- Funds regard ag investments (Chicago grains and cattle/hogs) as cheaply priced as a new N Hemisphere growing season begins. With the US stock market at a record high and funds flush with cash, managers are looking for low risk bets. The problem is that as Chicago futures market rallies, the cash markets fail to follow. This is because of the record world supplies of soybeans, wheat and corn that will be available as of March 1st. Also importantly, Chinese import demand for world grain will likely be down some 30-40% this year as higher tariffs are enacted and their own domestic corn market sags to a seven year low. This is leading world corn/wheat trade to slow, curiously at a time when funds are buying? Obviously, either funds or the cash market is wrong! Only time will tell who it is?
- Currently, average ex-farm spot milling wheat premiums in the UK are around the low single figures. There has been less than a £10/t premium for full specification bread wheat (nabim Group 1, ≥13% protein, ≥250s hagberg, ≥76kg/hl) over feed wheat since October. However, UK bread milling wheat prices are historically firmer, with average UK ex-farm prices two weeks ago hitting their highest level in 22 months. As such, the small average premium over feed is much more to do with strong feed wheat prices rather than milling markets themselves. The UK now has some of the most expensive feed wheat in the world. As part of the tighter UK wheat supply and demand picture that we already knew about this season, there has been continued strong demand for feed wheat for both bioethanol and animal feed. Alongside a strong export pace at the start of this season, this is now leading to higher UK feed grain import requirements.
- Firm feed wheat prices, rising up close to milling values, are a sign of the market trying to attract some wheat with milling quality for feed and/or bioethanol usage. The narrower the premium, the more likely wheat with milling potential is to end up in these markets instead, so the narrow premiums are at the same time contributing to the firm prices for UK milling wheat.
- In contrast to the UK situation, the latest Australian government estimates for wheat and barley production released this week are a further sign of the well-supplied global market. Both wheat and barley output for 2016/17 are estimated at record levels (35 million mt and 13 million mt respectively). These government estimates exceed the latest local USDA attaché estimates (33 million mt and 11 million mt) made two weeks ago, as well as the latest official USDA figures.
- Australian barley exports are expected to be particularly strong as a result, providing additional competition for the UK to non-EU destinations at a time when the exportable surplus remains relatively high. On the wheat side, with UK prices already near the top of the pile globally, the question is how far UK prices can continue to rise outside of any world market rally. However, the latest Australian figures could add further weight to world markets.
- Chicago markets started out the session lower and have recovered on new speculative buying. No bullish fundamental news is available, and it just appears that fund managers are continuing to look at grains as cheap and make new investment. We doubt that funds can sustain any lasting bullish run, but it should be noted that the market has not yet technically provided any chart based sell signal.
- Similar to the US last harvest, soybean yields in N and C Brazil continue at record levels suggesting a much larger crop. The Mato Grosso soybean harvest reached 50% over the weekend and yield totals are so strong that it has some talking that Mato Grosso could be gathering a 31-32 million mt soybean crop! Corn yields are also stellar and producers are reported to be very pleased. The harvest is just starting in C Brazil and soybean yield results have some well-placed crop analysts discussing a crop size of 107 million mt or more. Such a crop would make crop losses in Argentina less important with the 2017 Brazilian soybean crop up a potential 10-12 million mt from 2015/16. Note that a 106.5 million mt Brazilian soybean crop would not require record yields that were scored back in 2011.
- Brazilian farmers are delivering on prior sales commitments, with many more starting to write basis contracts. This leaves the producer open on flat price and currency, but it does provide soybeans to exporters/crushers. The recent jump in Brazilian basis is due to strong Chinese loadings with over 2 million mt being exported so far in the first half of February. China looks to load out some 5.5-6.0 million mt of Brazilian soybeans during February, a record.
- Some are suggesting that slow Brazilian cash selling is the reason for the Chicago rally. Yet, Brazilian cash soybean sources are finding farmers willing to deliver on prior cash contracts and sign basis contracts to move newly cut beans. As the Brazilian harvest pushes ahead, we would expect that farmer selling/supply will increase.