Nogger's Blog

04/01/13 -- EU grains closed the week on the defensive once again with Jan 13 London wheat down GBP1.10/tonne to GBP205.30/tonne, May 13 was also GBP1.10/tonne lower to GBP207.40/tonne and new crop Nov 13 fell a more modest GBP0.75/tonne to GBP182.25/tonne. Jan 13 Paris milling wheat was down EUR2.50/tonne to close at EUR251.00/tonne.

For the week that puts Jan 13 London wheat GBP1.45/tonne lower and new crop Nov 13 down GBP4.30/tonne. Jan 13 Paris wheat is EUR0.25/tonne easier versus last Friday.

US grains in general continue to fall as fund money exits the complex, dragging European grains lower with them. The extremely short "relief rally" that followed the eleventh hour deal to, at least temporarily, prevent the US tumbling off the edge of the fiscal cliff has quickly run out of steam this week.

As we have seen on numerous occasions before in recent years, price movements in the grain markets these days frequently owe more to money inflows, or in this case outflows, than fundamental factors.

Whilst some of this selling appears to be a result of an outright "risk-off" move, Index funds are also said to be starting to rebalance their commodity portfolios for 2013. Strange as it might sound, this essentially means them selling commodities that have performed particularly well for them in 2012, in favour of those that haven't.

The reason for that is that these better preforming commodities ie wheat, soybean and corn now constitute a larger percentage of their overall portfolio than fund managers would like. For example whilst CBOT wheat values appreciated by more than 19% during 2012, NYMEX crude oil dropped by 7%. A commodity fund that therefore wants say 10% of it's holding in crude and 5% of it's holding in wheat now finds that it needs to sell wheat and buy more crude to get back to this desired percentage.

There are also reports of some portfolios being restructured to include some Kansas wheat, and therefore less CBOT wheat in the mix in 2013, along with others suggesting that some bean exposure will be replaced by meal length.

Various trade estimates kicking around suggest that this fund rebalancing will lead to further fund selling in CBOT wheat, soybeans and corn next week versus buying in KCBT wheat and CBOT soymeal. Some numbers I have heard put potential CBOT wheat selling in the 50-70,000 contracts region, which would certainly be a bearish volume to come onto the market.

It is unclear how much, if any, of the recent selling we have seen forms part of this restructuring. It may also be that some of it can be attributed to other spec money looking to make a quick profit by establishing short positions ahead of this anticipated fund selling.

That could make for a choppy week ahead, especially with the USDA's January WASDE report due out next Friday.