• Midday comments:

• In wheat we are looking at the start of a fund roll, which will impact CBOT markets and fresh export business has indeed lent some support but it feels as if the market requires a bigger input if the bearish tone is to be curtailed. Yesterday’s GASC tender and the lack of French offers on the back of quality concerns does not appear to be a long term detractor to the market as Black Sea quality supplies look to be more than adequate to keep the business to themselves.Of interest is the “reluctance” of Ukraine to become part of the general pool of sellers, particularly in the light of their potential crop.

• We continue to hear of EU rain damage limiting milling quality and generally higher protein wheat, and whilst this is not an issue right now, any weather issues elsewhere (Argentina or Australia for example) could see quality premiums explode to the upside, at the expense of feed grains.

• Corn in Chicago has seen some support from wheat as well as dryness in parts of the western corn belt and strong ethanol demand, all of which has conspired to limit downside. Weather forecasts remain pretty much unchanged and supportive to good crop development and limited crop stress levels. We are looking at a “promise” of rain which is limiting upside right now, and it is important for the price trend that this is ultimately delivered in the first couple of weeks of August.

• The prospect of China limiting corn and sorghum imports due to their large corn crop, and rainfall in the US sorghum growing area of the western plains may well add to price pressures. China has large reserves of corn, some are suggesting as much as 100 million mt, and there is pressure to see this move this year, and imports of corn or sorghum will be seen as detrimental to such movement.

• Soybean markets are displaying typical weather driven volatility as forecasts are updated as much as four times a day. Bearish forecasts into next week saw old crop supplies increase particularly from S America as well as remaining US long holders. Actual rainfall, as opposed to forecast rainfall, will be vitally important if bullish yield estimates are to grow as many suggest.

• Suggestions that Argentine soybean sales are up in the face of debt default are widely discussed. S & P rating agency have already declared Argentina in default after the government missed an interest payment deadline. Regardless of the Argentine position it feels very much as if weather related risk premium is being withdrawn from the market as each day goes by.

• Evening update:

• The US has released its weekly export data as follows:

Wheat: 801,000 mt, which is above estimates of 350,000-550,000 mt.
Corn: 1,267,100 mt, which is above estimates of 800,000-1,250,000 mt.
Soybeans: 1,456,100 mt, which is above estimates of 900,000-1,300,000 mt.
Soybean meal: 751,100 mt, which is above estimates of 550,000-650,000 mt.
Soybean oil: 32,800 mt, which is within estimates of 0-65,000 mt.

• The International Grains Council has released its latest deliberations which show global wheat output at 702 million mt, an increase from 699 million mt last month but down from 710 million mt last year. Russia was forecast at 55 million mt, up 4 million mt month on month and an increase from last year’s 52.1 million mt. Ukraine came in at 21.5 million mt, up from 20 million mt month on month but down from 22.3 million mt year on year.

• Global corn output was forecast at 969 million mt, up from 963 million mt month on month, and down from 974 million mt year on year. Within this, the US was forecast at 353 million mt, up from 350 million mt month on month but down from353.7 million mt year on year.

• The world soybean crop was estimated at 304 million mt, up from 300 million mt month on month and up from 292 million mt year on year.

• Brussels granted weekly wheat export licences totalling 555,260 mt bringing the season total to 1.403 million mt, which is 305,278 mt behind last year. Corresponding barley exports for the week reached 118,000 mt bringing the season total to 907,000mt. Corn import licences of 217,000 mt were approved with the season total now standing at 1.1 million mt.

• The UK barley harvest was reported to be 85% complete as of yesterday, slightly ahead of average. Yields  so far have been reported to be 6.34 mt/ha, which is above the five year average. Quality is average and moisture reported to be around 14%. The earliest wheat harvests have taken place with some 10% now cut and yield reportedly good. Quality test weights and Hagbergs are also reported to be good although protein levels are below average. It must be borne in mind that this is still very early and there is time for a turnaround in harvest fortunes. The latest Stratégie Grains UK output estimates stand at 15.492 million mt of wheat (vs. 11.921 million mt lat year) and 6.015 million mt of barley (vs. 7.092 million mt last year).

• CBOT markets closed pretty much unchanged (corn a touch lower) and larger than anticipated US weekly exports provided support to both soybeans and meal yet growing global crop estimates and suggestions of improved US weather conditions (and the impact upon crop prospects) have placed a firm cap upon gains. The key number has been soybean meal exports which bring total new crop commitments to 3.7 million mt, which is a record and three times the rate of last year. So far, about half these sales are to “unknown” destinations leaving a degree of uncertainty as far as the 2014/15 soybean meal balance sheet is concerned.

• EU weather next week is forecast to be completely dry, following a showery end to this week, which will come as a relief to growers and hopes will be high that some quality can be regained.

• Midday comments:

• EU and Russian harvest pressure continues to weigh on international wheat prices despite the imposition of new sanctions on a number of Russian state banks which may heighten the geopolitical risk in the region. The Russian AgMin has estimated that the grain harvest so far stands at 45 million mt with an average yield of 3.43 mt/ha, which compares with 35.5 million mt and 2.79 mt/ha last year. Estimates of a Russian harvest as high as 59 million mt are circulating widely, compared with the USDA’s latest at 53 million mt, which could spark yet more aggressive pricing on international markets. In Ukraine there appears to be a building backlog of wheat which may well come to market anytime soon as output estimates rise. Some private estimates stand at 57.4 million mt (grain output), about 4% ahead of last year, wheat accounts for 21 million mt, up from 20.5 million mt last year.

• EU prices continue to decline with MATIF Nov ’14 hitting a new low and prices as low as we have seen in four years. Egypt came to the market last night, after the close, for mid-September shipment, and we again believe France will be absent on quality grounds. Russia is expected to be aggressive, and Romania and Ukraine may well make a showing whilst US may offer but freight will likely kill it.

• Morocco has cut its soft wheat import duty to 17.5% from 45% with effect from September 1st.

• Corn market fundamentals show little sign of demand expansion right now with lower cattle on feed numbers and in line with expected ethanol demand projections; this leaves a question mark over USDA export numbers which may well need to be reviewed in the August report – downwards and bearish! The fund position, which is a small net short, coupled with further long liquidation or adding to shorts will pressure prices, and any bearish August weather will keep pressure on the downside. The forecasts for this week remain dry for the rest of this week but show good agreement with wetter conditions across much of the corn belt  early to mid-next week. Temperature remains a non-issue.

• A private forecaster has put Ukraine corn production at 27 million mt, up around 4% from last year and should see the country a key exporter despite political tensions in the region.

• Soybean markets have seen something of a selloff as the forecasts contain needed rains and funds continue to add to their net short position. The ongoing lack of heat in front of coming rains has ensured limited crop stress and the potential rain in the key August period is seen as bearish. A further bearish input has come from some showery weather in central Brazil, which is not typical, although very welcome. Whilst providing a delay to corn harvest it has added a shot of moisture ahead of the soybean planting season which is no bad thing. Bean planting typically starts around mid-September, and with corn prices in Brazil below cost of production and with input prices rising sharply, we would expect to see a big swing in acres away from corn and into soybeans.

• US soybean exports and soybean meal demand remain strong, which will keep cash bids firm and provide some market underpinning despite producer selling in both Brazil and Argentina on the last price rally.

• The latest update on EU wheat production looks set to confirm wet weather damage reducing quality supplies and correspondingly increasing the feed pile as well as overall output set to top 147 million mt (including durum) making the 2014 harvest the third largest on record. France, the EU’s top producer and exporter, has suffered the worst of the weather effects as we have reported previously. July rainfall reaching as much as three times normal has been described as “relentless”, and Stratégie Grains have pegged soft wheat output for France at 37 million mt, above the five year average.

• Germany, the second largest EU producer of wheat, is also expecting a favourable crop but also some quality issues. Output at 25.6 million mt would rank as fourth best in the last 15 years. The UK, EU’s third largest producer, has not (yet) suffered the weather ravages seen by others and is looking for favourable weather to boost wheat supplies after two poor years of production. Poland, ranked fourth in the EU, is anticipating output of 9.6 million mt to equal last year’s production. Latest weather forecasts suggest that rain is expected to taper off in N Europe in the coming week although strong showers are anticipated in S Europe, which will continue to hamper harvest efforts in Romania, Bulgaria and Italy.

• Evening update:

• CBOT markets have been mixed (to say the least) with closing prices lower in soybeans and meal with the grains posting gains. Clearly there is nervousness to sell beans hard until such time as the wetter weather is confirmed yet rallies are struggling to fight improved weather prospects – a typical weather market.

• Egypt secured 175,000 mt of wheat exclusively from Russia a couple of dollars lower than last week with the next best offer coming from Ukraine only just more expensive. US soft red was around $8.00/mt too dear freight included and French was noticeably absent.

• News from China suggests that barley and sorghum imports may well be slowed down, or even halted, due to tighter pesticide restrictions. The real deal is that China needs limited grain imports in the light of record corn and wheat production, and this is their way of ensuring they control supplies effectively! It is likely that restrictions on feed wheat will follow before too long.

• Prior to our review of today’s trade we thought it worth a look back on how we arrived at today’s starting point:

• Generally sluggish US wheat exports added to yet more discussion around higher than expected Russian output has helped keep the overall fundamental market outlook on the bleak side. To counter this, continued wet weather in France as well as some flash export sales from the US could lend some support but the weight of Russian harvest pressure is dragging the all important cash values lower still with Russia undercutting pretty much every other origin around the world.

• Weekly US spring wheat condition was reported to be 70% good/excellent, the same as last week and 2% ahead of last year whilst the ten year average stands at 66%. There are suggestions that the average yield could well be the best in over 20 years! US Winter wheat is 83% harvested, bang on the ten year average.

• Concern does exist over dryness in Australia, more specifically in Queensland and New South Wales. Whilst there is plenty of time left in their growing season, any continuation of dryness will leave room for crop output to be downgraded, the USDA’s latest forecast stands at 25 million mt, which is already 1.5 million mt below last year. That said, a two or three million mt reduction in the Aussie crop will not have a huge bearing upon global supply as it would sit at the higher end of annual the output range since 1996. On a more positive note (from a UK centric perspective) it appears that the UK may well be in a position to “steal” milling wheat business from France into Algeria in the coming year. Recent wet weather in France being the main driver behind the potential switch. With an estimated UK wheat crop of some 16 million mt, compared with 11.9 million mt last year, the total exportable surplus will grow and it will be up to price to determine the actual volumes that finally leave our shores.

• Soybean markets have been in short covering mode in the light of limited rainfall in the ten day forecast although crop condition and early crop tour reports suggest the potential for record or near record output exists – barring major weather driven disruption. Clearly the crop would welcome soaking rains in the next couple of weeks although the current lower temperatures do reduce transpiration and evaporation and places a reduced stress upon the crop, although this needs to continue into mid-August.

• Soybean condition slipped to 71% good/excellent from 73% last week although the ten year average is only 58% at this time of year. The reduced condition was widely expected and markets have not reacted as it was already factored into prices. There is little in place right now to suggest any sharp move away from the USDA’s last estimated yield of 45.2 bu/acre.

• Soybean export strength continues strong each week. The latest USDA release announced private exporters sold 486,000 mt to China with the bulk from the US, and only 66,000 mt from “optional” origin.

• From a corn perspective, the market has only seen a relatively minor bounce, but dryness is of less concern with the crop pollinated, and it will require harsh weather conditions to avoid very high yields. Recent short covering, on short term dryness, lack of farmer selling and a technically oversold market all conspired to support the market yesterday. Double digit gains in soybeans added to the (crazy) high soybean/corn ratio, which continues to raise many an eyebrow, and tends to suggest there is more downside in beans than corn – maybe!

• Weather and crop conditions generally suggest a bearish lean to the market albeit this is old news. An updated yield forecast is needed as fresh input to a stale market, and this will come in the August report. Many continue to talk of 170 bu/acre plus, and we would expect to see some upgrade in the USDA’s next release. Again, as with soybeans, the corn crop would welcome a rain event of significance in the coming fortnight although lower temperatures will leave crop stress levels well within comfort zones right now. The  supply outlook remains bearish in the absence of adverse weather conditions.

• The latest crop condition figures showed a 1% drop in the good/excellent proportion, to 75%, which was in line with expectations and compares with the ten year average of 60%. The crop is 78% silking compared with the five year average of 75%.

• From a macro perspective we could well be looking at a second Argentine default in 12 years, which is hitting their exchange rates. Both Rosario and Buenos Aires Grain exchanges are using lower planted wheat acreages than the government (4.2 million ha vs. 4.5 million ha), despite which would still see a decent crop, the government is still not opening export licences and the market is dead as a consequence.

• In conclusion, the market is clearly trading nearby weather in the US, and unless we see a really hot and dry August any further rally in prices looks to be unsustainable. Higher prices right now will add a stimulus to increased S Hemisphere new crop plantings, which can only be interpreted as longer term bearish.

• Today has seen markets giving back a lot of yesterday’s gains with red the predominant pricing board colour. Wheat in Minneapolis has dipped to contract lows and is likely to drag Chicago lower and with no sign (yet) of a harvest low being set in Black Sea regions as supplies flow steadily and surely to ports and growers report much better than anticipated yields. Our view is that if US wheat can not form a seasonal low, it would be unlikely that corn and soybeans are there yet either.

• Prospects for rain look better with the main forecasts in agreement over the next ten days and cool temperatures likely into early/mid August. Cool and dry conditions followed by rain would be exactly “what the doctor orders” for soybeans as they reach bloom and pod filling and producers continue to report excellent crop condition.

• We have seen mixed prices today with wheat the downside leader with corn and soybeans heading in to the close in positive territory. Larger FSU wheat harvests and news that EU sanctions against Russia are unlikely to involve trade have helped wheat whilst corn and soybeans continue to take flight in the face of drier conditions.

• Fund short covering has been noticeable as Nov ‘4 soybeans made gains taking them back over the psychologically important $11.00/bu level and Dec ’14 corn made an attempt at closing the recent “gap” at $3.78/bu (unsuccessfully at the time of writing). Regardless of the hype by the bulls, neither corn or soybean crops are showing any sign (yet) of stress and we remain sceptical at this time that the bottom has yet been seen in either market. Maybe this is the time for nerves to get stronger!

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Weekly Update 25 July 2014

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Fund positions

• Early gains in CBOT grains have given way to lower levels in the last hour of trading. The soybean complex however has managed to hold onto its gains and it remains to be seen if this continues into the close.

• US weekly export sales data was supportive, particularly to corn and soybeans, over 98 million bu of soybeans were reportedly sold with 8.3 million slipping into the old crop (although many believe they will be shipped in new crop positions) and the remaining 90.1 million bu was definitely in new crop positions. The total of new crop soybean sales now stands at 541.1 million bu, well above last year’s pace. 56.3 million bu of corn was also sold, 11.5 million bu as old crop and 45 million bu as new. Wheat sales were 16.3 million bu, with crop year sales reaching 328 million bu, 27% (or 124 million bu) less than last year – competitive export pressure is ultimately showing!

• China has, at last, formally requested US DDG exports to be certified MIR 163 free, and this has again hit the price of cash DDG’s by as much as $15 at export terminals. The news amounts to a defacto embargo on US DDG’s as zero percent certification is not just highly unlikely, but virtually impossible by all accounts. The news is not only negative from a US DDG pricing perspective, but also from a soybean meal perspective – think alternate competing protein source.

• Reflecting upon the bounce in prices, particularly in soybeans, the main driver has been discussion on drier than desired weather across south west midwestern states. Seemingly subsoil moisture reserves are more than adequate but the short position held by funds has proved a little rich and we have seen short covering on the weather news. Clearly crops will require finishing rains if they are to maintain their current good/excellent ratings and there is no suggestion, currently, that this is any way unlikely.

• Of note over the last few days has been the increase in premium of the French milling wheat contract in the MATIF market when compared with its London feed cousin. Nov ’14 MATIF now stands at £15.82/mt premium to London (basis UK 18:00 exchange rate) which is around £5.00/mt more than has recently been the case. The cause of the rise is down to (particularly) French harvest quality, which we have referred to previously, and the impact which rain delays have had in downgrading much of the crop to feed rather than milling suitability. The impact upon milling prices is clearly evident from the MATIF market, but we also have to be mindful on the effect which will be felt, and seen, on feed grade prices once the market gets to Grips with the additional volumes that appear to now be inevitable.

• Despite the French quality woes, there is better news from Russia where wheat output forecasts continue to grow. An estimated 58 million mt is now being widely discussed and some daring souls prepared to even consider as much as 65 million mt (compared with last year’s 52.1 million mt) which potentially allows export volumes of 25 million mt (compared with last year’s 18.5 million mt) and would still leave an end stock of 6.7 million mt, which is a million mt above last year. Any advance on the 58 million mt would have to either be consumed domestically (unlikely in our view), exported (at what price – significantly lower than current levels?), or stored as additional end stocks. One way or another we do not see a story to fire up the bulls in this news!

• Added to the hove, there are talks of EU sanctions on Russian state banks in the wake of the shooting down of the Malaysian plane last week. The banks would, if such sanctions were invoked, would not be able to sell shares or bonds to EU investors and would limit their resources to government and/or domestic investors. This, in turn would limit their ability to finance the domestic economy, including farmers, who might just step up their sales pace and volumes in order to repay loans. In addition to a weaker Rouble this would see the advent of even cheaper Russian wheat. Whether or not this scenario plays out in the fullness of time remains to be seen, but there is a distinct possibility that it may, just may, happen.

• Today has seen Egypt’s GASC secure a further 235,000 mt of wheat, this time for early Sep ’14 shipment, unsurprisingly from Black Sea origins. Russia picked up 120,000 mt, Romania 60,000 mt and (at last!) Ukraine 55,000 mt. Average prices appear to be as much as $5.00/mt below their last tender two weeks ago, although we are awaiting final data at the time of writing. Initial information suggests that France did not offer in this latest tender amid quality concerns caused by the wet conditions prevailing as harvest is under way.

• As a corollary to the above, we are seeing French millers paying big premiums to secure quality supplies in the face of the weather damaged harvest. At the same time exporters are scrambling to cover or hedge earlier sales in alternate origins as quality fears grow and concern increases that French wheat may fail to meet premium grade standards.

• In an interesting move, probably away from initial predictions, we see Ukraine and Black Sea corn offered at around $5.00/mt less than US Gulf offers in the new crop Oct/Nov ’14 positions. The impact is that much needed export demand is being pulled away from the US at exactly the same time as the U is staring at a potential record harvest. US lack of competitiveness is being created by soaring barge and trail costs, to get the crop to export terminals, and poses a potentially significant issue for the uS going forward – watch this space!

• As we approach the close in Chicago we see corn, wheat and the soybean complex all trading in positive territory. The oversold markets are working to adjust and we would not expect to see lasting gains. Weather forecasts in the US continue to suggest that crop prospects have little to fear at this time.

• Last night’s crop condition report was pretty much as expected with corn rated good/excellent unchanged week on week at 76%, which is up from last year’s 63%. The crop is 56% silking, which is ahead of the five year average of 55%. Soybeans rated good/excellent stand at 73%, up 1% week on week and ahead of last year’s 64%. Spring wheat is 70% good/excellent, as was tha case last week, and compares with 68% year on year. Winter wheat is now 75% harvested, which is the five year average pace. Whilst there was no surprise, the data shows crops at their best in 20 years although they still have to get through August – and possibly more important, the market remains oversold and liable to correction, which we saw to some extent today. CBOT markets, into the close of trade, capitulated and gave back earlier gains and traded largely in the red in the final 15 minutes.

• Wheat output forecasts for Russia are steadily increasing as early yield data is above expectations. Wetter weather across the Volga, Ural and Siberian regions (apart from the far west fringes of the Volga valley, which is a marginal production region)  is the main driver of better yields. The upper range of estimates now stands at 57 million mt, which is 4 million mt over the USDA’s latest forecast and will likely be a key driver of global price direction given the influence that the Russian exportable surplus has in pricing. Russian domestic prices are in the process of falling sharply as the winter crop is harvested with prices reported to have dropped as much as 20% in the last two weeks. Black Sea and Russian output has been critical in the recent downtrend in wheat prices (amongst other factors) and it is difficult to see the bottom until we see global cash markets displaying some stability.

• Reports of poor quality in the French wheat harvest continue to circulate, which is not good news for quality buyers. However, this does play into the hands of feed consumers as the available supplies of feed quality grains continues to grow, this stockpile includes not only wheat but also corn (maize). Lodged crops and sprouted grains appear to be the main culprit in the quality arena in France right now. From a UK perspective, French feed supplies are looking for buyers by offering at a discount price that appears to be in the region of €4.00/mt below UK feed wheat levels. The logical outcome would suggest that UK prices will drop in order to compete for export business in an already pressured over-supplied market.

• Finally, the much discussed El Niño appears to be continuing to weaken, which is assisting the Indian monsoon and providing reduced threat to Australia, which has seen little impact so far this season. Given the lack of adverse weather in the US and the outlook for bumper crops there, the reduced threats in India and Australia as well as SE Asia as a whole hardly suggests we should change our bearish stance at this time.

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Weekly Update 18 July 2014

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Fund positions

• Today’s preliminary quiet session was overshadowed by news that a Malaysian airliner had been shot down by Ukrainian militants en route from Amsterdam to Kuala Lumpur with the loss of 280 passengers and 15 crew, The news raised concern that the conflict has escalated to a more international stage and traders scrambled to cover short positions, particularly in wheat and markets in both the US and Europe rose markedly. The major fear is that potential exports (despite the fact that sales are currently minimal) will be compromised and put pressure on other export origins. As of the time of writing there has been no confirmation of the facts, nonetheless nervousness remains in the market – rightly so.

• Prior to this news we were digesting last night’s Stratégie Grains update which revealed a further upgrade to EU soft wheat output as well as a cautionary note over quality. The current outlook is now for 140.5 million mt, a 1 million mt increase on June’s estimate, and around 4% over last year’s output. Barley output was also increased by 700,000 mt to 56.2 million mt which is some 6% below last year’s output. Corn output was also increased month on month from 65.9 million mt to 66.4 million mt.

• US weekly export sales data was released as follows:

Wheat; 320.700 mt which is below estimates of 400,000–550,000 mt.
Corn; 1,068,600 mt which is above estimates of 600,000-800,000 mt.
Soybeans; 598,600 mt which is within estimates of 450,000-775,000 mt.
Soybean meal; 173,300 mt which is within estimates of 45,000-240,000 mt.
Soybean Oil; 8,400 mt which is within estimates of 0-30,000 mt.

• Brussels granted wheat export certificates amounting to 175,208 mt, which brings the season total to 570,242 mt. This is 72,589 mt behind this time last season.

• Clearly we need to see how the Ukrainian situation plays out in the next day or so. Despite the tragic incident we do not believe that the flows out of the Black Sea are fundamentally changed, we do not see US, EU or Russian troops intervening to either escalate or quell the civil strife which is currently in play. We fervently hope that this is not the “Black Swan” event that we have been discussing in recent weeks.