called El Niño.

“Coming unfavourable weather provides a good excuse for speculation in China’s agriculture commodities this June,” Dong Tian tian, an analyst at Beijing-based Sdic Essence Futures, said. “The fever for iron ore and steel futures is now easing. Where the speculators go? Possibly, agriculture futures.”

“We have already seen some cash going into US agriculture commodities to deal with the possible declining supply,” Dong said.

Board of Trade soybean, corn and wheat futures for July deliver all jumped over 10 per cent in mid April, with soybeans extending a rally above $10 a bushel on April 12, the highest price since July. Corn traded near $4 a bushel at the same day. They all slightly retreated in May. China is expected to follow the commodity benchmark.

She said investors generally agree that the prices of some agriculture futures have fundamental supports and another rally is expected.

Investors expect a decline in supply because agriculture production in US and South America will be hit by the expected coming bad weather. Plus, the oversupply situation in China’s agricultural market has eased in 2016 due to lower inventories.

Oil World reported that flooding in Argentina, the world’s third-largest soybean grower, is expected to cause an around 5 per cent reduction in that crop this year.

Brazil said in April that it will ask to suspend a 10 per cent tariff on imports of the grain from non-Mercosur origins such as the United States. Mercosur is the common market of the South America, compromising of five member countries, including Argentina, Brazil, Paraguay, Uruguay, and Venezuela.

Corn prices are hovering at record levels due to tight supplies, signalling a grower may need to import grain. Meanwhile, the country’s crisis of president Dilma Rousseff ‘s possible impeachment also increased investors concerns on the nation’s agriculture supply decline.

Demand, however, is expected to slightly increase in the agriculture market as spiralling pork prices in China will stimulate production of the meat which requires great demand for corns and soybeans.

China’s Ministry of Commerce said on its official website last Thursday that pork prices will remain high this year, but price rises are controllable through government measures to ensure a stable supply.

Speculation is still a major catalyst for any expected rally, Dong said.

She said no matter the negative effects that any bad weather may bring , a serious situation of demand and supply mismatches will not appear in China’s agricultural market which remains supported by high inventories.

Dong’s view is echoed by Zhang Jian, deputy manager of investment and consultant office at Guoyuan Futures. He said speculative trading in China’s agricultural futures market is highly expected as the La Niña pattern exactly provides an opportunity for investors to revalue the market and adds to prices for agriculture futures. He said he didn’t expect such a crazy move in agriculture futures as in was seen in steel.

Investor appetite for industrial materials has waned now after China’s three futures exchanges raised transaction fees and margins due to orders from regulators to limit speculation.

Prices of main metal and bulk commodities soared as investors piled in since the beginning of March. “A property market rebound and new projects actually boosted commodity demand from late February to early April,” said Wang Wenjun, senior analyst at Guang zhou futures. “As spring approached with the start of a new year, it is always a peak season for new projects.”

With profits increasing, speculators flooded into the market in April and you steel rebar futures hit a 19-month high on April 21.

Rebar is used to reinforce concrete.