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Weekly Update 29 August 2014

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Fund positions

• Midday comments:

• The run in to the Labor Day long weekend in the US coupled with increased tensions in Ukraine have lifted markets in early trade today. The Labor Day holiday is, in our view, a short-term distraction to the market, and will all be over in a few days. However, the Ukraine/Russian issue seems to be becoming more of an “on again, off again” affair which has dragged on, and on. Today’s news has included a statement from Ukrainian President Poroshenko to the effect that Russian forces, including tanks, had entered the east of the country. A request has been made to call an emergency meeting of the UN Security Council and also the European Council to respond to the situation. The Kremlin has continued to deny that their forces are fighting in the country. The Russian Rouble hit lows not seen since last March on the back of the news, and it is somewhat ironic that this may in fact aid their grain export programme by making them more competitive in an already competitive marketplace. CBOT, Paris and London wheat markets have (predictably) all added protection on the latest news.

• Corn prices rose on both the forthcoming holiday weekend in the US and gains in wheat, although the price gains don’t feel terribly compelling right now. There are some serious questions being asked about the outlook for corn export demand and this is becoming more talked about than previously. Demand is good, before anyone questions our last statement, however the potential for growth from the USDA’s latest export number of 1.725 billion bu looks questionable particularly as China has not relaxed corn import restrictions, and indeed appear to be clamping down on other feed grains including DDG’s, sorghum and even alfalfa. In addition, corn export potential from Ukraine together with the abundance of feed wheat supplies in Europe, France in particular, will doubtless appear tempting to buyers, including SE Asia, and will potentially displace more traditional US corn exports.

• Soybean markets also found support from Labor Day and Ukraine news. SDS (Sudden Death Syndrome) and flooding talk is also coming forward as the bulls, at last, find something to (almost) latch onto and turn into a story. The potential for flooding and associated damage is most likely to be fully offset by improved outlook for the rest of the Midwest. The September ’14 soybean contract is, at last, unwinding open interest and the impact of the final old crop contract is reducing, leaving the new crop fundamentals to determine market direction.

• Evening update:

• CBOT and European markets are all trading in positive territory at the time of writing, the reasons have been previously stated above. Other news includes a report from the Russian Grain Union that their grain can now be sold to Brazil, which has the potential to displace US supplies, particularly in view of current price disparities. Clearly for this to happen, it will require weather and supply to become an issue in S America again this year. The CBOT Dec ’14 corn and wheat differential has risen to $2.07/bu (again at the time of writing) and highlights the potential difficulty that US wheat will face in achieving a competitive status in export markets. Whilst this level is nowhere near the “highs”, it will make the life of US wheat difficult. The likely overstatement of EU corn imports by the USDA and growth in feed what supply in the EU, following rain affected harvests, particularly in France, will all conspire to adversely impact US corn exports still further.

• Early US harvest yield data from the Delta and southern states is “impressive” according to reports. The range of yield for soybeans is 65-85 bu/acre and corn 170-230 bu/acre. Bear in mind that the USDA’s latest figures were 45.4 and 167.4 respectively. Also bear in mind that much of the southern acreage will have benefitted from irrigation, which is not the norm across the whole US crop. Regardless, there is little doubt that the early yields, which are huge, will reassure the bears and spark nervousness amongst the bulls, and it will be interesting to see their reaction post the Labor Day holiday, and also what the USDA’s September report brings.

• Weekly US export data was released as follows:

Wheat; 403,600 mt which is within estimates of 300,000-500,000 mt.
Corn; 662,900 mt which is within estimates of 350,000-850,000 mt.
Soybeans; 1,228,000 mt which is above estimates of 600,000-1,100,000 mt.
Soybean meal; 77,200 mt which is below estimates of 125,000-300,000 mt.
Soybean oil; minus 11,300 mt which is below estimates of 10,000-40,000 mt.

• Brussels granted wheat export licences for the week totalling 684,920 mt bringing the season to date total up to 3.99 million mt. This is 136,749 mt (3.3%) behind last years same time figure. Corn imports for the week were 29,151 mt, their lowest in some while, bringing the season up to 1.876 million mt. This figure suggests that the “annualised rate” stands at a lowly 1.5 million mt and compares with our current estimate of 4 million mt, last year’s 14.509 million mt and the USDA’s latest estimate of 11 million mt (vs. 13 million mt in the July report). Clearly someone is going to be very wrong at this rate!

• To close, on a lighter note, we hear that Putin has suggested his troops are “on holiday” in Ukraine, aiding their “cultural cousins”. Whether this turns out to be the now normal weekly “invasion” story or not remains to be seen, but the market has taken this one more seriously than in previous weeks as evidenced by today’s more persistent, and bigger, price move.

• Midday comments:

• Early on saw little fresh news and the feeling that the forthcoming long holiday weekend in the US  (Labor Day) would see some “risk off” as players don’t want exposure over any extended period. That said, reports of the best crops in twenty years, ideas that this week’s rains will boost crops still further and added to that ideas that both Brazil and Argentina will see a surge in 2015 soybean acres. The elevated corn/bean ratio also has the potential to see elevated US soybean plantings next season with 86 million being widely discussed today (vs. 84.8 million this year). Increased acres in the US next season on top of a big opening stock (big end stock this season) the end stock next season does not bear thinking about, it would be absolutely massive – what price soybeans and other oilseeds then?

• In the absence of any real bullish news as far as soybeans are concerned, the market is looking for a story, and lo and behold, Sudden Death Syndrome (SDS) has appeared on the scene although it is not really impacting prices – right now.

• In corn we saw Taiwan issue a tender for 60,000 mt from Brazil or S Africa, the US is excluded – which is bearish. Good weather, big potential supply pressure and suggestions that US exports may be below those of 2013/14 are all there to pressure corn prices lower. There are potentially supportive issues around, although it feels as if the bulls are clutching at straws when raising them. However, for the sake of fairness we will give them airtime; demand increases (assuming feed wheat prices remain firm) and a reduction in harvested acres in S America, Ukraine and China to name but two.That said, the big UDS harvest and stagnant demand seems to be prevailing right now.

• In wheat, Taiwan rejected all US offers in their tender stating that prices were, “too high”. Added to further Black Sea sales to Egypt yesterday the news has been construed as longer term negative from a price perspective. Having said that we have seen some technical support at the lower end of yesterday’s price range. The prospect of plentiful supply and weakness in other grains as well as lack of interest in expensive US wheat are all viewed as negative for the market.

• Evening update:

• The Russian Grain Union put forward their estimate of the 2014/15 grain crop, usurping the AgMin’s 100 million mt estimate by forecasting output at 104 million mt. Their view of exports was also higher than the AgMin at 30 million mt. Suggestions that the 2008/9 record crop of 108 million mt could be broken this year if weather conditions remain favourable are also being widely discussed. Export progress in August also looks to be strong with 4 million mt looking likely and well above July’s 3 million mt figure.

• CBOT soybeans and corn closed slightly lower with wheat ending in the green, lack of frost forecasts is favouring corn whilst early strength in the soy complex, mostly attributed to Sep ’14 meal, has failed. Shorts in the Sep ’14 meal contract are being squeezed (hard) ahead of first notice day – they clearly took no heed of my comments regarding the August contract squeeze!

• Putin and Petro Poroshenko met and whilst no solution was reached, it feels like there is a roadmap for a peaceful solution to the difficulties, which will pave the way for the removal of most of, if not all, the risk premium that is currently built into the grains markets.

• Paris wheat, on a £Stg adjusted basis, has reached premiums of £18 plus/mt over the London feed contract, and it is almost comical to read that French traders are “feeling relieved to have missed the recent Egyptian business by only $5, and the larger French crop would leave France in an advantageous position to increase feed wheat exports.” What planet are they on?

• Further issues remain in the French market which have been brought to our attention today:

• Quote: 3.1.3-16 The buying Clearing Member must free the selling Clearing Member’s storage capacity before the end of the delivery month. Unquote

• This innocuous phrase, hidden amongst 30 pages of contractual jargon on Matif wheat futures, is stunning (we admit with regret that prior to today, we were unaware of its existence). In plain terms, if you take delivery of Nov futures and do not remove the wheat by Nov 30, you are in default and the ‘seller’ who delivered the wheat can resell it against you in the cash market! The consequences are as follows: 1) There is no such thing as full carry as there is no way to take delivery of one contractual month and re-deliver against the next (or subsequent) positions. 2) The delivery silos (today there are two, but for the last 10 years it has been a monopoly), can corner the delivery market in both directions. Either a) they simply get long up to the goolies and refuse (without need for justification) any physical delivery (which has been the case on most delivery months over the past 10 years), thereby compelling shorts to cover (from them!) and creating huge inverses or b) (a scenario which is much more likely this year), sell short the total silo capacity and deliver. The longs will be screwed with just 2 weeks to move out wheat which this year is essentially feed wheat, and which on the cash markets is currently trading €30 below Matif. Their only solution will be to sell back to the silos – at whatever price the silo dictates. Things have gone quiet since the furore back in July over Matif contract/delivery specs, but with an open interest on Nov of 163,000 contracts, this is not over. The Matif contract is a disaster from every standpoint, and it is time the Euronext/Rouen Mafia was broken. But don’t call us, call the CME.

• Rant over!

• Midday comments:

• As the UK returned to trading desks following the last holiday weekend before Christmas (did we really mention the “C” word?) Egypt’s GASC announced a further tender for wheat to  be shipped in late September. Unsurprisingly, the clever money is on Black Sea suppliers to win the business with France, W Europe and the US very unlikely to offer, let alone win any volume. The results are due to be announced mid-afternoon, UK time, and we will comment in the latter half of today’s update.

• The soybean market has “gapped” lower on the overnight trade and has continued in negative territory as impending record large US crops weigh heavy on sentiment. The September ’14 contract, which is approaching first notice day on Friday, has traded wildly and it is reported that the spot cash basis is trading at record highs which has dragged sufficient supplies to cap upside price movement. News that the early soybean harvest in southern states is under way has also limited upside and it feels as if a “top” is in place in both beans and meal, weather conditions are also supportive of this view. Early yield reports from the lower Delta region are huge (50-70 bu/acre). A slight (1%) drop in soybean good/excellent rating to 70% from 71% last week (vs. the ten year average of 57%), was below an unchanged expected rating.

• The corn market lacks much in the way of fresh news right now, and last night’s condition report which showed a week on week improvement in the good/excellent of 1% to 73% (vs. the  58% ten year average) was maybe enough to trigger some downside price action. Weather conditions continue to support the improved yield theory, and much talk of 170 bu/acre continues. As harvest progresses northwards we would expect to see further downward price pressure.

• As the weekend came to a close we saw Ukraine/Russian tensions dissipate once again and the aggressive Black Sea sales campaign became a focus for the market. Romania has announced a record wheat harvest of 7.4 million mt and Russia’s gMin has forecast their 2014/15 grin crop at a minimum of 100 million mt with exports rising to as much as 30 million mt compared with 25 million mt last year. Some market support may come from the rain delays to the US harvest, but our view is that global grain supplies will ultimately prevail and pressure to the downside as US prices are currently uncompetitive from a global perspective.

• Evening update:

• Egypt purchased 175,000 mt of wheat, 115,000 mt from Russia and 60,000 mt from Romania with the latter priced most aggressively. France (surprisingly) offered  but was (unsurprisingly) uncompetitive with their best around $5.00/mt more expensive than the dearest of today’s trades. In addition to Egyptian news, we heat that Algeria is reminding suppliers that mixed origin wheat will be rejected, and this is surprising purely because it is, a)  extremely unlikely, and b) Algeria is in a tough place with France seemingly unable to fulfil existing sales, German and Blatic commitments are already high and Algeria can’t (won’t?) take Black Sea origin; all in a year when their import requirements look as if they could leap to a massive 8 or 9 million mt.

• Prices in Chicago have traded lower throughout much of the day, although as we approach the close we see soybeans and wheat moving to unchanged or just into positive territory. If this is a “turnaround Tuesday” it does not feel compelling!

• Given the overall bearish market tone, we continue to look for bullish news, with little success it has to be said. However, there is ongoing discussion of early frost damage although the chances of damage are currently viewed as extremely limited right now. Forecasts suggest that the likelihood of damaging cold conditions in the period to 15/20 September are remote at present.

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

Weekly Update 22 August 2014

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Fund positions

• Midday comments:

• Yesterday’s news that Ukraine may put the brakes on fresh milling wheat sales tempered wheat price downside early on as short covering was triggered and prices stabilised somewhat. History has shown us that both Russia and Ukraine have done whatever necessary in order to secure domestic supplies, and this is perhaps the reason for some nervousness. However, as we reported yesterday, the domestic supply audit ploy has been “used” before and we are largely discounting it at this time. MATIF Nov ’14 wheat scored a bullish “outside day” chart formation which is regarded as a bullish sign and traders will be keeping an eye on the direction of prices in the coming day or two. Following yesterday’s increased German wheat outlook, ADM have today forecast the German crop at 26.04 million mt, up from 24.6 million mt last year. About ⅓ of the crop remains to be harvested and weather conditions continue to present obstacles to the farmer and raise the prospect of further quality downgrades.

• Corn markets seem to have recorded a short term top and the prospect for lower prices looks improved, particularly if the crop tour posts further bullish yield prospects. Monday’s bearish “outside day” also paves the way for potentially lower levels. Lanworth, the Reuters owned research and analysis firm, has forecast US corn yield at a record 174.8 bu/acre following crop inspections in key states earlier this month. If weather continues cool and wet yield could well rise to over 175 bu/acre they added.

• Soybeans have had further confirmation of improving yield which will keep a lid on any upside, and likely keep the downtrend intact. The recent rebound in corn and wheat may leave sideways price action for soybeans in the short term despite the longer term bearish picture, and we do not believe that the longer term picture has changed. Lanworth’s soybean yield estimate was also a record at 46.4 bu/acre which would take end stocks to  a massive 516 million bu. Any improved “finishing” weather for the crop could add to yield, and a 47 bu/acre crop would leave end stocks even higher at 567 million bu. (Both estimates assume no demand changes).

• Evening update:

• Despite some of the overnight suggestions that a bounce was in place we have seen afternoon markets in the red with Sep ’14 soybeans the only bastion of strength (just) and fundamental data pointing to subdued markets. The ProFarmer crop tour are suggesting large corn yields and an abundance of corn available to feed livestock, in addition to plentiful (and possibly growing) feed wheat supplies. Funds are reported to have been active sellers adding momentum to the downturn in prices today.

• In Ukraine there are reports of serious fighting in the Donetsk region as government forces push strongly to end the separatist uprising. The strength of fighting is giving rise to suggestions that the uprising could well be over in days adding to the downward pressure on wheat markets.

• Midday comments:

• A calmer Black Sea and weaker corn pressured wheat although some slightly supportive data from the weekly crop condition report countered the pressure. Spring wheat at 68% good/excellent was 2% below last week, and the ten year average is also at 68%. Harvest in the US is reported to be 17% complete compared with the ten year average of 42%. Some additional support came from reports that as much as 15% of the Ukraine wheat crop could be lost due to fighting although this is unconfirmed at present.

• Last night’s follow through selling has been seen as a bearish development and “finishing” weather is being deemed as more important than current crop condition. The 1% downtick in good/excellent crop condition to 72% is minor support, if indeed it is support at all. The ten year average good/excellent rating stands at 59% highlighting just how good this crop is currently looking.

• Last night’s good/excellent crop ratings saw a 1% improvement to 71% which bodes well for a resumption of the longer term price downtrend to resume, aided by further bearish weather reports which could see a further improvement in next week’s ratings update. This could be enough to put a lid on market upside and see potentially new contract lows in the offing. The ten year good/excellent crop rating average stands at 58%, (as with corn) highlighting how good the current crop really is.

• Evening update:

• Wheat markets in both the US and EU have uncovered some short covering and prices have established some support as a consequence. Ukraine’s flour millers have requested a suspension of milling wheat exports until such time as crop quality can be fully assessed. It is noted that such requests are made at this time most years, and as such little importance should be attributed to the story, rather it should be viewed as an attempt to establish favourable domestic prices for millers and exporters alike. The net fund short in the Chicago market appears to have swallowed the story once again and taken a degree of cover!

• Australian weather in recent days as well as the near term forecast has been described as “incredibly helpful”. Victoria and New South wales have additional rains forecast for the remainder of August into mid-September.

• The German wheat crop has received an upgrade by the German Farmers Association (DBV) to 26.2 million mt from 24.6 million mt year on year. Their estimate of rapeseed output was also raised by 100,000 mt to 5.8 million mt.

• The ProFarmer crop tour reported an increased corn yield in Ohio at 182.11 bu/acre compared with last year’s 171.64 bu/acre and the three year average of 146.13 bu/acre. S Dakota yield was placed at 152.71 bu/acre, below last year’s 161.75 bu/acre but well above the three year average of 125.7 bu/acre. Soybean pod counts in Ohio reached 1,340 per 3’ x 3’ area, compared with 1,280 last year and above the there year average of 1,190. Pod counts in S Dakota were 1,057, up from last year’s 1,016 and above the there year average of 900. How accurate is the tour? For corn, at times it is spot on but 2012 was a big miss and statistically there is a 1.45% variance between to tour’s figure and the NASS September yield figure. Compared with final US outturn the tour is expected to be within 3.5% or 5.2 bu/acre. Soybean history is similar to corn, tour yield is expected to be within 1.5% of NASS September figures and within 6% of final yield. However, the market watches the tour avidly, and debates its findings enthusiastically.

• Midday comments:

• Friday’s wheat support, which came largely from the ongoing tensions between Ukraine and Russia and sparked short covering prior to the weekend, appear to have largely dissipated and early morning trade has given back Friday’s gains – and more. Ongoing reports of military equipment on the border will undoubtedly keep risk premium in the market though if feels as if tension induced pressure now lasts a matter of hours rather than days, as was the case earlier in the dispute. Grain exports from both Russia and Ukraine continue with seemingly no disruption, and there is continued pressure on the farmer, particularly in Russia, to continue selling to avoid interest rates as high as 16%, pushed to these levels by financial and banking sanctions taking effect.

• Corn markets received something of a boost from positive technicals in weekly charts as well as talk of sharply reduced potential planted acreage in S America and possibly Ukraine next year. However, bearish weather, potentially bearish news reports from the ProFarmer tour and a negative US export demand picture as US prices tighten their spread to other major exporting nations all lean on prices to the downside. In addition, the quantity of EU feed grade wheat that will doubtless be looking for a home, and therefore competing with corn, should not be forgotten.

• From a soybean perspective it feels as if the market has failed to fully price in (to the downside) the huge supply that will shortly become available to the market place. The cash market has been led by the tightness in nearby positions that has plagued the market for much of the last season, and still lingers despite the disappearance of the August futures contract last week. Weather looks to be excellent for adding to the USDA’s latest yield forecast, particularly when added to last weeks rainfall. Temperatures remain non-threatening and crop prospects remain excellent right now.

• Evening update:

• Soybeans and meal look to be heading into the close in positive territory whilst the grains are trading lower today. The ongoing strong cash basis in soybeans for August and September is cited as the key to higher levels, and continues to lend support to the new crop positions. The current nearby market has been described as a game of “musical chairs”, no crusher/exporter wants more supply (at high prices) than absolutely necessary. When demand is sated (music ends) prices will very likely drop – dramatically, and the plentiful new crop availability will drive the market lower – substantially in our opinion. Timing of this is key.

• Without doubt, if we were not witnessing such a tight old to new crop transition this season we would be seeing very different pricing structure right now particularly in the light of such favourable weather forecasts for the coming two weeks. The US corn and soybean harvest looks to be on target to start in earnest across the Delta and far southern midwest in a couple of weeks and we would certainly not wish to be holding a long position at that time!

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Weekly Update 15 August 2014

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Fund positions

• Expiry of the August ’14 soybean and meal contracts gave a show of fireworks to the market today as cash basis prices surged with domestic end users and exporters found themselves short for late August and early September. The meal contract has pushed up $50/ton clearly indicating the dangers that lurk within the spot month and more so in the contract delivery period – a lesson which should not be lost! Clearly soybean growers with stocks remaining are enjoying the rally as a (perhaps) last opportunity to make sales. Now that the August contract is finally “off the board” it will be interesting to see how the new crop market settles.

• Brussels granted weekly wheat export licences totalling 726,970 mt bringing the season total to 2.69 million mt. This is 119,885 mt (4.3%) behind last year. 164,000 mt of corn import licences were granted making the season total 1.8 million mt.

• US weekly export data was released as follows:

Wheat; 338,700 million mt which is below estimates of 450,000-650,000 mt.
Corn; 670,700 mt which is within estimates of 600,000-900,000 mt.
Soybeans; 1,143,200 mt which is within estimates of 850,000-1,150,000 mt.
Soybean meal; 120,100 mt which is below estimates of 300,000-625,000 mt.
Soybean oil; 2,000 mt which is within estimates of 0-30,000 mt.

• In Stratégie Grains’ latest grain report issued yesterday they estimated the EU soft wheat crop higher at 144.1 million mt, which is 3.6 million mt ahead of their July estimate and well above last season’s 135.5 million mt. Interestingly they revised their outlook for exports down by 900,000 mt to 23.7 million mt as a result of reduced exportable milling wheat availability, mainly in France. The proportion of milling wheat in the EU harvest is estimated at 59% which is a sharp reduction on the 2013 figure of 71%. As a corollary, the proportion of feed wheat is sharply up at 41% compared with 29% last year!