- HEADLINES: Rains to start Friday across Argentina; World Ocean freight rates decline to multi-year low; Wheat takes US corn export lustre.
- Chicago grains are mixed at midday with the grains firmer, while soybeans sag. Brokers indicate that index fund flows are still occurring in the grains, mostly in corn, and investors try to gain exposure to ag/food markets. Some large brokerage firms see commodities outperforming equity markets in 2023 and are trying to diversify their clients accordingly.
- We do not see fund flows as continuing or sizeable beyond this week, it is latent investor index fund type of buying that was waiting to get past the USDA January Crop Report. This flow is also pushing spreads, which is keeping some sellers aside. March corn futures trading at a 4-cent premium has some bears scratching their heads. However, Chicago spreads are more about order flow than cash markets, at least until spot futures are closer to delivery.
- We look for a mixed to mostly lower Chicago close on fund flows. Thereafter, it is all about when and where rain drops hit in the gauges of Argentine farmers. The bulls won’t budge on their length until the rain falls.
- Chicago brokers estimate that funds have bought 1,500 contracts of wheat and 5,500 contracts of corn, while selling a net 5,100 contracts of soybeans. In the products, funds have sold 2,100 contracts of soymeal and 6,900 contracts of soyoil. The soyoil selling was sizeable as key moving averages were breeched. Rain across Argentina could cause a decline below $0.62 March soyoil which would set up the next purchase opportunity. Over time we look for the oil share trade to appreciate.
- World ocean freight rates have fallen to a 31-month low which argues that the world economic outlook is worsening, and raw material demand is soft. The China reopening following the Lunar New Year holiday could help spur demand in metal, energy, and ag markets, but assumes that China’s consumer steps forward with new spending. The Chicago rally since the US harvest has been about supply and the loss of US corn/soybean crops and the Argentine drought. It is demand that is troubling with US corn, soybean and wheat exports sagging and feed demand to decline due to falling US livestock numbers and the ongoing fight of the US poultry industry against avian flu.
- Mexico purchased 195,000 mt of US corn. Traders expect that US corn, soymeal, and soybean weekly export sales to be large on Friday. We have concerns that Black Sea or Australian wheat can now trade into SE Asia below the cost of Gulf US corn on a landed basis. And Brazil/Argentina have started to drop their premiums on June forward fob corn to compete with the US. Nearby, Brazil will capture world soybean and product demand on price into September.
- The midday weather forecast is little changed from the overnight GFS solution and remains consistent. A wetter pattern develops across Argentina’s crop belt starting later today with 10-day cumulative rainfall 1.50-4.50” with the passage of 3 fronts. Such rain totals are near to above normal. The extended range 11–15-day period enhances this wet trend which will includes RDGS in Southern Brazil next week. Near normal rain falls across N and C Brazil which will be ideal for late podding soybeans. There will be enough dry slots for N Brazilian farmers to advance their harvest and the seeding of winter corn. No extreme heat is noted, and the outlook stays favourable for record soy production. And it is far too early to worry about excessive wet weather causing any N Brazilian harvest delays or worry for soybean crop quality.
- Friday’s price action will depend on Argentine weather and whether the radar “lights-up” heading into the weekend. China will be on holiday next week which will limit their buying. Key will be if fund managers added to their already record large soymeal length. The market risks are to the downside with cash soybean basis bids weakening. The location and amounts of Argentine rain will direct Chicago prices next week. Our view is bearish.