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Weekly Update 17 January 2014

• Today’s big news is the purchase by Egypt’s GASC of a further 295,000 mt of wheat for second half February shipment. The sources were 55,000 my from Ukraine, 60,000 mt Russian, 120,000 mt French and 60,000 mt US. There were, in addition to the traded origins, also offers from Romania. Of more significance than five origins was the fact that the offered levels were in a tight price range, the majority all within $3, and all within $7. Given the bearish outlook, we have to admit surprise at the volume purchased, which may well support our previous thought that Egypt has more to purchase than many believe. Clearly time will tell.

• Brussels has granted 829,247 mt of wheat export certificates maintaining the “brisk” pace. The season total now stands at 16.664 million mt, which is 5.187 million mt (45.2%) ahead of last season.

• Despite both the Egyptian tender and the vast EU exports it was interesting to note MATIF wheat trading lower. Maybe, at long last, there is a realisation that there are not too many homes clamouring for significant volumes of wheat in the coming months running up to the new harvest.

• The USDA has today released its weekly export figures as detailed below:

Wheat; 401,900 mt which is within estimates of 350,000-600,000 mt.
Corn; 821,000 mt which is above estimates of 300,000-550,000 mt.
Soybeans; 1,226,800 mt which is above estimates of 750,000-1,050,000 mt.
Soybean meal; 234,700 mt which is above estimates of 50,000-150,000 mt.
Soybean oil; 16,900 mt which is within estimates of 0-35,000 mt.

• The strong export numbers gave CBOT markets something of a boost with corn and soybeans leading the way, and most soybean positions as well as the grains closing higher. The day’s high in March soybeans, $13.30½, remains below the $13.39¼, which is key resistance and we would not wish to see exceeded if our bearish stance is to remain intact. Markets retreated from the highs on additional producer selling and profit taking. In recent weeks we have seen weak Friday markets as Asian markets close earlier than the US and few want to take on additional risk in advance of the long weekend.  (Bear in mind it is a long weekend in the US as they celebrate Martin Luther King day on Monday).

• The fight in the market right now is in soybeans as tight US cash supplies battle it out with the record large S American crop. The latest S American weather forecast has added rain to Argentina and southern Brazil, which will be welcomed.

• CBOT markets have been mixed today with grains trading lower and old crop soybeans finding some strength from renewed fund buying and strong US cash markets.

• The old crop strength will direct US soybean export sales and world demand to S America or defer fresh sales into new crop positions. The July – November spread has reached a new high of $1.60 (July premium) today and from a cash perspective  the US Gulf vs Paranagua FOB spread has reached $0.90 (Gulf premium) for February. Both elements should conspire to either push buyers towards the record large Brazilian crop or defer purchases to new crop positions.

• Interestingly we are seeing some confidence from Brazilian exporters who are offering guaranteed February load dates.

• In the US the National Oilseed Processors Association (NOPA) announced a record December soybean crush pace with 165.384 million bu, an increase from November’s 160.145 million bu. Expectations were high at 163.9 million bu, but even expectation was exceeded. Strong crush margins are cited as a key driver for the crush pace. January crossings are expected to be lower on account of the extreme weather conditions early in the month which caused logistical problems.

• Corn and wheat markets are lacklustre on the back of slow export demand and some aggressive farm selling on the back of the price rally earlier in the week.

• In other news Brazilian flour millers are once again pressing for a lifting of the 10% import tax, which is applied to North American wheat supplies, because of supply tightness caused by lack of Argentine supplies beyond the half million mt which was proposed earlier this week. A decision on the tax is anticipated in the next few weeks.

• CBOT markets have been mixed today and corn closed a touch lower whilst wheat, soybeans and soybean meal closed higher all in low volumes. It would seem that index fund rolling and rebalancing has commenced today and a substantial volume of corn were purchased towards the close lending some support. The roll/rebalance has not impacted grain or soybeans to any degree.

• January soybeans and products contracts expired today with little in the way of fireworks as much of the position had already been unwound in earlier trade. With March now being the “front month” contract we would expect to see limited upside from here on in; there appears little in the fundamental arena to suggest that soybeans need to be priced above $13.20/bu.

• In Brazil, private agricultural consultants, AgroConsult, have estimated the 2014 Brazil soybean crop at a record 91.6 million mt, which is an increase from December’s estimated 90.7 million mt. Their corn estimate gee slightly to 76.2 million mt from 76.1 million mt. AgroConsult actually tour and survey crops rather than conduct desktop research, and as such their figures carry a reasonable degree of credibility. AgroConsult added that as much as 42% of the Brazilian soybean crop could be harvested by the end of February, making early stock available to crushers and exporters alike. The 2013/14 plantings were some three weeks earlier than in 2012/13. Some other forecasters have estimates as high as 93 million mt, and it should be remembered that only last weekend the Agricultural Minister stated that the soybean crop could “easily” exceed 95 million mt. One thing appears to be certain, and that is that the Brazilian crop is going to be a big one!

• Further news emerged today that China has rejected more DDGs overnight and active testing for non-approved MIR 162 continues and rejection follows positive test results. Trade in corn and products into China from the US has slowed significantly.

• We are still looking for lower prices, just in case anyone was confused!

• Markets have shown a degree of strength today following Friday’s late announcement that Egypt had purchased one cargo of US soft red wheat (the first US sale to Egypt of the marketing year), which triggered some short covering. Weekly soybean export inspections were above expectations and rain prospects in southern Argentina have been trimmed back a touch. Following the decline in markets last week these pieces of news were all it took to set the bulls running, although it is premature (and significantly so) to suggest there is anything bullish in the longer term outlook. Producer selling on the back of elevated prices is very evident and will likely cap the upside.

• Argentina has approved 1.5 million mt of wheat exports with the prospect of a further 500,000 to 1 million mt to follow. Half a million tonnes is scheduled for immediate release, the balance to be shipped at a slower pace according to reports. The intention by Argentina is to prevent a rapid drawdown on domestic stocks as was the case in mid to late 2013.

• Fears that Russia may be about to bear the brunt of freezing conditions, which could leave winterkill a serious issue following abnormally mild conditions, appear to be receding. Snow is forecast ahead of the cold snap, and that would provide an insulating blanket to help protect crops. Saratov, a key wheat producing district in the Volga region, is expecting –18℃ (–1℉) later in the week, this is some 5 degrees warmer than previously expected. Many have raised the question of wheat hardiness after delays in planting although the mild conditions have assisted crops reach dormancy. Autumn precipitation across Russia and Ukraine winter wheat zones has been close to non-existent although it has improved over the last couple of weeks. Southern Russia, where the majority of wheat is grown, is experiencing drought conditions. The last month has accrued a 30 mm deficit and 67 mm deficit over the last three months in Stavroplo, Krasnodar and Rostov.

• The soybean harvest in Brazil is under way and picking up pace. Early planting, despite dry conditions, was a feature as farmers were keen to get an early crop in an attempt to be able to plant a second follow on soybean crop. Some local analysts have suggested that the yields in Mato Grosso could be the best ever.

To download the weekly update as a PDF file please click on the link below:

Weekly Update 10 January 2014

Our weekly fund position charts can be downloaded by clicking on the link below:

Fund positions

To download our recap of today’s USDA report please click on the link below:

USDA Jan 14 Recap

To download our recap of today’s USDA stocks and planting report please click on the link below:

USDA Jan 14 Recap Stocks – Plantings

• Brazil’s CONAB has today released its latest forecast for 2013/14 corn and soybean output. Unsurprisingly, given favourable weather conditions, they have raised their estimate for corn to 78.97 million mt, from December’s figure of 78.78 million mt. The USDA’s latest figure stands at 70 million mt. For soybeans their forecast is 90.33 million mt, up from 90.03 last month; the USDA’s last estimate stands at 88 million mt. Possibly more telling is the widely quoted comment that the soybean crop could “easily” exceed 95 million mt with yields exceeding official estimates.

• Following a prolonged absence from the headlines, there is a reported fatality attributed to H5N1 bird flu. The victim was travelling to Canada, from Beijing in China when symptoms appeared. Chinese authorities are looking into the case, although first comments suggest that there is no other evidence of the virus in Beijing. As of mid-December there were 648 confirmed human cases of the disease of which 384 had been fatal. Whist it is reported to be difficult for humans to catch the disease, there are fears of mutation and pandemic.

• Following yesterday’s market decline we are seeing follow through selling, particularly in the grains (corn and wheat) which has followed through in both London and Paris. The decline in CBOT is much more marked than in either London or Paris, the soft red wheat price already around $20 below French. The simple explanation for the price dislocation being that the US wheat is “locked” due to the call on export facilities from soybeans and corn, added to which the bumper Canadian wheat crop is flowing into the US. There is an estimated 8 million mt combined US and Canadian exportable surplus, which is struggling for outlets.

• The USDA has today released its weekly export figures as detailed below:

Wheat: 294,800 mt which is within estimates of 200,000-500,000 mt.
Corn: 155,200 mt which is below estimates of 200,000-700,000 mt.
Soybeans: 156,200 mt which is below estimates of 450,000-950,000 mt.
Soybean meal: 62,800 mt which is within estimates of 50,000-175,000 mt.
Soybean oil: 33,500 mt which is within estimates of 0-60,000 mt.

• The above export figures represent season lows for soybeans, soybean meal and wheat. Front month markets in corn and wheat (Mar ’14) have posted contract lows whilst Nov ’14 soybeans have been flirting with (and broken below) the $11.00/bu level.

• Brussels has granted another big week of wheat export licences to start 2014 in the same manner that the 2013 season has progressed. The weekly total hit 734,260 mt, which brings the season total to 15.8 million mt. This is 4.75 million mt (42.9%) ahead of last year.

• Looking forward to Friday’s USDA report it appears that most market players are expecting US soybean and corn crops to be revised upwards. It is probably fait to say that these expectations are already factored into markets, and no more so than in corn in recent weeks whilst soybeans have also seen lower prices since late December.If the USDA actually confirms the trade’s expectation it may not transpire into additional bearish price action. However, if we see an unexpected reduction in the soybean crop, the bullish upside could well surprise, although we would expect it to be of limited duration.

• The average trade estimate for the US 2013 corn yield is 161 bu/acre , above the last USDA figure of 160.4 bu/acre. Assuming acreage is unchanged we are looking g at an output in excess of 14.05 billion bu. For soybeans, the average trade estimate stands at 43.2 bu/acre giving a 3.27 billion bu crop. Dec 1 stock numbers are equally estimated at relatively high levels; corn at 10.77 billion bu and soybeans at 2.17 billion bu. If correct, the corn number will show growth, year on year, of almost 2.75 billion bu.

• Following the holiday break we have today received the update on Brussels’ wheat export certificates covering the last two weeks of 2013. True to the run of form so far this season, they did not disappoint. The two week total comes to 1.072 million mt, which takes the season total to just over 15.1 million mt. This is 4.4 (41.3%) million mt ahead of last year and points more strongly towards a full year figure in the 28 million mt ballpark. Higher consumption of both barley and maize (corn) in feed rations, displacing wheat and making it available to be exported, supports the large export volume theory.

• In other news it has been suggested that China is accepting some cargoes of corn and DDGs despite positive test results for the non-approved GM trait, MIR 162. The slide in US DDG prices, which reached as much as $30/ton, has seen some evidence of a reversal with prices clawing back some $10/ton.

• Looking forward we are awaiting Brazil’s CONAB estimates on both corn and soybean output, scheduled for release on Thursday. A soybean number of close to 90 million mt for Brazil (and over 55 million mt for Argentina) is widely expected. Corn output also looks good with continuation of non-threatening weather conditions.

• Our conclusions remain unchanged.

• Thin markets have been the order of the day, no doubt prompted by the imminent USDA report as well as the start of the index fund roll which will start tomorrow (Wednesday). Uncertainty over the size of index fund rebalancing is leading to more caution than usual and a marked reluctance to take on additional risk.

• Talk of heat in Argentina is believed to be somewhat overdone and cooler conditions and rain are moving south providing some relief from warm and dry weather which has existed in recent weeks. Early yield data from Brazil’s Mato Grosso and Goais is reported to be at record levels, adding strength to the 90 million mt plus estimated output discussions. Current and forecast weather in Brazil will do little to reduce output in the near term and we continue to look for prices to come under pressure.

• Late Friday saw the results of the Egyptian tender, which raised some eyebrows in view of the size of the business transacted. A total of 535,000 mt saw 355,000 mt awarded to Russia, Ukraine and Romania (55,000 mt, 120,000 mt and 180,000 mt respectively) with the remaining 180,000 mt going to France. Unsurprisingly we have seen a degree of support in wheat markets following the tender although it remains unclear as to whether or not Egypt is now done for the season. Total Egyptian purchases (by GASC) this season have reach over 3.5 million mt, which compares with just under 3.5 million mt last year and over 5 million mt in 2011/12. It has been suggested previously that former President Morsi left office with wheat stock levels lower than desirable although we are unlikely to get formal confirmation of this. If that was to be the case, we could well see further tonnages being sought by Egypt in coming weeks. As always, time will tell.

• Weekend reports from Egypt state that stocks are sufficient to last until late April, and previously a six month wheat  stockpile was stated to be the objective.

• Further reports from Reuters inform us that more corn rejections have occurred following discovery of the non-approved GM event, MIR 162, and the likelihood of further rejections appears to be on the cards. One of China’s “official” new agencies reports that over 600,000 mt of corn and products have been rejected by the nation. Weakness in China’s feed demand must surely be coincidental to the recent discoveries (or is that just a malicious thought on our part?).

• Extreme cold weather in the central US has raised fears of winterkill in wheat and farmer selling appears to be drying up quickly. Our belief, at present, is that this is likely to be limited and not a significant issue. In advance of this week’s USDA report the news, coupled with the Egyptian trade, has led front month CBOT wheat back over $6.00/bu; how long it stays there remains to be seen.

• S American weather remains kind with regular rains forecast across Argentina and S Brazil with a southern directional trend , which will favour the drier S Argentine crop regions.

• We still favour selling into rallies given our longer term view that global restocking is under way.