Once again, in the run up to today’s pivotal 1st September grain stocks report, markets have given way to lower levels as funds reduced their net long positions and the pressure of an extremely rapid US harvest weighed on prices.

Nov ’12 soybeans moved below the $16/bu mark having dropped over $2/bu since early September; corn similarly dropped $1.30 from late August highs; clearly the huge pressure from the large fund positions has taken its toll. In sympathy Dec ’12 wheat has also fallen – but at most $1/bu from the July highs.

Today’s report was anticipated in a nervous fashion by many who were concerned that the key corn stock figure could well include some early harvested new crop volume and, on the surface, appear bearish. However, the reported corn stock figure came out at 988 million bu, which is below estimates of 1.113 million bu and the lowest carryout for eight years. The market reacted with a sharp rally gaining $0.35 in rapid trade and eventually locking the full $0.40 limit higher as traders digest the information. One thing is certain, and that is that the USDA’s October output level for corn will be absolutely crucial for price development going forward. Any yield or output reduction will surely pave the way for a significant jump in prices and likely new highs in price will be required to curb demand to a level which the supply position will allow.

Meanwhile, Soybean stocks were reported at 169 million bu, above estimates of 131 million bu, but the on-going pace of export commitments would seem to absorb the “surplus” and the morning market remains a touchdown. Wheat stocks came in below estimates of 2.279 billion bu at 2.104 billion bu and the (Dec ’12) market has made strong gains right along with the corn market. The USDA has come under fire following a number of their reports in recent years – maybe today’s effort will restore confidence and pave the way for the trade to have faith!

The week has seen Strategie Grains reduce UK wheat output to 13.724 million mt, the lowest level of output since  13.137 million in 2007. This announcement is just the latest in a  steady decline of their estimate since the March 15.587 million mt forecast. This helps to confirm our view that the UK will indeed need to import wheat to prop up the tight balance sheet this season. If this becomes the case we would not be surprised to see US supplies featuring in a competitive tender situation.

Global wheat markets have seen a move away from Russia with the EU believed to be the likely source of Algeria’s 700,000 mt purchase this week. However, it seems that Russia may well have been one of the sources of Iran’s 1 million mt Oct – Dec purchase along with Australia and EU. France and Romania were the two beneficiaries of Egypt’s latest foray into the market place, this time for 300,000 mt for early December shipment, with France winning the lion’s share. There was an offer from Russia in the latest Egyptian tender but it was only 60k mt and it was offered at a premium of $372 per mt, a full $24 higher than the French offer.
In the US, winter wheat seeding was reported at 25% complete as of this past Sunday with no indication of the planting pace slowing. Expectations are for US winter wheat acreage to be up significantly at the expense of other crops and increased potential for double crop soybeans next season. This increase will likely be proportional with stronger soft red than hard red plantings. Some expected precipitation in the drought stricken plains of Kansas should promote growth in early planted fields but additional shower activity will be needed to alleviate the strong concerns for establishment.

News from southern hemisphere wheat producers does little to boost confidence levels right now as dry weather continues to be a feature in Western Australia and the prospect of a crop below 20 million mt is openly discussed by traders. This obviously brings with it concerns as to the ability of Australia to keep up with export levels which we have come to expect.

After last week’s conflicting Russian ministerial commentary on “will they, or won’t they,” limit or restrict exports, the latest information leads us to believe that intervention stocks are likely to be released onto their domestic market to relieve the seemingly inexorable rise in prices which have been a feature this year. If this is the case we doubt that it will allow further grain for release into export markets and alleviate global supply tightness.

If the US markets, and in turn our own domestic grain markets, can gain confidence from today’s stock report, it is quite possible that the price drop experienced in the last few weeks becomes a low point which may not be repeated for some time to come.

US wheat and corn markets have declined ahead of tomorrow’s market report which is anticipated to be bearish. Soybeans gained a degree of strength on short covering but has failed to regain and sustain positive territory so far this session.

Of note was the dismal level of corn exports, 400 mt, higher sales levels were recorded but were offset by cancellations from “unknown destinations”. Soybean sales however have reached 77% of the USDA’s annual forecast with 50 weeks of the marketing year to go! Destinations other than China have featured although it was reported that China have secured further supplies for this season delivery. There still appears to be little, if any, evidence of slowing demand and we believe there is little Brazilian supply to help alleviate the situation.

EU wheat is believed to be the source for Algeria’s 700,000 mt purchase and it was reported today that EU exports last week were 365,000 mt, bringing the season total so far to 3.3 million mt.

Other wheat news includes no rain in the forecast for W Australia into next week and an absence of rain in the forecast for the Black Sea region into mid-October. The current market decline does not seem to reflect the conditions which seem to be developing right now!

Turning to tomorrow’s report we fear that the 1st Sep corn stock figure will reflect some early harvested new crop material and, on the face of it, look better than it truly is. If this transpires to be the case we would expect to see further sharp declines as traders absorb the news. However, we still expect the October output figures to reflect lower figures, particularly in corn. Any growth in soybean output is likely to be more than fully absorbed by the massive pace of exports being experienced right now.

The bare facts still remain pretty clear; we have had a devastating drought year, not just in the US, end stocks in the US and more globally are going to be tight even from a historic perspective and soybean export pace still shows no sign of diminishing. The conclusions we draw remain unchanged on the basis of this outlook.

Commodities continue to sell off as Greece and Spain see renewed civil disobedience and feelings that global economies are weakening rather tan strengthening.

The continued selloff has left commodities very much oversold from a technical perspective but the weight of the fund longs which have been dumped have pushed markets to levels which do feel overdone right now. Friday’s report will prove a key point upon which prices will slide further or gain a foothold from which to attempt to test the highs once again.

US farmer selling has been absent today as growers have elected to store crops and this has pushed cash basis to stronger levels.

Egypt has, once again, entered the wheat market in a tender, this time for early Dec ’12 shipment, which saw Romania win 120,000 mt and France 180,000 mt. Prices were some $2 to $4 above the last tender.

We hear news that the Russian Agricultural Ministry is discussing sales of their intervention stocks in an effort to limit further escalation of domestic price levels.

The current price break has encouraged soybean buyers as the US reports further export sales of 140,000 mt, believed to be to China, as their crush margins get closer to profitable.

Market prices dropping as they have are stimulating demand in a way which we believe can not be sustained, we are approaching levels which can only be described as cheap when viewed in purely fundamental terms.

We are at what we can only describe as “a pivotal period” for market price development for forward periods.

The first piece of news to report today is US crop progress as follows:
US CORN CONDITION- 24 PCT GOOD/EXCELLENT, 24 PCT WK AGO, 52 PCT YR AGO -USDA
US CORN – 88 PCT MATURE VS 76 PCT WK AGO VS 57 PCT 5-YR AVG -USDA
US CORN – 39 PCT HARVESTED VS 26 PCT WK AGO VS 13 PCT 5-YR AVG -USDA
US SOYBEANS CONDITION- 35 PCT GOOD/EXCELLENT, 33 PCT WK AGO, 53 PCT YR AGO -USDA
US SOYBEANS – 73 PCT DROPPING LEAVES VS 57 PCT WK AGO VS 59 PCT 5-YR AVG -USDA
US SOYBEANS – 22 PCT HARVESTED VS 10 PCT WK AGO VS 8 PCT 5-YR AVG -USDA
US WINTER WHEAT – 25 PCT PLANTED VS 11 PCT WK AGO VS 27 PCT 5-YR AVG –USDA
Clearly both soybeans and corn are well advanced as evidenced by harvest progress which is at a pace that can only be described as very rapid, and the winter wheat crop is also on target to match five year average planting pace. Expectations are for harvest pace to continue along current lines and finish early.

We could pontificate on early yield data but prefer to await more reliable information at this time – watch this space!

Russia is scheduled to hold a food security meeting later this week which could well pave the way to a clearer direction on their exporting future. The ongoing rise in their domestic flour and wheat prices is bound to have some bearing upon the decisions made.

Australian weather conditions continue to elevate concerns for their final wheat output which is being put at sub 20 million mt by some forecasters.

The UK could well be turning to the US for imports this season as the poor harvest looks as if the domestic balance sheet will be unable to satisfy demand this season.

• A further day of price declines across the soy complex, corn and wheat as fund and producer hedge selling continues to pressure prices.

• Volume trade appears to remain reasonably high.

• US soy and corn harvest pace continues well.

• Soybean yields contain conflicting data with both better than expected and disappointing figures. Next week should provide more definitive data when a greater acreage is harvested.

• US export demand is being stimulated by the current price decline – a position which the S&D can not afford.

• We would expect to see forthcoming wheat tenders featuring EU and US supplies in the near future as other origins move upwards in price.

• India raising concerns over rising prices and could potentially  restrict export activity.

• Australian wheat crops remain pressured by continued dry conditions.

• Early Argentine wheat yields are reported to be disappointing.

• Given the dependence of global wheat markets on international trade the news from Australia, Argentina and India does not look good for the balance sheet.

Another day of profit taking followed yesterday’s rally with the soy complex taking the brunt of the drop in prices. We have yet another day with no real fresh news and consequently the market feels somewhat directionless. The falls are not sustained and chop both ways in a sloppy decline.

US weekly export sales were poor in corn with under 70,000 mt, well below the estimated 350 to 400,000 mt; wheat was well within estimate and soybeans were at the upper end of expectations with soy products both above estimates. The key here is that soybeans show no sign of rationing and the current price drop is simply encouraging further consumption which can not be sustained. Consequently we anticipate price strength before harvest is completed, particularly in soybeans.

Yesterday’s wheat tender by Iraq highlights the structure of pricing on a global scale, with Russia offers succeeding purely on a freight advantage and only marginally below both Australian and US offers. Our view that Russian offers will soon cease to feature in export markets appears to be closer than before.

At home ADAS’s latest figures suggest that the UK output is at a 20 year low despite the fact that harvest is not yet finished. Estimated output sits at 6.9 to 7.2 mt/ha subject to final figures from yet to be gathered crops in northern regions. This is a reduction from previously estimated levels of 7.1 to 7.4 mt/ha and features particularly low specific weight grain. The ADAS figure is broadly in line with the figures released by Strategie Grains last week.

As the US markets draw towards a close we note that news of better than expected soybean yields abound, dragging values lower. Similar news circulates on corn yields with the same price impact. Fund selling appears to continue as does selling by elevators to hedge their intake and this weighs on prices.

We continue to restate our dogged view that the current price decline is not a reflection of long term fundamental supply demand change, and that we will see new price highs before the season is over.

Has the downside in ag markets reached an end? With “turnaround” shifted from its usual Tuesday by a day to Wednesday all the key crops ended today’s session in positive territory. Once again though, there has been little in the way of fresh news. China have continued to sell off state soybean reserves, as they have for some time now, and estimates (for what they are worth) suggest they have a couple of months worth of stocks at their disposal. It must be remembered that there is no corroborative data to support these figures however.

It would appear that selling activity by funds has dried up today, hence the reversal of the trend of the last few days, and some fresh buying has been apparent as the market hit a technically oversold position, albeit in light volumes.

It has been reported that Russia have made an additional sale of wheat, this time 150,000 mt to Iraq for delivery in Nov ’12. Their ministry have tightened the range of their 2012 grain crop estimate to 72 to 73 million mt whilst estimating the season’s exports in a wide 10 to 14 million mt.

Early US harvest reports indicate better than anticipated yield in soybeans although, as we have previously said, more data is necessary to establish a credible pattern.

Oil World has published their S American soybean production estimates for 2012/13 as follows:
Brazil 56 mmt vs. 66.4 yoy
Argentina 56 mmt vs. 40.5 yoy
Paraguay, Uruguay and Bolivia also qualify for improved estimated production although overall significance is relatively small.

Markets have again continued in liquidation mode led, this time, by Chinese futures prices dropping overnight. There has been little, if any, significant fresh news – and as we said last time – lower prices will trigger consumption which the market, from a supply perspective, can ill afford.

Harvest is in full swing in the US and in addition to fund liquidation we are seeing physical deliveries by farmers to their elevator which is triggering futures selling (as a hedge by the elevator) which adds to the current downward pressure right now.  We are seeing a short term pressure triggered by an abundance of supply which will not offset the longer term fundamental supply tightness.

We maintain, if a little stubbornly, adding to cover rather than falling into the trap of believing the market is in free fall is the way forward.

S American crops will be required in abundance in order to restore global stocks to adequacy, and the dry Australian picture right now does not add to confidence levels right now.

If the market behaves in the way we expect, we believe that we will see a “low” at some time in the very near term which may well be viewed enviously, in coming months, by those who missed it.

CBOT markets started the day on a weak note which continued in heavy volume trade throughout the session. Favourable harvest weather, profit taking from “tired bulls” and a weak technical chart pattern all conspired to hit grain and soy values sharply. Friday’s weak soybean performance and the previously viewed bullish QE3 background started to lose lustre.
It seems the bulls are now looking for the corn and soybean harvest reach 50% before they embark on further buying sprees. Some are fearful of the upcoming stock report which they fear may well include newly harvested corn and make the old crop stocks look larger that they truly are.
Corn was reported at 26% harvested, up from 15% a week ago and 8% at this time last year; soybeans are 10% harvested and progress in both crops is expected to be rapid.
One thing seems certain, and that is if corn priced drop much further there will be no effective demand rationing, indeed it might even stimulate consumption which the balance sheet simply can not afford; hence our outlook. We still view this price dip, sharp though it is, as an opportunity to add to cover at better prices than seen in recent times.

Interestingly we hear that the US EPA last Friday said it would expand its bio-diesel mandate to 1.28 billion gallons from the 1.0 billion which is in place for 2012. This begs the question, “do they have any intention to lower the ethanol mandate as requested by several States?” Clearly, it would seem that this will not be answered until after the November election is decided.

Another, better, week has passed from the perspective of the UK farmer as combines have been working long hours to gather the rain delayed and weather damaged wheat harvest. Empirical evidence is pointing continually to poor specific weights, reduced yields and the need for millers to turn to overseas markets to source better quality whilst, at the same time, reducing their specifications somewhat for what little UK grain they are prepared to purchase.

The most significant news is probably that of the two Egyptian wheat tenders this week bringing their five-week purchase total to some 1.7 million tonnes. Tuesday’s tender saw Russia awarded a reduced 60,000 mt prompting speculation that their offerings were running low; however today’s tender saw Russia awarded 120,000 mt out of the total 235,000 mt, albeit at prices some $6/mt higher than two days earlier. It seems that the Egyptians are looking to capture tonnes before the Russian “pot” runs dry. Interestingly, France has picked up 180,000 mt this week as the Russian / Ukraine / Romanian supplies begin to see prices escalate – probably reflecting overall availability.

The much-anticipated USDA report yesterday was preceded by market prices easing back in advance of the announcement because traders, and the funds in particular, were fearful of what figures might be published. The initial reaction to the report was to see prices dip further; particularly corn where the forecast yield was only marginally reduced from the August estimate. However, the market has regained some of the losses as closer inspection would seem to indicate an extremely tight end of season stock position unless the much discussed price driven demand rationing takes place. Given this outlook, the lack of consumer cover and the reluctance of farmers to sell we continue with our bullish stance and view this pullback in price as temporary and an opportunity to fill gaps and extend cover where appropriate.

From a soybean perspective, the report was “bullish” but could be critiqued from a number of perspectives. The pod weight used to establish yield was left at an “average” level which feels wrong given the dry conditions where it would seem more likely that a below average pod weight would be harvested. With this in mind we would not be surprised if actual yields fall below USDA estimates and the October report shows further cuts. Overall we feel that the outlook for soybeans remains bullish and dips, if they appear, should be viewed as buying opportunities.

Strategie Grains have reduced their estimate for EU corn and wheat output adding pressure to global prices. Corn output was trimmed substantially by 4.3 million mt to a five year low of 53.5 million mt as the persistent hot and dry conditions in south and central Europe last month led to poor grain filling. This leaves the crop some 19% lower than a year ago and leaves the way open for imports to rise to over 8 million mt. Interestingly, this estimate is 3.8 million mt below yesterday’s USDA estimate.

Wheat estimates from Strategie Grains also cut 1.7 million mt from the EU harvest to 123.6 million mt. The commentary continued with a conclusion that exports would have to be cut and usage curtailed if minimum “pipeline” stock levels were to be maintainable. All in all, this can only be construed as “bullish” for prices going forward and we would advise any gaps in cover to be filled on the current price dip.