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Weekly Update 27 June 2014

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• Markets have been pretty dull ahead of next week’s USDA report and trade has been mixed as grains trade either side of unchanged and soybeans stick stubbornly in positive territory. One of the issues leading to indecision is the wide variation in estimates of what the report will contain, hence our previous comments pertaining to “expect fireworks”.

• As we approach not only month end but also quarter end we are witnessing something of an exodus of fund money from the Ag Commodity sector. The bearish new crop fundamentals are sufficient to discourage fund managers away from long positions and the fast approach of July trading month first notice day hastens their exit from front month positions. August is such a thinly traded contract that funds are unlikely to use it in any significant volume, therefore we are close to seeing old crop fund activity finally come to an end – RIP! The trigger for new fund activity is likely to be a significant weather event, which does not (currently) look likely, so the foreseeable future looks as if we will endure a “grind lower” type of trading.

• As mentioned previously we would expect crop condition ratings to show an upturn in next week’s data release as a consequence of generally favourable conditions across the Midwest, N Plains, which should, when added to fund activity, see a limit to price upsides.

• The one downside has been cash basis levels for soft red wheat jumping sharply in the US Gulf as supplies of export grade grain remain tight in the early harvest period. Early harvested wheat in the Ohio River Valley and mid-South has g=higher than desired vomitoxin levels, which will necessitate blending down with better quality grain or use in animal feed. The lower quality grain and recent rain delays to harvest have left exporters short of volume hence the rise in basis levels in recent days.

• The wheat futures market features a carry cost (as opposed inverse) and this is encouraging growers and elevators to sit on stocks with the promise of higher prices in coming months. Added to this, flour millers are bidding to secure supplies and compete with exporters increasing pressure on prices. The impact on cash corn prices has also been noticed as farmer selling has slowed as futures market prices have declined in recent weeks.

• Old crop US soybean export sales were, once again, above expectations at 11.7 million bu (318,000 mt) aiding today’s price gains. The buyer(s)/destination(s) were unknown (although Europe was widely rumoured to be the destination), and many expect the sale to be shipped in the new crop position rather than the old, as the sales were reported. Interestingly, the US origin was seen as better value following the rise in Brazilian premiums this week.

• The IGC (International Grains Council) today increased their estimate of world wheat output by 5 million mt to 699 million mt. This is low when compared with other trade estimates, which range from 707 to 711 million mt largely supported by bigger crops anticipated in Russia, EU, Canada and Australia.

• Today has been somewhat uninteresting with CBOT markets trading either side of unchanged and as we head into the close it is corn which is lower, wheat and soybeans showing some slight gains albeit in minimal volume trade. Clearly the prospect of next Monday’s stocks and seeding report is looming large in the sights of traders and fresh risk appetite is on the wane. Additionally, next week is a short one in the US with the 4th July Independence Day celebrations creating another holiday and long weekend. Next week’s report has the potential, as we have already highlighted, for explosive price action but it is a racing certainty that the weather will be the biggest influence going forward. Unexpectedly bullish news will likely be seen as a selling opportunity as potentially record large corn and soybean harvests appear to be just around the corner.

• There are still fresh cargoes of soybeans and meal en route to the US from Argentina, Paraguay and Brazil helping alleviate the season end tightness. Interestingly, this time last year the waiting time to load soybeans in Brazil was 64 days, this year it is six! This makes further Brazilian shipments into the US a distinct possibility should Monday’s report spring any bullish surprises.

• Our view, right now is that bullish surprises will be unlikely given news which we are receiving on glowing reports of soybean and corn crops outside the recently flooded regions (which are few and far between).

• Sales of new crop grain from Russia are ahead of seasonal norms as a consequence of good harvest prospects and farmers looking at the prospect of reduced prices in coming months and speeding up forward sales. In contrast, Ukraine has seen traders exercise caution due to the political situation and farmers offering aggressively low prices, and new crop sales are lagging behind normal pace. The Black Sea producers of Russia, Ukraine and Kazakhstan, three major global wheat exporters are expected to see a further season of large crops despite concerns over Ukraine’s ability to produce in the face of recent upheaval. It is worth noting that Ukrainian exports have continued without interruption so far this year. The reluctance to make forward sales is a direct result of uncertainty in the political arena as well as lack of clarity over VAT refunds on exported grain – a not insignificant factor!

• Last night saw the release of the latest US crop condition an d progress report which showed soybeans to now be 95% planted, up from 92% last week and just ahead of the five year average. The crop Is rated 72% good/excellent a 1% decline from last week, but ahead of last year when it was 65%. Corn is rated 74% good/excellent, 2% down from last week but ahead of last years 65%. Winter wheat is 30% good/excellent, unchanged week on week and 2% down on last year, whereas the proportion rated poor/very poor is 44%, 1% ahead of last year. The crop is now 33% harvested, up from 16% last week, 19% year on year and ahead of the five year average of 31%.

• All in all, having heard so much doom and gloom over flooding and crop damage in the last week there is little of significance being reported in the latest data. Any excess surface moisture appears to be draining fast into thirsty sub-soils, potentially future proofing crop demands into the warmer summer months. Based upon nearby weather forecasts we would not be surprised to see crop conditions nudge ahead and increase the potential for better than trend-line yields, which is already being discussed openly my many in the trade. The only area of debate is the degree rather than the possibilities of such positive yield direction.

• Historically, the years 1994 and 2004 are being discussed, corn yields were above trend-line by 14% and soybeans by 10-12%. Linear projections would, if we were to see a 10% over trend yield in corn, show 174 bu/acre and even more if a weather adjusted trend-line was used. In the face of such thoughts any bullish momentum is difficult to comprehend. The impact on corn should not be forgotten when looking at wheat prices, the two grains have to be considered very closely related as “feed grain” and pricing decisions made accordingly.

• Soybean markets, cash markets in particular, have shown little impact of the prospect of the US running out. The Jul/Nov spread has closed in to around $1.80 (Jul premium), a level not seen since February. First notice day on the July ’14 contract is fast approaching, and we wonder if the USDA will spring any surprises in the upcoming stocks report on 30 June.

• US DDG’s are coming under price pressure and we have heard that any buyer is being “picked off” very smartly as stocks build and sales are difficult to come by. Whether this will provide import opportunities into Europe, specifically the UK, remains to be seen, but it appears that bargains are around in the US. The trigger for the price decline was the instigation, by China, of a ban of further imports due to MIR 162 “contamination”. Reports of a decline in ex plant prices in late March from $245/ton to $150/ton today are not uncommon. There seems little to suggest that China will change their stance any time soon, so the potential for cheap DDG’s looks set to remain for a while.

• Wheat markets have been active over the weekend with Egypt’s GASC stepping into the area once again picking up 180,000 mt of Russian and Romanian origin grain for shipment in the first ten days of August. Following a sim liar pattern to last year Romania secured two of the three cargoes with Russia picking up the third, prices reflecting around $4.00/mt more than the last purchase on 12 June. French and US offers were significantly more expensive and were consequently bypassed. Other business over the weekend included Saudi Arabia securing 780,000 mt of hard and soft wheats for Sep/Nov shipment and Pakistan buying 55,000 mt from Black Sea origins. The GASC business looked aggressively priced, and the Saudi purchase more so by all accounts. As we have mentioned before, when the Black Sea sellers are open for business there is little others can do but get out of the way – never stand in front of a speeding train! Sellers appear (for now) to sell below replacement in anticipation of lower prices at harvest.

• Some post market digestion of Friday’s soybean meal rally has unearthed sizeable fund shorts in front month call options which required some frantic last minute buying and triggered the late uplift in prices, reputedly 9,000 contracts were traded in the last five minutes of CBOT trading hours! This lent support into grains which also moved higher late Friday.

• CBOT grains Monday have eased as has soybean meal although soybeans ended in positive territory. That said, old crop cash soybeans do not have the same strong upside strength as was seen last year on the back of exhausted supplies. Consumer cover in the US is reported to be well placed through July and August with farmers electing to sell corn rather than soybeans at present.

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Weekly Update 20 June 2014

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Fund positions

• Today has seen a rain triggered rally in Chicago with fresh fund interest apparent, particularly in corn and soybeans as some localised flooding is reported in parts of Iowa and Minnesota. Whilst the market is reacting to the upside it must be borne in mind that the additional moisture is adding to output rather than detracting from it in other parts of the US. Reports suggest that flooding is localised and not threatening national output, unless an extended pattern of rain continues through to mid-July. Our overall view is that the current rally is an opportunity to make sales rather than take cover, and we feel that it will have a short shelf life. Aside from the reported flooding, it appears that weather conditions are close to ideal – hence our market view!

• US export sales data showed wheat sales some 12% down on last year and corn sales to be slowing amid competition from S America and Ukraine. Global consumers appear to be comfortable with cover levels right now and look to be awaiting lower prices before adding further coverage.

• News that Chinese corn stocks are closer to 150 million mt than 100 million mt is emerging. The issue of how to dispose of such an increased volume amid another potentially large harvest, in excess of 220 million mt, is rearing its head large and loud. A number of suggestions have been put forward including China returning to the world corn export market – excellent timing!

• Brussels has granted weekly wheat export licences amounting to 363,485 mt bringing the season total to 29.127 million mt. This is 8.6 million mt (41.9%) ahead of last year.

• The upcoming USDA acreage and stocks report scheduled for 30 June has, in past years, provided extreme volatility in its wake. With new crop Dec ’14 corn already testing its January low we have looked at what the report could potentially show us. Given the weather, it is possible that acres will provide a bearish input and also that stock levels may be higher than originally estimated, due to lower feeding levels in the Mar/May period, adding to that tone. Old crop soybeans, on the other hand, continue to be tight and supportive to new crop pricing remaining well above January low prices. Weather conditions remain (generally) favourable to both crops as evidenced by crop condition reports, which show some of the best ratings in many years. The current rains (flooding) should be taken with a “pinch of salt” bearing in mind thae old adage that “rain makes grain”.

• If weather conditions remain favourable, as suggested by the forecasters, we could well be talking of 46 bu/acre plus soybean yields (1.8% above the USDA’s latest) and many believe that acres will be a minimum 1 million more than the USDA and possibly up to 3 million greater. If, and “if” is a very big word, acres are 2 million more and yield hits 46 bu/acre we will be talking US end stocks of 490 million bu, a massive jump from this year’s 125 million. Stocks/use ratios would jump from this years low 3.7% to a healthy 14.2%. Our preferred view remains looking for Nov ’14 soybeans to test $10.00/bu provided weather remains favourable.

• In corn we can envisage a similar situation; producers in the far northwest may have missed out on planting but many others had ample opportunity to seed their crops and indeed exceed their initial intentions. If yield reaches 168 bu/acre, and many are talking even higher, and acres grow by 1 million we could be looking at end stocks hitting 2.116 million bu with stocks/use ratios jumping to 15.8% from this year’s 8.4%. Feeding of corn in the current year could be lower than anticipated due to reduced pig numbers following the impact of the PED virus. On the other hand, current corn prices are relatively cheap and with crude oil prices rising on Middle East tensions ethanol production is potentially about to become very profitable and could well trigger higher production and corn usage.

• As always we will have to wait and see what the report brings, but we felt it worthwhile to discuss some of the possibilities which may emerge.

• CBOT grains have shown a glimmer of life today, trading into positive territory and prompting some to ask if the falls are sufficient for now. The gains appear to have been prompted by US ethanol production jumping to record highs in advance of anticipated seasonal demand growth with margins for producers in positive territory and in the face of weaker corn and rising crude oil prices. Ethanol production reached 972,000 barrels consuming over 100 million bu of corn in the week, a record – the previous best going back to December 2011. One offshoot from such a large week of production is the volume of DDG’s which has to be consumed, mostly domestically, given the state of trade with China who are refusing to accept imports at present as a consequence of the non-approved (MIR 162) GM event in US corn and products, which we believe to be more politically than food safety motivated.

• In wheat the wet US Plains forecast and associated yield reduction fears have sparked some buying interest, more so in Kansas futures than Chicago, but prompting short covering in the latter market. This has in turn spilled over into EU markets. However, international FOB levels remain weak with many asking, “where is the bottom in this market?” With the Black Sea region harvest in our sights, most importantly with Ukraine having little or nothing on their forward book as far as sales are concerned, we would venture to suggest that there is further downside to come. Added to this, pressure from global sellers of corn looking for a market into which to sell the current upside in wheat prices does look to be limited.

• The US announced the sale of 140,000 mt of 2013/14 soybeans to “unknown” destination. The sale has come as a surprise, not only the size – two x 70,000 mt vessels, which would suggest Pacific North West loading to China, but also that US offers are so much more expensive than S American FOB prices. Some, including ourselves, question whether the trade will ship as old crop (if at all) and if US stocks are so tight why was the sale made in the first place – at a discounted price.

• Ukraine’s sunseed plantings are all but completed with over 5.0 million ha now seeded, which compares with 4.6 million last year. The likely total area will reach 5.5 million ha and conditions look to be largely favourable and a crop in excess of 10 million mt looks to be achievable, and exceeded if the weather plays ball. This will potentially be a further bearish factor as far as oilseed and oilseed meal prices (read soybean and rapeseed meal) are concerned into the coming winter.

• The EU’s Monitoring Agricultural Resources Unit (MARS) has released a generally positive EU grain crop yield in its latest bulletin. The outlook showed grain yields above the five year average with soft wheat 4.2% higher than the five year figure. It was not all good news however, concerns were raised over dry conditions in Spain. The UK was singled out with above-average temperatures being recorded over the last six weeks with above average rainfall and conditions were described as “close to optimal”.

• Stratégie Grains latest monthly grain report showed improved EU production month on month as a consequence of improved weather conditions. Soft wheat output output was increased 2 million mt month on month with both imports and exports showing declines, albeit small. Overall, end stocks for the 2014/15 season were reported to grow by 3.6 million mt over last year to 14.6 million mt. Of relevance was the point made by Stratégie Grains that stocks were seen to be higher in non-traditional exporting member states, which could be significant when looking further forward.

• Lower has been today’s trade with front month July ’14 soybeans trading below $14.00/bu, breaching the significant 100 day moving average for the first time since early February – and trading convincingly lower. The new crop Nov ’14 contract has held support at $12.00/bu – so far – although floor brokers report expected selling into the close tonight.

• Corn has traded slightly lower whilst wheat as manage to find some support, from where we know not! The Romanian is under way with Ukraine expected to start early July. Active export sales from the black Sea have to be found before harvest is in full swing – otherwise lower prices will be necessary to attract buyers.

• The new crop soybean/corn ratio remains stubbornly resistant having hit 2.75:1 today – the message being new crop soybeans are still hugely expensive and have the potential for a huge setback – unless corn prices rise (unlikely in our opinion).

• The latest US crop condition report showed corn as 76% good/excellent, up from 75% week on week and up from 64% year on year.The crop is 97% emerged, better than last week, last year and ahead of the five year average. Soybeans were reported 73% good/excellent, below last week’s 74%, but ahead of last year’s 64%. The crop is 92% planted ahead of all comparatives, and is 83% emerged, again ahead of all comparatives. US winter wheat was rated 30% good/excellent, which is unchanged week on week and 1% behind last year, the crop was reported to be 92% headed which is ahead of all prior period comparatives.Harvest is reported to be 16% harvested, behind the five year average of 20%. US spring wheat is now 72% good/excellent, up from 71% week on week and 68% year on year. Emergence at 91% is above prior period comparisons. All in all, US crops look to be in good fettle!

• CBOT markets failed to hold onto early, if limited, gains as weather conditions showed no threaten signs. Limited heat has been key as far as corn is concerned, and this looks like continuing in to early July as far as current forecasts are concerned. Pollination conditions look, at this time, to be favourable although there is time for conditions to change. El Niño conditions appear to be in a holding pattern rater than building, as was previously the case, but favourable conditions look set for now.

• Other news is scant as far as Ags are concerned, the Ukraine situation remains in a position of unrest with increased troop movements, talks over gas supplies are unresolved and there are further calls for increased sanctions as a consequence. There also appears to be a rapid descent into civil war as far as Iraq is concerned pushing Brent Crude to contract highs. The world, or parts of it, are clearly in a mess but the global crop situation continues fair – long may it continue.