News today in the aftermath of the USDA’s report includes a further Egyptian tender, this time for 235,000 mt for Nov ’12 shipment. Russia was awarded 120,000 mt, France 60,000 and Ukraine won the final 55,000 mt. Russia managed to hold on to sales due to its competitive freight position but observers believe the pace of exports is losing its edge. The winning Russian bids were some $6/mt higher than the last tender just two days ago. Clearly Egypt are keen to get tonnes on board before that competitive edge disappears totally. The total Egyptian purchases in the last five weeks amounts to some 1.7 million mt.

Harvest pace in the UK has picked up in the recent spell of better, drier weather permitting some “catch-up” to take place. Whilst acres have been cut it has not led to improved quality and we continue to hear of low specific weights and claims against contract quality. New contracts are being negotiated on a reduced specification to avoid the necessity for large claims and millers are reducing their purchasing qualities to gain supplies at home whilst at the same time seeking better quality supplies from overseas to supplement their grists.

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 yea flow 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.

First glance would have one thinking, “hmmm, this is bearish!” However, the market in the last few days had already factored in the “not bullish” report to a fair degree and, as such had less room in which to tumble. End of season stocks are nowhere near as comfortable as we would like, indeed our discussion with colleagues in the USA tonight has left us distinctly uncomfortable in terms of adequacy of corn and soybean stocks and certainly we do not feel flush with wheat levels either. The question remains as to when rationing will kick in to extend stocks sufficiently to last until the next harvest, which needs to be a good one to allow for some degree of stock replenishment.

Buried in the detail of the report are elements which seem downright incongruous, soybean pod weight being one. The figure used is an average which feels wrong in such a drought stressed year. We would expect output to drop significantly if and when the USDA revises this particular element of the report next month.

Additionally, there are areas of the report where we are not in agreement with the USDA and believe there will be some significant adjustment in the October report. Examples include corn harvested acreage and Australian wheat output to name but two.

Having said all that, it would be overly arrogant to denounce the report as wrong; it is just that we believe there are a number of holes which seem all too evident. It feels like the USDA has “dressed up the house to sell it”, so, “caveat emptor!”

USDA comment 12 Sep 12

The market started the day quietly with further long liquidation ahead of tomorrow’s USDA report. It would seem the bulls are tired and inclined to reduce their position size. Some 15% of the US corn crop and 4% of soybeans was harvested as of Sunday; however the view is that insufficient data is available to predict yield with any accuracy.

ABARES reported the Australian wheat crop at 22.5 mmt, lower than their previous 24.1 mmt and well below the USDA’s last 26 mmt. Dry conditions in W Australia are reducing yields by nearly 40%. However, export projections for 2012/13 remain upbeat based upon existing stocks remaining from the 2011/12 harvest.

Egypt once again stepped into their buying boots and picked up another 235,000 mt wheat, this time Russia was only offering 60,000 mt which was taken up by Egypt. In last week’s tender Russia offered 420,000 mt; are we at last seeing the beginning of the end of Russian exports? France picked up the largest tranche of business securing 120,000 mt. In total Egypt have made purchases of close to 1.5 million mt in the last month. The next tender will be watched with great interest to see if Russia make any price competitive offers of significance.

Finally, we received the following news item from Reuters today which is added in full. This could be either extremely significant or fizzle out to nothing …….

11 September 2012 18:48

According to a Reuters information, the European Commission might have drafted a new rule proposal, not official yet, which would limit by 2020 to 5% in energy the share of 1st generation biofuels, i.e based on agricultural feedstock used in food consumption. The draft also proposes to stop all forms of subsidies for biofuels after 2020. Finally, it defines new CO2 emission factors for several biofuel types, which would be unfavourable to biodiesel.

The current legislation gives a 10% incorporation mandate in energy for biofuels, whatever the feedstock. The Commission proposal to limit at 5% the share of 1st generation may thus strongly put this objective into question, by lack of alternatives, as 2d generation biofuels are not expected to be widely available by then.
The share of biofuels is considered at 4.7% in 2011, and is expected to reach 5% in 2012 (mostly first generation biofuels). If adopted, the new proposal would thus bring to a halt the biofuel market expansion, and most particularly biodiesel, which currently represents 70% of biofuels used in EU.

It is nevertheless better to remain cautious about the future of this proposal, which is for the time being not public. If it were to become official, it should in any case be adopted by the different EU governments and by the EU Parliament.

The week started with markets showing a degree of firmness which evaporated later in the day with CBOT markets moving towards the close in a very lacklustre fashion as another “no news day” failed to provide additional fodder for the bulls.

Nonetheless, traders are waiting for Wednesday’s USDA crop production report. Average trade estimates of corn yield stand at 120.6 bu/acre, marginally below the last official estimate; average trade estimates for soybean yield are also marginally lower than USDA figures at 35.8 bu/acre. The market is likely to trade in a narrow, choppy range until the figures are released then, hopefully, find some direction once again.

Our discussions with colleagues closer to the action in the US speak of very poor early corn yields in some areas, admittedly the only reliable estimate of yield will come only when the crop is fully harvested.

We will be watching the progress of the US harvest with keen interest in coming weeks.

The past week has proved somewhat better for beleaguered UK farmers who have been struggling to gather in their rain delayed harvests. The key issues emanating from all analysis done so far on the UK harvest include the variability of both yield and quality with specific weight remaining the biggest single matter. Early data includes more of the better quality milling wheats, and final yield and quality results, when known, could well deteriorate as there will be a higher proportion of feed grains in the overall result.

An additional blow has emerged from recently harvested wheat with reports of loads being rejected at destination for high counts of DON, toxic fungal residues, which despite the high fusarium levels this season have not proved problematic so far.

As of Tuesday, UK was 55% harvested according to ADAS reports; this compares with an average of 85% and the forecast settled weather should see the pace of harvesting improve at last. In continental Europe the French and German harvests have shown marked improvement over the last couple of weeks and quality wheat is freely available and “capping” UK prices, which hit import parity recently. The likelihood of a greater volume of UK imports in the coming season has increased significantly as a result.

In key Black Sea exporting regions the Russian and Ukraine harvest outlook and forecasts continue to deteriorate. Latest IGC wheat output estimates place Russia at 41 mmt compared to 56.2 mmt last year and 53.2 mmt 2009-11 average. Ukraine fares little better with output estimated to be 13.0 mmt compared to 22.3 mmt last year and the 2009-11 average of 20.0 mmt. Last week’s news that there will be no curb to exports by Russia continues to “feel” wrong given their forecast output and current pace of sales.

In recent days we have seen Russia win two Egyptian tenders amounting to 360,000 mt both for shipment in October. Russian exports are currently running at around 3 million mt/month over the July to September period and their own self-imposed export volume of 10-14 million mt is fast being consumed. In addition Ukraine this week won a tender for 55,000 mt to Egypt, again for October shipment. It does appear however that Ukraine has residual stocks from last year to help sustain a higher export pace than would be possible from this years drought depleted crop.

Latest news from Egypt would indicate a further 240,000 mt October shipment and 60,000 November shipment tender award has been made to Russia in addition to the above.

Ukraine has picked up 55,000 mt for November shipment and Romania was awarded 60,000 mt each for October and November shipment. Clearly the world’s largest importer has its sights set on the best value grain and the Black Sea powerhouse is continuing to benefit.

When the Black Sea does finally dry up, in grain export terms, buyers will have to turn to EU sources then US as these fit the profile in price terms with EU prices remaining at cheaper levels than US supplies at least for the present time.

Attention is now turning to key southern hemisphere wheat producers Australia and Argentina where smaller wheat areas than last year have been sown. Despite their small percentage of global output (6.4%), the two accounted for some 23% of exports last season. Growing conditions will therefore be watched very closely given the potential bottlenecks that exist in northern hemisphere export corridors.

We continue to believe that markets have not yet completed their upside potential; the current dip in prices represents an opportunity to take further strategic cover if gaps exist or to extend cover into deferred positions.

Today has been quiet with markets drifting lower throughout the session and currently trading close to the lows. London and Paris have also been lacklustre in sympathy.

Once again there has been little in the way of significant news to change the overall market and it is probably this lack of fresh news to “feed the bull” which has led to some profit taking and easing in prices.

In the US Allendale have come out with their projections ahead of next Wednesday’s USDA figures and have placed an estimate of 34.9 bu/acre on soybeans which compares with the USDA figure of 36.1 bu/acre. Overall output according to Allendale would be 2.602 billion bu versus the USDA at 2.692 billion. Other figures from Cordonnier and Lanworth are 34.5 bu/acre and 35.0 bu/acre respectively. Lanworth are renowned for their use of satellite technology in crop forecasting although it remains to be seen as to how accurate they can be. The remnants of hurricane Isaac have provided rainfall over the lower Mississippi and eastern Midwest although it is believed to be too late to assist with pod filling.

Corn estimates from Allendale are at 118.2 bu/acre, well below the USDA’s 123.4 bu/acre giving an output of 10.326 billion bu, below the USDA’s 10.779 billion bu. Cordonnier and Lanworth figures are 119 bu/acre and 116.64 respectively.

In Russia the harvest continues and current estimates of the wheat yield are at 1.95 mt/ha compared to 2.87 mt/ha last year. If we believed this to be poor, spare a thought for Kazakhstan where grain yields are running art 0.75 mt/ha nearly half last years figure of 1.4 mt/ha.

Given the above we view today’s dip in prices as an opportunity to look at taking cover to fill any gaps which may exist. The dip may last for a day or so, but with our expectation on the next USDA crop report it may well be short lived.

Markets opened this morning with a positive tone following the extended weekend in the US to celebrate Labor Day. However, the early morning euphoria eased towards the end of the session in Chicago with soybeans, corn and wheat all just about ending in positive territory. The early highs, in which front month soybeans set another new record high, were all left behind as the session drew to a close.

Early month trade often attracts new money and fresh impetus to former trend direction, which we referred to in recent updates, however the market took fright at the mighty requirements of the US economy. Shares turned negative as US data showed the third consecutive month of decline in the manufacturing sector – and at the fastest pace in three years.

On a positive note for commodity markets, nothing in the fundamentals has changed and we approach the USDA September report with caution expecting data to show further yield reduction in both corn and soybeans as a result of ongoing dry conditions.

In terms of statistical data released today, the German ministry have released their production estimates and these show a reduced soft wheat output of some 105 kmt to 22.386 mmt, below last years figure of 22.71 mmt.

We still view any dips in price as buying opportunities for those with gaps in cover.

With the US markets closed today marking the Labor Day holiday it felt like a “non-day” would be on the cards. On a slow news day what do we discuss? Well, according to the Met Office the summer of 2012 has been the wettest for 100 years, as if we needed to be told that! On average the Uk received 366.8 mm rainfall during the summer months of June, July and August which compares with a more normal figure of 241 mm. In addition we are told that the summer was likely to be one of the most dull on record with 399 hours of sunshine, the worst sine 1980.

Clearly a slow news day! However, the wet and dull weather have conspired to produce a delayed harvest with resultant harvested wheat yielding poorly as previously mentioned. Specific weights are the poorest since 1977 according to the HGCA, and considering these figures are based on early (in relative terms) harvested grains in the south and contain a large proportion of milling quality wheat the final results are likely to deteriorate further.

Finally we saw this weekend become a major one for export tenders with close to one million tonnes of deals done. Egypt and Saudi Arabia were key buyers with a host of sellers featuring including Australia, EU and North and South America. The Black Sea region was not one of the key sellers on this occasion, having filled Egypt’s earlier 355,000 mt order.

Some view the overall Russian sales volumes to date as reflecting the exploitation of current availability, poor harvest prospects lead many to conclude that the exportable surplus will soon be committed, possibly as soon as the end of October, and that particular source of supply closing the doors. Should that become the case tenders will likely switch to EU and US origins with their higher freight costs.