• The drop in prices over the last few weeks, which has left funds net short in both soybeans and wheat, has left markets technically oversold as we have previously mentioned. Corn and wheat futures have hit four year lows whist soybeans have shed almost $2.00 from their June highs. The only way a technically oversold market can relieve the condition is to either rally or trade sideways for a period until selling pressure abates. Today’s higher levels suggest we are in this period of consolidation, which we believe will pave the way for fresh selling and lower levels in coming weeks, and that we will see fresh lows before any significant longer term price trend change.

• To further support this argument we would note that US and world farmers are, in general, poorly sold and we believe they will use price rallies as an opportunity to correct this situation, which will potentially put a lid on price gains.

• The EU today implemented the first corn import duty of €5.32/mt. This is to prevent too much cheap corn being imported, and this is particularly relevant today in times of abundant feed wheat supply. Duty levels are calculated daily and if FOB US corn premiums decline, CBOT prices decline or freight rates reduce, the duty will rise further. The data used in the calculation is published by Brussels on 16 and 30 (or 31) of each month. EU importers are unaware of the duty payable until such time as their cargo is cleared.

• The harvest in Russia is continuing to surprise to the upside with wheat yields leading private forecasters to increase their forecasts to 55-56 million mt. The Russian AgMin has estimated the total grains crop at a nice round 100 million mt, which is an increase fro their previous forecast of 97 million mt.

• Following Friday’s drubbing of the market on the back of the bearish USDA report and favourable US and world weather, we are not surprised to see something of a recovery to start the week as the market was extremely oversold and profit taking was going to be inevitable. From the information we can find Dec ’14 corn and Sep’ 14 wheat are the most oversold they have been since the economic crash of 2007/8. The soybean complex, now that it appears the old crop US balance sheet is largely resolved as well as expiry of the July ‘14 contracts, which holds the most downside in our opinion. The crop is entering the bloom phase this week and the critical pod formation phase begins in late July and August, and will require drier and sunny conditions for the crop to flourish. This is exactly what is on offer in the current forecast. Any meaningful rainfall in August, once pods are set, will likely ensure a record large 2014 US soybean crop.

• The release by the CFTC of the latest fund positions (forwarded) shows heavy net shorts in soybeans and wheat but the funds maintain a net long in corn. We remain surprised at the fact that the funds continue to hold onto losing net longs in corn.

• There have been reports of further escalation of the Russian/Ukraine tensions as a rogue shell is reputed to have killed a Russian citizen and Russia has promised retaliation. Whether this will influence grain prices, or not, remains to be seen.

• Regardless of any market bounce to counter the current oversold position it would seem that prices will struggle to hold onto any meaningful gains in the face of large US and world supplies, which appear to be just around the corner. It must also be borne in mind that new crop sales by US and world growers are limited, and any uplift in prices will likely be capped by an avalanche of sellers queuing up to book bids.

• The new crop soybean/corn ratio remains high at 2.8:1, and also suggests to us that soybeans will be the downside price leader.

• The market is awaiting crop condition reports later today, and expecting condition to be no worse than last week and hopefully better.

• Is today’s price recovery a “dead cat bounce”?

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

Fund positions

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

USDA Recap 11 July 2014

• CBOT markets closed lower in advance of the USDA report with soybeans (Nov ’14) at their lowest level since November 2010. Any sign of strength was jumped upon by the bears and swallowed up in a market which clearly wants to go lower as midwest weather continues to favour crop development. The main question in relation to the corn numbers in the USDA report is whether or not they will increase yield in the light of near record crop ratings and the good weather forecast in the coming two weeks. The trade estimates are for bearish numbers, but (as always) we will have to wait and see. Wheat continued its grind lower on the Egyptian tender as well as EU wheat prices testing ten month lows. It is reported that Romanian wheat quality is better than previously thought, and this no doubt triggered their aggressive offers to Egypt. Russian wheat prices for August delivery have reached season lows. The USDA numbers are expected to be neutral, unless they increase EU and Russian output, which will have to happen at some time – but maybe not July.

• US weekly export data was released as follows:

Wheat; 338,100 mt which is below estimates of 400,000-635,000 mt.
Corn; 744,600 mt which is within estimates of 600,000-1,050,000 mt.
Soybeans; 582,700 mt which is within estimates of 200,000-600,000 mt.
Soybean meal; 142,400 mt which is within estimates of 30,000-275,000 mt.
Soybean oil; 12,800 mt which is within estimates of 0-30,000 mt.

• Brussels granted 377,000 mt of wheat export licences for the week, which brings the season total to 411,000 mt compared with 318,000 mt last year. Corn imports for the week were 125,000 mt with a season total of 257,000 mt compared with just 49,000 mt a year ago.

• The second portion (50%) of the annual 278,000 mt zero tariff corn import quota was used yesterday, as well as 31,000 mt of a separate 400,000 Ukraine quota. This points towards the trade expecting import levies in the near future with the front three months of Chicago corn now trading well below $4.00/bu. Our estimate of new crop levy is in the order of €3.00/mt (based upon an aggressive freight costing) which basis Black Sea replacement would put Ukraine corn at around € 153.00/mt C&F – some €12 below Nov ’14 MATIF wheat and some €30 below feed wheat prices in northern Europe. Bearing in mind northern Europe is easily the best destination for Ukraine corn it looks fairly and squarely as though EU demand will remain strong. Whether it will reach last year’s14.51 million mt, which was just below to 2007/8 record of 14.6 million mt, remains to be seen. We suspect that ample supplies of feed wheat will force prices to a level where they have to compete in feed rations – otherwise we will be facing huge end stocks.

• Egypt’s GASC purchased a further 240,000 mt of wheat, and Romania secured the lot. Black Sea origins were expected to win, and did not disappoint. One Ukraine offer looked value, but the shipping port made freight a cost disadvantage. Russian offers followed up with one French offer not too far away at around $7.00/mt above the winning sales.

• CBOT markets closed lower (again) with buyers sidelining and starving the market of bids, and we all know what happens when there are more sellers than buyers! Brazil’s CONAB added to their soybean crop, albeit a mere 0.22 million mt, but the impact is to see December stocks increase – to a three year high of 2 million mt. Their forecast for exports Jan/Dec was a whopping 45.3 million mt, which given the current pace is currently only just above last year when 43 million mt was exported, looks to be on the high side.

• Corn made new four year lows with the Dec ’14 contract closing below $4.00/bu for the first time since 2010. Fund exits from stale and owing positions continues amid griping over losses. Will they learn their lessons this year? CONAB’s estimate of the Brazilian Safrinha corn crop rose to 46.2 million mt, an increase of 500,000 mt from their June estimate. The total corn crop was estimated to be 78.2 million mt, an increase of 200,000 mt, marginally behind last year’s record crop.It is believed that government subsidies will be required to move the crop from Mato Grosso to port purely on account of the sheer size of output. In an election year will this happen?

• Global wheat priced dropped again on fierce competition to secure sales, as evidenced in the Egyptian tender. Fund selling was evident once again. Ukraine lost out, as we mention above, as did France. New business is needed by both parties and it appears that buyers are noticeable by their absence and prices are moving accordingly

• In Chicago “Turnaround Tuesday” has failed (so far) as far as soybeans and meal are concerned and the grains have hardly made a convincing rally. Volumes have not been spectacular and funds have been seen as sellers in old crop corn and soybeans. July ’14 soybeans dropped below March lows and triggered longer term sell signals whilst the August contract have tested key support at $12.50 – and broken it, which will be significant in triggering lower levels. One caveat however, markets are somewhat oversold at present and this may provide an opportunity for them to stage a recovery. If this does occur we would view it as an opportunity to short the market in order to benefit from any fall – which we believe will follow as farmers and funds sell once gain.

• The development of the El Niño weather phenomenon appears to have stalled somewhat with eastern equatorial Pacific waters cooling significantly over the past week or so. This has eased drought fears in Australia as well as Malaysia and Indonesia; central US winter conditions may well also be cooler.

• The French AgMin poured some cold water on their grain output with reduced soft and durum wheat forecasts for the 2014 harvest. Soft wheat output was estimated at 36.5 million mt, down from 36.9 million mt year on year whilst durum was estimated at 1.4 million mt, a drop from the previous year’s 1.8 million mt. Barley output however was estimated at 11.3 million mt, up from 10.3 million mt year on year.

• In soybeans the old crop fund long position is unwinding fast (as we reported) as the 2013/14 US balance sheet tightness looks to be all but resolved and urgent requirement for old crop cash beans is now minimal. Farmers, as a consequence, have dropped their bullish stance and are freely offering their remaining stocks, and whilst movements are minimal, it has been sufficient to suggest crush requirements are satisfied until August and early new crop supplies. Added to this, the record plantings would now suggest that the soybean complex will lead the market (including grains) lower.

• It was suggested that Latin America sold 60,000 mt of soybean meal to S Korea at a price substantially below either US Gulf or Pacific NW levels. Brazil will be back in play next week, following their world cup fever break (any excuse) and we would expect to see much more aggressive selling of old crop supplies by producers and exporters – adding further pressure to prices.

• The wheat market looks set to have to answer some big questions – and before too long!

1. Where does Russia set its intervention prices, a 5% uplift would offset its 5% drop in currency and leave 12.5% protein prices on a parity with last year’s FOB level of $245.
2. What is Ukraine going to do with its 20 million mt harvest, which is just around the corner – bearing in mind it has nothing, milling or feed, sold on its books.
3. If Ukraine wakes up, and smells the coffee, and goes looking for business (and it may be thin on the ground with Aug/Sep having traded elsewhere) at what price will they have to be to attract a bid.
4. How good is the Ukraine crop, As much as 40% of their milling crop is required domestically so the exportable surplus (which is the key) will have to compete, but with what – will it compete with wheat or corn.
5. If Dec ’14 corn in Chicago drops to $3.50 and Ukraine corn premiums drop to 50 points over CBOT (last year it got to plus 5) it will price their corn at $157.50/mt. Where does feed wheat need to be priced to compete with that level. Also, milling wheat at some $90/mt higher looks as if it will struggle to stay there.

• Many questions – and not many answers at present, but there is a significant threat to current price levels right now!

• Hot on the heels of wheat, corn is running its race to the bottom as well as the market looks for demand to offset the record large US, Chinese and potentially Black Sea supplies. Last year, corn did not score its lows until September as Ukraine led the market down. This year Ukraine is (currently) the high cost option whilst US and Argentina fight for demand. We would expect to see Brazil (as previously mentioned) and Ukraine become more aggressive in coming weeks, Ukraine particularly needs to get sales on the book before late summer – or potentially miss the boat – literally as well as figuratively!. The Black Sea can not go into the winter without lightening their potential corn stocks in a market which is also becoming oversupplied with feed wheat.

• Late Tuesday saw Egypt’s GASC issue a further tender for wheat, this time for late August shipment. The results of the tender are expected to be announced on Wednesday.

• The latest fund position report shows a further decline across all three agri commodities, with soybeans scoring the largest net short position since we have been charting the data in January 2012. The combined fund position across soybeans, corn and wheat is now net short with only corn clinging onto a small long position. As ever we have to be mindful of the consequences of any change of heart by the funds and its impact upon prices, although at this time we are not concerned at this happening in the short to medium term.

• CBOT electronic markets reopened after the holiday weekend at 2:30pm UK time and gapped lower, pretty much as expected and posted losses throughout the session. Favourable weekend weather prompted losses although profit taking finally offered a degree of support and stemmed further losses. Fund selling was evident in soybeans and meal as well as wheat and it is expected that liquidation in their corn position will be inevitable if weather conditions remain as they are.

• Soybean crop ratings were 72% good/excellent, unchanged week on week and improved on last year’s 67%. Corn is unchanged week on week at 75% good/excellent and up from 68% year on year. Spring wheat is 70% good/excellent, unchanged week on week and down from 72% year on year. Finally, winter wheat is 31% good/excellent, up 1% week on week but down from 34% year on year. The crop is now 57% harvested, up from 43% week on week and 55% year on year.

• Overall, CBOT grains hit prices not seen since 2010, four year lows! The trigger for moving higher four years ago was the start of the drought conditions in Russia – how time flies! The key determinant being the massive looming US corn crop as well as abundant global wheat output. Levels look set to go lower unless we see some significant shift in weather conditions. If we look back at historical prices (to see if any repeatable patterns exist) the sharp losses seen following the Independence Day holiday are more frequently than not followed by month long declines in price (in soybeans and corn). Given the reasonably consistent pattern shown (13 out of 15 years), we would be happy to follow such a pattern and favour shorts in the coming four weeks or so.

• In years where weather conditions across central US regions are uniformly good and temperatures average near or below normal in the key pollination growth phase, corn yields tend to be record large. This year is displaying exactly these criteria. Forecasts continue to suggest little to change, and as such the prospect for a bumper corn yield remains high.

• Russian wheat crop estimates are rising due to better than expected winter wheat yields and recent rains across the Volga and Siberian regions. Expectation of a crop some two or three million mt above the USDA’s estimate of 53 million mt are being widely discussed. This is important as global FOB wheat prices are heavily influenced by the exportable surplus in Russia. If Black Sea/EU prices retest the $240/mt FOB level it will make any rally in US levels untenable from any fundamental viewpoint.

• The coming USDA WASDE report, on 11 July, is expected to highlight record large US 2014 soybean seedings as well as reduced corn feeding during Q3. Many also expect a negative US residual soybean usage to reflect their understated 2013 crop. As such a further bearish set of data is anticipated – but as we all know the USDA has a habit of springing surprises, so caution should remain.

• Wheat in Paris hit five month lows on the back of US prices as well as weaker Black Sea prices. Talk of rain and additional feed wheat in Balkan regions as well as tighter delivery specifications than those of the futures contract further pressured prices. Any weather issues in France could make the MATIF contract a tricky one to trade (being a deliverable contract), which will be interesting to watch.

• All in all, it is difficult too see anything bullish at this time, we remain committed bears and look to sell any rally of note.

In the aftermath of the stocks and seedings report it appears that some are struggling with the reality of the situation. Both producers and funds have admitted to lack of acceptance of the data and the longer term bearish implications.2015 and beyond is looking bearish unless farmers withdraw significant marginal acreage from production.

Egypt’s GASC purchased 180,000 mt of wheat for mid-August shipment from Romania and a further 60,000 mt from Russia in their latest foray into the market. Traded prices reflected a slight discount to Black Sea asking levels, and it is interesting to note there is still nothing on the books with Ukraine. One further point is that US Gulf price levels remain too high to be competitive and looks to be the world’s most expensive wheat right now – where does that suggest prices will go in coming weeks?

EU wheat (MATIF) hit five month lows as prices unsurprisingly declined following Monday’s USDA figures. French offers in the GASC tender were still $15/mt too rich to compete – again where does that suggest prices will go?

It feels like markets have further downside, but we would expect a short covering rally as we approach the 4th July holiday period when markets are closed, and quiet in the run up. The opportunity to sell into any rally looks a good one to us.

The US released their crop condition report which told us the following:

Winter wheat is 30% good to excellent, unchanged wow, and down from 34% yoy. The crop is 44% poor to very poor, unchanged wow and up from 42% yoy. The crop is 43% harvested, up from 33% wow and up from 40% yoy, but below the 5 year average of 48%.
Spring wheat 70% good to excellent, down from 71% wow and up from 68% yoy. The crop is 26% headed, up from 10% wow and up from 16% yoy, and below the 5 year average of 29%.
Corn is 75% good to excellent, up from 74% wow and up from 67% yoy. The crop is 5% silking, up from 3% yoy and below the 5 year average of 9%.
Soy is 72% good to excellent, unchanged wow, and up from 67% yoy. The crop is 94% emerged, up from 90% wow and yoy, and unchanged from the 5 year average. The crop is 10% blooming, up from 3% yoy and unchanged from the 5 year average.

Perhaps of more relevance is the “fallout” from yesterday’s stocks and plantings report which saw market prices plummet as traders sold in huge volumes on the back of what can only be described as one of the most bearish reports we have seen. Clearly some degree of risk premium remains in pricing, particularly nearby, but focus is now fairly and squarely on the looming new crop and record, or close to record, harvests, which have to be viewed in the light of growing global stocks.

The start point was June 1st corn and soybean stocks reported to be larger than expected, which paved the way for record breaking soybean plantings with potentially big yield and a corn crop which appears to be flourishing in near ideal conditions. Buyers who have stood back and sellers who booked early bids look to be the current winners.

Our recap of the USDA stocks and seeding report is attached as a pdf. Please click on the link below to download it.

USDA June 30