CBOT markets settled lower as fund selling capped soybean rallies and capping corn prices leaving wheat to trade in a narrow range. Support from outside markets was lacking and resulted in a dull day!

The EU granted 750,000 mt wheat export licenses bringing the total to 7.3 million mt or 6.5% more than the same time last year. The weekly total is the highest since the 1 million mt granted in the last week of September 2010 after the Russian export embargo came into force. We see the pace of exports continuing to remain brisk based on reduced available supplies elsewhere; which can only continue to exacerbate and heighten the critical end stock position we are facing. Algeria’s 400,000 mt “optional origin” wheat purchase is thought to be French illustrating the point. On the back of this information it would seem unlikely that any fall in EU wheat futures prices will be long lasting and should help to support non EU origins as well.

The Ukrainian position on wheat exports continues to fascinate, seemingly the Ukraine government has advised Egypt (and others) that it will no longer export wheat after the year end. This, it would seem, will lead to cancellations of shipments in the new year. Additionally, this is placing more emphasis upon wheat exports from the region, at the expense of corn shipments which face potential defaults as a consequence.

The US drought monitor continues to display “exceptional drought” across the US Plains leaving the recently sown winter wheat crop struggling in the dry conditions.

In the southern hemisphere we continue to watch the Australian and Argentine crops with a degree of despondency. Not only is output under pressure but quality, too, is suffering. Without doubt the ability of the southern hemisphere to export at last year’s levels is behind us and the question now is, “what will they be able to provide.”

The upshot of all of this, with six months remaining in the northern hemisphere marketing year, is that demand will likely switch to the US in quick time, and we expect Egypt to return to the market very soon; the awards made will be watched closely to see the direction.

Today heralds a “new” item of news with reports that the US Army Corps of Engineers are about to proceed with plans to reduce the flow of water from the upper reaches of the Missouri river reservoirs in an effort to preserve water stocks in a drought related conservation measure. The impact of this measure is to potentially lower the water levels in the Mississippi between St Louis and Cairo, Illinois at a time when water levels are already low following the summer long drought.

The prospect of barge traffic being halted as a result is believed to be very real and the strangle-hold this will place upon grain exports is not to be underestimated. Measures to keep the waterway open for longer, such as dredging and removal of obstructions, are being discussed but concerns are rising. There are ongoing discussions as to the legality of the measure which we will watch with interest.

The USDA’s crop progress report, issued yesterday, is highlighted below:

US SOYBEANS – 96 PCT HARVESTED VS 93 PCT WK AGO VS 93 PCT 5-YR AVG
US WINTER WHEAT CONDITION- 36 PCT GOOD/EXCELLENT, 39 PCT WK AGO, 50 PCT YR AGO
US WINTER WHEAT – 95 PCT PLANTED VS 92 PCT WK AGO VS 94 PCT 5-YR AVG
US WINTER WHEAT – 79 PCT EMERGED VS 73 PCT WK AGO VS 81 PCT 5-YR AVG

The key statistic, to our mind, is the ongoing reduction in wheat condition, good/excellent classification down by 3% wow; at the same time the poor to very poor rating increased to 22%, up from 19% a week ago. We need not remind anyone of the need for global wheat crops to perform in the coming year to make up for this year’s poor showing.

Soybeans have gained ground today following the higher than expected US crush figures for October; these came in at 153.5 million bu well above trade estimates and 12.4 million bu above the same period last year. It is also the third highest October figure on record. The combined Sep/Oct figure is 9% higher than last year which flies in the face of the USDA’s forecast decline this year. Clearly the price rationing needed to allow the crop to last is not yet underway. The potential for explosive upside in prices remains high on our agenda.

We received news today of New Energy Corp, US based ethanol producer of nearly 30 years standing with a capacity of 100 million gallons of ethanol per year, filing for Chapter 11 bankruptcy. Their president blamed drought, poor corn harvest, higher corn prices, high ethanol supply, low ethanol pricing and low gasoline demand for their demise. He added that they were not the only producer facing tough times and a challenging industry situation.

In terms of good news, Strategie Grains estimate the EU 2013 soft wheat crop at 136 million mt, an increase of 10.6% over weather reduced 2012. The increase is attributed to an increased area of 23.6 million ha (up 3.5%), and based upon yields at 5.7 mt/ha compared to 2012 yield which stands at 5.4 mt/ha. Clearly the UK and northern French crops have to be planted, conditions continue to be challenging due to waterlogged fields in many places.

The morning started in fine “turnaround” style with higher levels seen from the outset on a technical bounce from Friday and Monday losses, but this was not maintained as fund liquidation of soybeans resumed and dragged wheat and corn lower.

Soybeans broke below the $14 mark as prices search for a base and the technical sell stops were hit. Corn, on the other hand, found some price support from October lows which lifted values somewhat; whether they are robust enough to last remains to be seen.

We have had confirmation that bio-ethanol producer, Ensus, is utilising corn to boost starch levels in an effort to restore yields to more realistic levels. This follows hot on the heels of new year corn purchases by feed manufacturers who are finding better nutritional value in the imported grain.

UK wheat trade statistics show larger than expected September exports although these are likely to be “old business” committed well before harvest issues intervened. Spain appear to be the largest recipient of the UK shipments. However, it would seem unlikely that the situation will continue with imports expected to rise significantly from previous years.

CBOT markets all started lower today following Friday’s USDA report induced selling. The pace of selling picked up and spilled over into Europe as MATIF dropped €7 in the largest single day loss since late last July. Buyers ran away, preferring  to find better value another day.

We rarely mention MATIF corn; however, following Paris wheat losses and CBOT corn declines it was little wonder that Paris corn prices followed lower, albeit in limited volume. Cash demand from consumers in deferred positions was lively but sellers ideas remained firm on limited offers. The EU physical tightness is starting to become much more evident and with no volume offers from S America it looks as if European buyers are going to struggle to fulfil their needs.

Fundamentally, the markets should be trading higher but fund sellers have turned tail and are exiting positions which is causing “contagion” selling at present dragging prices lower. The market does feel oversold right now and we look for a “trigger” to reverse the current downward momentum.

London wheat closed higher again, albeit off the highs, but the May ’13 contract managed to set another record high earlier in the session; this being the fourth day in a row this has happened. The May contract has risen by over £20.00/mt within a four week time frame and new crop prices approach the £200.00/mt mark as UK and northern France experience delays in sowing due to wet conditions in the fields.

The surge in EU prices is a reflection of tight global supplies, not only wheat but all feed grains, as we have reported here in recent weeks. EU corn import licenses have reached 2.1 million mt, well above USDA forecasts, and more than double last year’s level. This comes as no surprise given the pace of grain exports and paves the way for ongoing strong import volumes over the remainder of the season, potentially pressuring Ukraine, US and S American supplies and pushing prices higher still.

It would appear that there is still a significant amount of physical cover to be taken by UK consumers in the New Year, albeit many have futures hedges in place to limit upside risks.

Friday’s USDA report, to be issued at 13:30 UK time, left US markets in a reflective state on Thursday with little in the way of direction as market participants awaited fresh news and possibly direction.

Once again the market is very much wheat focussed with Paris hitting new highs as technical chart based buying from funds was evident along with decent cash demand from non EU buyers and a drop in the Euro as Greece passed its austerity measures.

The EU has to begin the job of rationing; either domestic prices have to rise to close the export channel or the export price has to rise to switch demand away from EU origin. Neither of these scenarios are playing out right now! The upshot of this means that significant corn imports will be required to meet demand (which will be enlarged as a result of growing wheat exports) later this season, and EU buyers would seem to have “missed the boat” as both Ukraine and S American premiums have risen on limited EU buying. When the buying kicks in, (notice we didn’t say “if the buying kicks in”) the impact on prices is likely to be significant.

Friday’s USDA report looms large, and we (alongside many others) do not expect the figures to reflect our view on corn yield or carryout stock. Our views on the Argentine crop, Ukraine exports and potential EU imports which we have reported here in recent weeks point towards a changing global corn perspective which will drive prices higher and demand towards an already tight US.

CBOT markets have had a positive day today almost from the off, and that is in spite of reportedly better planting conditions in S America. US winter wheat condition lost 1 percentage point from last week (good to excellent) which is a record low and Australian wheat has an elevated quality risk as a result of unseasonal rainfall . We also continue to hear additional news of crop development pressure in parts of Russia and Ukraine as summer drought conditions continue into the autumn and early winter leaving wheat vulnerable should winter conditions prove to be extreme. The drop in US wheat condition comes on the back of the worst recorded summer drought since 1956 and also at a time when global supplies are under extreme pressure.

London wheat hit new highs again today with the May ’13 contract hitting £225.00 and closing just £0.25 off that level. New crop conditions fare little better as autumn sowing conditions continue to delay planting of cereal crops in both the UK and northern Europe, France in particular. Paris wheat also made new contract highs and technical levels are being tested which, if broken, could pave the way for new all-time high prices. We reiterate our view that US wheat is now looking cheap in relation to other origins.

We now look forward to Friday’s USDA report which is widely anticipated to present a bearish soybean output estimate but could well hold a “sting in the tail” for grains with reduced wheat output in both Australia and Argentina. In addition reduced US and world grain numbers would not be ruled out in the report.

This is a big week in a political sense with the US choosing a new (or maybe not so new) president tomorrow, which when coupled with the slug cash removed from  hedge funds as a result of hurricane Sandy has left US markets lacking clear direction.

Wheat in London and Paris  made contract highs not only in the tight old crop position but also in new crop as well as weather concerns escalate over delayed sowings in northern Europe and the emergence of newly sown wheat looking less than great.

US wheat continues to be reported as emerging poorly across the Plains in dry conditions, the latest Argentine reports are calling for reduced output and early harvest reports from Australia confirm our fears of a lower harvest output there.

Little wonder we are seeing wheat receiving support which is not currently apparent in corn and soybeans right now.

We have seen a week marked, in the main, by markets trending higher as fundamentals point towards higher levels. The disruption to markets as the US was hit by hurricane Sandy was widespread with the New York Stock Exchange, ICE futures markets and New York subway system closing for a time. Markets initially sold off but recovered quickly as some “bargain hunting” and realisation of value returned to the market. We wish everyone caught up in the storm and its aftermath a safe and speedy return to normality.

The return of Egypt to the market saw sales made once again by France (120,000 mt), Russia (120,000 mt) and Romania (60,000 mt). We do not believe that the Russian sale should be seen as a return by them to the export market, rather an “allocation” of tonnage not taken up by Iraq a week earlier.

More important for coming months is the additional sale by France, which continues to see the EU balance sheet tighten still further in a season that is predicted to end with around three weeks of ending stock. Worryingly, this would leave the region below “pipeline” requirements and we anticipate the need for significant feed grain imports in the remaining months of the season.

We are already seeing EU feed manufacturers chasing offers of S American and Ukrainian corn in an effort to fill the looming void. Volume offers are thin on the ground and rapidly escalating in price, and beyond December offers are virtually non-existent at the moment. To add to the problems, we heard that a sale of French corn, for shipment in November, to Japan was concluded inn the week. It is believed to be in the order of 25,000 to 50,000 mt and a “first” for France. The sale, if confirmed, will add credence to our view that global consumers are finding increasing difficulty in sourcing feed grain supplies from traditional sources.

The latest US crop rating produced a surprise inasmuch as the winter wheat condition was reported at only 40% good to excellent. This is the lowest such rating in over 20 years and is a result of the summer long drought which continues to affect the Plains. The dry conditions are forecast to continue into the early winter and the potential outcome is that tillering of wheat crops will be reduced and will result in lower yield. This comes at a time when global stocks are running at uncomfortably low levels and southern hemisphere crops look unlikely to “refill the barn”. Reliance upon bumper northern hemisphere harvests to take on that mantle in around eight months time is now at an all time high.

Argentine crop output was downgraded in the week by as much as 20% for corn and 10% for soybeans following prolonged storms and continued rainfall. Parts of Argentina, which is the No 2 corn and No 3 soybean exporter, are reported to have received as much as a full years rainfall since September. Crop analyst Michael Cordonnier forecast an 80 million mt soybean crop in Brazil, which is a reduction from the earlier 81 to 83 million mt estimates. He also referred to “fields as much as two feet deep in water as far as the eye can see,” and the likely reduction in Argentine corn output that this would cause.

The worsening prospects for S American crops comes at a time when global stocks are tight to say the least and improved, if not record, crops were being predicted as the saviour of the situation. We appear to be moving away from “salvation” at present and we consequently reiterate our view that higher prices on all three key crops, soybeans, corn and wheat are likely in coming months.

Yesterdays USDA weekly crop progress stats follow:

Weekly crop progress report (all numbers expressed in percent)
US CORN – 91% HARVESTED VS 87% WK AGO VS 60% 5-YR AVG
US SOYBEANS – 87% HARVESTED VS 805 WK AGO VS 785 5-YR AVG
US WINTER WHEAT CONDITION- 40% GOOD/EXCELLENT, 46% YR AGO
US WINTER WHEAT – 88% PLANTED VS 815 WK AGO VS 85% 5-YR AVG
US WINTER WHEAT – 63% EMERGED VS 49% WK AGO VS 67% 5–YR AVG

Out of all the data it was the winter wheat rating which caught our attention at just 40% good to excellent which is the lowest rating for some 20 years. As we mentioned earlier in the week it is the dry conditions across the Plains which are contributing to such a rating, and is could well cause issues with the crop entering dormancy in less than ideal condition. This is particularly relevant in a year when any early yield issues are potentially critical from a global standpoint.

Support was evident in early trade in Chicago but profit taking towards the end of the session trimmed gains to the lower end of the trading range.

S American weather, at last, shows some improved conditions across central and northern Brazil which will improve planting prospects. Dryer weather patterns are forecast across southern Brazil and Argentina which, if they materialise, will relieve the extended period of wet weather experienced by the regions.