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Weekly Update 13 June 2014

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Fund positions

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USDA Recap 11 Jun 2014

• Today’s US markets have been marked by wheat futures falling to fresh seasonal lows as the winter wheat harvest progresses and rainfall, which is much needed, is forecast for the drier regions of Russia. Wheat crops in Europe and China look to be record large and news that Brazil will also produce a record 7.37 million mt crop, reducing their import needs. Egyptian financial troubles pose suggestions of “soft” import demand, particularly for the early season, and the market is now looking for price levels at which demand might get some stimulation.

• Brazil’s CONAB increased their 2014 corn output estimate to 77.89 million mt, the second largest on record, and it is interesting to note that the early season estimate was only 70 million mt on account of declining profitability. Economic drivers and government support increased safrinha acres by almost 4%, which has added the additional output. This level of output will doubtless pressure global export prices as Brazil will compete with US, Argentina and Ukraine in an already competitive marketplace where wheat is also expected to compete for space in animal feed diets.

• CONAB also estimated 2014 soybean output at 86.05 million mt, a decline from last month’s estimate of 86.57 million mt.

• Soybean futures have seen some support, no doubt based upon pre-USDA report pricing despite the fast approaching first notice day on the July contract where open interest is fast declining. The expectation is that the USDA will announce few, if any, surprises, and the June data has historically shown little tendency to “upset the apple cart” and this Wednesday is not expected to buck the trend. Price action post-report is expected to remain focussed upon weather, both US and global.

• France’s AgMin reported an upbeat rapeseed output figure for 2014 at 5.2 million mt, which is an 18.8% increase year on year, and at the same time estimated winter barley output at 7.9 million mt, an 8.2% increase year on year.

• Tomorrow’s USDA report will be published at 5pm UK time tomorrow, and we will provide an update when we have had an opportunity to look over the data.

• Reuters has today reported that China has stopped issuing permits for the import of DDG’s from the US due to non-approved GMO contamination. The much discussed MIR 162 event has been responsible for in excess of 1 million mt of rejections of corn in the last year. It was also reported that around 250,000 mt of contaminated material, stored in port stores, is now required to be re-exported, although there is no official confirmation of this. US DDG prices look likely to decline on the news as ethanol producers, and resellers, will target livestock producers already hard pressed by high protein prices due to tight soybean stocks and the resultant impact upon soybean meal availability. The ban by China is expected to last well into Q4 2014.

• There is also news that China is looking to dispose of some 25-30 million mt of corn from their reserves at a break-even or better price. A ban on imported US corn and products dovetails wonderfully into the corn sales plan – isn’t it amazing how these coincidences arise so fortuitously for China on so many occasions!

• CBOT prices on grains have been lower throughout the day with corn leading the way, having shed over 2.5% with about 40 minutes of trading left. Wheat was also lower, but only 1.5% down in active trade. Soybeans and soybean meal have traded either side of unchanged and look to have found some (slight) support – for now.

• Wheat prices in Black Sea regions remain under pressure as harvest in SE Russia and Romania look likely to start within two weeks and buyers are scarce to say the least. Prices look as if they will come under further pressure, certainly until harvest gets under way.

• The USDA is scheduled to release their June crop supply/demand report on Wednesday at 5pm UK time.

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Weekly Update 6 June 2014

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Fund positions

• Thursday has shown us another day of declines with a general 1.5% drop in CBOT grains and 1% (and more) in the soybean complex.

• The front month (Jul ’14) soybean contract fell below its 50 day moving average price for the first  since early February. The next target level looks to be $14.01, which is where the 100 moving average sits tonight, a full $0.60 below todays closing price. The November contract dipped below the 50 day average three days ago, and the drop now looks more convincing. In addition, the “island top” we mentioned at the weekend remains intact and flags a potentially bearish change in trend which should be watched closely.

• Reports from the ground are showing excellent soybean and corn crops in the Midwest, Plains and Delta following recent rains. The Delta is just starting the pollination phase in corn, which will obviously push northwards in coming weeks. Crucially, there is little significant threat from high temperatures which can significantly reduce yield, particularly at pollination time. Growers in the Delta are suggesting that their crops look the best in recent memory as a result of cooler and wetter weather conditions. The weather conditions across the Plains and Midwest remain favourable with rain and cool temperatures forecast into late June. Atlantic Ocean cooling, which is being reported at present, would suggest conditions will remain favourable into July.

• Fund liquidation has been evident today as fund managers appear to be disinclined to hold onto stale, losing positions any longer in the face of bearish new crop positions.

• Informa Economics have today released their latest US wheat crop estimates with 2014 winter wheat output lowered to 1.396 billion bu, from 1.496 billion bu previously. Their forecast for 2014 US hard red winter wheat output was 744 million bu, soft red winter wheat was 447 million bu and white winter at 205 million bu. The figures were initially perceived as slightly bullish, but the market closed lower regardless.

• The United Nation’s FAO (Food & Agriculture Organisation) forecasts global cereal crops at 2.48 billion mt, a 1% increase from its last estimate. 2015 stocks were seen at 576 million mt, a 10 million mt increase from its last figure.Within these numbers, 2014 wheat output was seen at 703 million mt, a 12.6 million mt year on year reduction.

• US weekly export sales were reported as follows:

Wheat; 343,400 mt which is within estimates of 275,000-625,000 mt.
Corn; 570,400 mt which is within estimates of 550,000-800,000 mt.
Soybeans; 271,800 mt which is below estimates of 400,000-850,000 mt.
Soybean meal; 299,500 mt which is within estimates of 225,000-375,000 mt.
Soybean oil; 5,100 mt which is within estimates of zero to 35,000 mt.

• Brussels granted weekly wheat export licences amounting to 304,557 mt, which brings the season total to 28.295 million mt. This is 8.194 million mt (40.8%) ahead of last year. Corn import licences for the week reached 306,000 mt bringing the season total to 13.608 million mt.

• Trade in Chicago has been a back and forth affair as traders struggle to get to grips with ultimate price direction, low volume has added evidence of such indecision.Corn has continued to slide, unconvincingly, on the back of potentially record large global crop projections whilst wheat has basined a touch on some short covering and Black Sea price stabilisation (for now).

• Global weather and crop growing conditions look too good to permit any sustained rally in new crop prices, and as we approach July, fund liquidation is as inevitable as night following day! We appear to be witnessing a pattern of declines to start and end the week with something of a bounce in between, it will be interesting to see if this remains the pattern this week and next.

• Global exporters appear to be girding their loins for fierce competition this coming season . Argentine FOB corn bids have fallen sharply in recent days, Black Sea 12.5% wheat levels are trading well below US Gulf and Brazilian soybeans are offered well into US new crop positions. We could well see significant “harvest pressure” this season – for the first time in a number of years. This point appears to be corroborated by the lack of new US grain or soybean sales in this morning’s report, the US is currently uncompetitive, despite declining CBOT levels.

• Egypt’s GASC has reinstated the 13.5% moisture level for wheat imports (at least for the next nine months) which will bring EU, and France in particular, back into play. One side effect may well be that Black Sea prices decline still further in an attempt to remain still more competitive. Some continue to express concern over levels of farmer debt and consequent machinery availability together with lack of fertiliser and crop treatment programmes in Ukraine.

• Our inclination has been to start looking at taking some (small) new crop grain cover on the current price break. Prices have dipped considerably from the highs of recent weeks, and whilst we think there will be lower levels, an initial foray into the market and bargain hunting may yield some good value right now.

• Tuesday has seen Chicago pricing boards displaying acres of red as prices have declined, sharply in some cases. It would be realistic to suggest an average of 1.5% has been shed from prices in today’s session (which, to be fair, is not yet over as we write this). Favourable US and world weather and the potential for record harvests has been the main driver of today’s price direction. Old crop soybeans have led the way lower for a change as straight liquidation and old/new crop bear spreading has featured. We have been advised that general fund long liquidation has been evident in the latter part of the session today. It appears that funds are getting tired of stale and losing net long positions right now.

• Of interest in Chicago, despite today’s declines, is the spread between new crop soybeans and corn, which at 2.7:1 feels too wide. The price of Nov ’14 soybeans, in relation to Dec ’14 corn, just looks wrong right now and we would expect to see this spread close – ultimately.

• Wheat from the Black Sea region is searching for buyers with prices looking lower once again. Buyers continue to remain reluctant to commit to the region for fear of further instability, particularly as US President Obama has suggested beefing up the US military presence in Eastern Europe in a counter to “ongoing Russian aggression”. To date there has been nothing to suggest that availability of wheat and other grains and oilseeds is anything other than “business as usual” – so far.

• US crop conditions were reported last night, corn was reported to be 95% planted, 1% ahead of expectation and five year average. The crop is 76% good/excellent compared with 63% year on year. Soybeans were 78% planted, up from estimates of 75%, 59% week on week, 55% year on year and above the five year average of 70%. Emergence was reported as 50%, above last week’s 25%, 29% year on year and five year average of 45%. Winter wheat was reported to be 30% good/excellent, unchanged week on week and year on year. Spring wheat was reported to be 88% planted, the same as the five year average, and is 67% emerged, which is up from last year’s 58% but below the five year average of 72%.

• Trading to start the week has been pretty uninspiring as far as volumes are concerned, the highlight being the return of London wheat markets to their Feb ’14 lows (Nov ’14 traded £142.00) where some support was found. Paris also traded lower but the moves in exchange have ensured that the lows are still some way off – for now. The outlook for EU wheat crops, and Black Sea for that matter, still looks good, and the potential for imported corn to displace wheat in feed rations for another season still exists. If that becomes the case, growers will need to reconsider their position as far as price expectations are concerned, and lower price levels in order to compete with the alternate grain.

• There is talk of hot and dry conditions in the Volga region of Russia, which has resulted in some trimming of wheat output forecasts, and this is the first sign this season (so far) of any such threat to crops through less than ideal weather. The trade expectation of Russian wheat output sits in the range of 49 to 52 million mt vs. 52 million mt last season. Some relief in Russia is contained in the latest forecasts with up to 2” of rain projected to fall across the coming fortnight. Russia’s spring wheat belt is adequately wet.

• Our view remains that longer term price trends remain bearish in the absence of a significant weather issue, the Volga “threat” will need to grow and expand its geographical coverage before any major spec buying is triggered.

• The expectation for US plantings data, due to be released later today, is that corn will reach 94%, soybeans 76% and spring wheat 86%. Initial ratings for good/excellent corn is expected to be 71%, which compares with 63% last season.

• Finally, the Ukraine AgMin has put 2013/14 grain exports so far at 31.4 million mt, which is an increase of 43.2% year on year.