- The equatorial Pacific has been at La Niña thresholds for two consecutive months, and all weather models remain in agreement that La Niña will be established officially by December. La Niña then persists into Feb/Mar. This won’t be an issue for the N Hemisphere growing season (neutral ENSO is expected by spring), but a close eye needs to be kept on S Brazil and Argentina over the next 90 days. Brazil’s forecast is a bit wetter in the 6-10 day period, and soaking rainfall upwards of 4-6” will impact parts of Mato Grosso, Goias and Minas Gerais, where it is most needed. The EU and GFS weather models are in fair agreement on light to moderate, but scattered, rain impacting Argentina late next week. Temperatures in Argentina will rise into the 70s and low 80s, and so much more rain will be needed by early December. 30-day rainfall in Cordoba, Santa Fe and fringe areas of N Argentina rests at 40-60% of normal. Next week’s rain event will do little to boost soil moisture.
- Two issues will keep growth the US’s share of world trade limited over the next 12 months, and both centre on Russia. The first is that following incredible yields in 2017, trend yield in Russia will be elevated, and in fact trend yield there is growing at a pace much faster than anywhere else. A simple 20-year linear trend in 2018/19 is pegged at 2.68 mt/ha. Trend yield in Russia has grown 27% since 2010, which compares to growth in US trend wheat yield of just 9%. Russian farmers keep getting better! The second is that, while logistics will indeed cap exports, carryover stocks are forecast at a near record large 17 million mt. This will keep the domestic market in Russia depressed, and also provide a rather large buffer against weather issues next spring and summer. We note that above normal precipitation and above normal temperatures have been recorded in the Black Sea so far this autumn.
- We expect Russian wheat acreage to rise 1-2% on last year, as farmers there have maintained profitability despite a drop in price and as weather has been quite favourable in Southern and Central Russia this autumn. Assuming slightly larger total wheat area and trend yield, Russian wheat supply in 2018/19, assuming even semi-normal weather, will stay above 90 million mt and thus sustain Russia as the world’s dominant exporter in Aug-Dec of 2018. Domestic feed and food use is projected higher, albeit slightly, and exports of 34 million mt will likely be hit pretty easily. Stocks/use at 15% in 2018/19 will be about average, but notice that it is well above 2015/16. Russia does not aim to store grain, it’s just that in 2017 it will be forced to. The balance sheet tightens next year assuming normal weather, but a major change in world cash prices is unlikely.
- There is a decent correlation between Russian interior prices and Russian wheat stocks measured as a percent of domestic use. Or, rather, price correlates with the need to sell excess supply. Assuming our preliminary 2018/19 Russian wheat balance sheets, replacement costs in S Russia, from where a majority of exports are sourced, will likely hit a low of $180/mt in Sep-Oct. Assuming normal cost and freight, Russian fob prices next will range from $195- 205/mt, vs. $185-195/mt so far in 2017. However, with Gulf wheat basis in recent years ranging from 60-200 cents over futures, the US market does not expand its share of world exports unless spot futures stay below $4.80. A Russian crop of 65 million mt or less, a yield 10% below trend, is needed to allow US exports to reach above 1,050 million bu.
- Soybeans stayed under pressure through Tuesday after breaking through major moving averages at the start of the week. Fundamentally the market is struggling under the large crop and slowing exports, while Brazilian weather forecasts have turned more favourable as planting starts to wind down. Funds were estimated sellers of; 6,000 soybean, 2,000 soymeal, and 3,500 soyoil contracts. With harvest near complete across the Midwest, cash supplies pressures are easing and supporting cash basis up and down the US river system. Basis prices at terminals on the IL and MS rivers are now $.30 over the lows that were scored in late September. Basis at processors in the Eastern Cornbelt has also improved, though cash markets across the Midwest are holding well under a year ago. NOPA will release soybean crush data for October on Wednesday, and ahead of the report the average trade estimate calls for a crush rate near 165 million bu, or unchanged from a year ago. The November Crop Report was the last for the year, and the December WASDE is typically uneventful. The next major fundamental update will likely be in January, which looks to leave Chicago futures in a broad range.
- December corn continues to eye the September contract’s low ahead of first notice day at $3.30-3.35. The USDA’s November WASDE confirmed there is an overabundance of supply, particularly across the Plains, and large deliveries are likely. Funds, however, are now short an estimated 245,000 contracts, a new record, and we doubt sub-$3.30 spot futures lies in the offing. Biofuel margins remain solid in spite of today’s drop in crude and gasoline futures. Argentine basis is strengthening, albeit slowly. S America’s Dec-Feb climate outlook will be updated Thursday morning, and with La Niña to be established soon, it will be interesting to see NOAA’s opinion on rainfall in Argentina and S Brazil. Light and scattered showers will impact parts of Central Argentina next week, but a trend of declining soil moisture will continue into late November, but it remains that either a sharp cut in US acreage or S American yields is needed to balance major exporter supply and demand. More than anything a lack of fresh input into the holidays will sustain listless trading.
- The US$ plunged today, and with wheat not subject to changing biofuel margins the market was allowed to stabilise following Monday’s collapse. There is little fresh news available, though there is talk Egypt may again lower its ergot tolerance to 0%, and as the Russian Ruble continues to weaken, rallies will be limited to fund short covering affairs. We peg managed funds’ net short this evening at 124,000 contracts. Even other world markets appear stuck. EU and Black Sea fob offers continue to do very little on a weekly basis and are offered near parity with one another through winter (Russia still wins based on quality and freight). Gulf basis, however, has rallied and has pushed comparable HRW offers to levels well above the world market. Iraq interest is noted, but otherwise lasting rallies in futures will do more harm than good to US demand. Abnormally warm temperatures will continue across the Black Sea region into the opening days of December, and so the seasonal slowdown in Russian shipments will be a bit delayed. Short covering rallies do lie in the offing.