• A $28 range on Dec ’14 soybean meal today, but with the subtle change this time being that the market closed at the lower end of the range rather that at the top. It seems that another day of technical bullish price surge in the face of prospective overwhelming supply was too much for the market and both soybean and meal markets capitulated. Will it last? Have we now seen the top? Both questions to which we sincerely hope the answer is “Yes” but cannot provide reassurance of this right now. The grains, wheat and corn, both finished the session a touch lower in sympathy with the soybean complex.

• The International Grains Council today raised its forecast for 2014/15 global wheat output by 1 million mt to a record 718 million mt adding that they expected to see global demand rise strongly too. They also increased world corn output, by 6 million mt from their last month’s estimate 980 million mt which would be below last year’s record 983 million mt. They viewed the figures as ”comfortable” with end stock levels at their highest since 1987/88.

• US weekly export data showed little to raise excitement levels this week, and the figures reported are as follows:

Wheat; 459,100 mt which is above estimates of 300,000-375,000 mt.
Corn; 534,400 mt which is below estimates of 700,000-900,000 mt.
Soybeans; 1,326,100 mt which is within estimates of 1,000,000-1,500,000 mt.
Soybean meal; 153,000 mt which is within estimates of 150,000-300,000 mt.
Soybean oil; 15,900 mt which is within estimates of 10,000-30,000 mt.
It is noteworthy that there is little interest in US wheat and corn in the light of current prices remaining uncompetitive.

• Brussels issued weekly wheat export licences totalling 797,945 mt which brings the season total to 10.4 million mt. This is 1.019 million mt (10.9%) ahead of the same time last year.

• Within the UK there are reports of serious frit-fly problems that are affecting winter wheat establishment in western areas including Hereford, Shropshire and Worcester. The ultimate impact is impossible to predict, but needs to be watched in order to assess whether output will be compromised or not.

• In an interesting commentary released today it has been suggested that the re-election of left wing President Rousseff in Brazil may leave a question over Brazilian reliability as a soybean supplier. The fears raised were over potential drift towards leftist policies as followed by Argentina, which have encouraged farmers to hold crops, particularly soybeans, as a currency hedge. Supportive evidence has come from Imea, the Mato Grosso Institute for agricultural economics, suggesting that Mato Grosso farmers have only sold forward 16% of next year’s soybean crop compared with 41% a year ago. Is this a true correlation or trend? Only time will tell.

• It is sometimes interesting to see what changes occur in 24 hours, yesterday we were hearing concerns (from the wheat bulls) over poor Russian crops, heat in Argentina, poor early Aussie yields and today it ia all about a weaker US cash soybean meal market. We look forward to month end tomorrow and (hopefully) a return to some semblance of order and stability of both opinion and direction – we can but hope!

• We have seen another day where soybean meal has led the charge higher with today’s range in the front month contract (Dec ’14) topping $30 and prices exceeding the $400 level for the first time since late June. There is little in the way of fresh news since yesterday, end user double booking in efforts to beat the logistical snarls and follow on short covering by funds. Calling a “top” to this move is exceedingly difficult, but the move itself looks unsustainable in the longer term. Farmer selling of soybeans appears active, and our contacts advise us that crushers are able to source their requirements without problems. Consequently the push higher appears unattributable to either non-availability of beans or massive export demand, merely transportation. It is likely that this will find a resolution sooner rather than later, and as we said yesterday, we would expect an extremely sharp price correction to occur when the resolution materialises. In the meantime our advice is to “tough it out”, difficult as that may be right now.

• It should be borne in mind that this year, unlike last, we are looking at substantially lower crude oil prices as well as favourable weather conditions. In addition, the outlook for a repetition of last winter’s brutally cold conditions is remote right now given ongoing suggestions of the reportedly strengthening El Niño. None of these points can realistically point towards any long term upward trend in soybean (and by association soybean meal) prices.

• One area of concern to us is that this current price spike could elevate prices to a point where they find it hard to retreat sufficiently far to breach their season lows. However, this is pretty low on our priority list right now, and we will look at it again once the current move appears done.

• Taking a slightly different tack, ongoing reports of adverse conditions in Russia continue to circulate, and the potential impact on grain production is receiving more attention than in recent weeks. Winter wheat in Russia was sown in dry soils and ongoing dryness has persisted in the Southern District, Black Earth and Volga regions. By 8 October some 13.4 million ha was planted to winter grains leaving just over 3 million to meet the projected planting area. The Southern District is Russia’s most important winter wheat area accounting for just over 40% of the national harvest and is made up of four regions, Krasnodar, Stavropol, Rostov and Volgograd. Scant rainfall over the last six months in the region has left a soil moisture deficit reported to be in the order of 120 mm although recent precipitation has improved the position, but significant rain will be required to restore soil moistures to normal. Some are drawing comparison with the severe drought of 2009 in which Russian wheat output fell to 41 million mt, the lowest in nine years, although we believe it is still too early for such conclusions to be drawn.

• In Australia a number of private forecasters are placing the wheat crop at 22-23 million mt which is some way below the current USDA level of 25 million mt. Argentina has suggested they will harvest 14% more wheat than last season allowing greater exports to Brazil than was the case last year, potentially limiting US exports.

• Despite prices of grain being assisted higher by the soybean meal supply bottleneck we continue to believe there are bearish factors which will eventually come into play. The current price levels are putting US corn exports in jeopardy with Ukraine, Argentina and Brazil (and possibly France) looking as if they will benefit. In addition, the volume of feed wheat within the EU remains a bearish factor particularly in the context of record US corn production. Further, the role of the market in the US will be to grow exports to reduce potentially burdensome end stocks to manageable levels, and this will require lower and more competitive prices (and soon). Finally, the uplift in prices in October has made corn production in the US more viable to growers and could well see new crop planted acres at more usual levels rather than, as was being suggested some weeks ago, a substantial reduction and switch to soybeans.

• Ultimately the question which should be asked is, “when is the price of soybean meal, and in turn soybeans, corn and wheat, going to top out and return to normality?” Clearly there is no magic wand or crystal ball but we do think that we are staring at a “blowoff top” and lower prices before much longer.

• A $26 range on front month soybean meal (so far) today highlights the volatility being experienced for the reasons we highlighted this morning. For completeness, we should add that we are now at the bottom of the trading range, just into negative territory. Cash basis prices have held firm for much of the day as end users have double booked to endure deliveries as they allowed stock levels to drop in anticipation of abundant new crop supplies which have been slow to materialise both from a crush perspective as well as the logistical nightmares. It is expected that October crush data will reveal an increase in pace of almost 50% with around 157 million bu of soybeans being processes.

• Currently it has been revealed that US nutritionists are exploring ways of reducing soybean meal inclusion levels on account of the current expensive price levels. $430-$440/ton is hard to absorb and DDG’s, cottonseed and canola (rapeseed) are all being explored as is relatively cheap lysine. Such actions will, if exercised, reduce soybean meal demand and help prices to decline to more realistic levels. At such a time as we see prices drop, we would expect the move to be both dramatic and speedy.

• In Brazil it is reported that Mato Grosso has planted around 20% of its soybeans as of last week, this is below the five year average of 42% although this has not (yet) translated into yield concerns. However, there is concern over the safrinha corn crop, and there is even talk of a second soybean crop in Mato Grosso. The current market pricing structure can only further encourage this and we would venture to suggest this is a “wrong” signal to give in light of large and growing global stocks.

• Yesterday’s US crop condition report showed corn to be 74% good/excellent, unchanged week on week, and to be 46% harvested, which is a touch better than expected and compares with the ten year average of 62%. Soybeans were reported to be 70% harvested as expected, which is behind the ten year average of 79%.

• It is probably correct to say that chart technicals look bullish in a fundamentally bearish market right now. The bulls and the bears still have to establish a supremacy and market direction. As we have said on many previous occasions, when the technicals and fundamentals do not agree we tend to side with the fundamentals, and we see no reason to veer away from this stance right now.

Our focus today is soybean meal which has shown sharp gains that were initiated specifically in the nearbys with fund short covering and cash demand. Prices have rallied to their highest since the June USDA crop report. Despite eastern Midwest farmers progressing well with harvest and delivering beans to crushers it is a lack of rail cars and logistical difficulties that are producing what we describe as a cash bottleneck.

Southeastern pork and poultry producers needing meal are being forced into double booking cash meal, taking trucked in supplies whilst awaiting rail car deliveries that are currently delayed, possibly arriving later in the week. This is a pretty generalised description of the acute difficulties being faced in the short term. The double booking is creating a false demand picture for the long term but reflects short term cash demand.

The meal rally is leading the advance although grains and beans are not displaying anything like the strength of meal, which in our view, fully justifies the observations above. Producer hedging in the grains is helping to cap any upside at this time.

Soybean meal cash basis for Nov and Dec IS retreating lower, but focus (rightly) is on the spot month alone right now. Brazilian farmers who are enjoying the CBOT rally and a sharp drop in the Real are taking the opportunity to hedge considerable soybean volumes in Chicago which in turn caps upside.

In conclusion, we feel the meal market is giving entirely the wrong message to the market right now! The US does not need to see any further switching or cancellation of meal sales given its likely record supply position. Meal markets, specifically nearby, but also into year end have reached a level where S American supplies pencil into the US as imports. The price squeeze is as a result of a tight logistical situation. Western Midwest meal is offered $5.00 below Dec ’14 CBOT!!!!! Nearby issues and difficulties will be resolved in coming weeks and we doubt that this rally in meal can be sustained.

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Weekly Update 24 October 2014

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• As a pretty general comment it seems that at current levels US January ’15 soybean prices are as much as $2.00/bu overpriced. As Brazilian planting weather improves dramatically and US harvest progresses with the promise of volumes large enough to swamp the marketplace we would expect prices to drop, and potentially dramatically. Current prices reflect a stock/use ratio of around 8% or end stocks of 275 to 300 million bu. The current forecast of 450 million bu (and possibly growing) would suggest prices have to face a decline, the question to ask is, “When?”

• Whilst the above may well fly in the face of what is currently happening in markets, specifically soybeans, it feels very much as if the “burden of proof” lies with the bulls to justify why prices should not decline.

• US weekly export data has been released with soybean figures surprisingly at double estimates, adding support to prices. The numbers are as follows:

Wheat; 299,300 mt which is below estimates of 350,000-500,000 mt.
Corn; 1,031,200 mt which is above estimates of 800,000-1,000,000 mt.
Soybeans; 2,170,200 mt which is above estimates of 800,000-1,000,000 mt.
Soybean meal; 23,000 mt which is below estimates of 150,000-250,000 mt.
Soybean oil; 10,600 mt which is within estimates of 10,000-50,000 mt.

• On the subject of exports, Brussels granted another big week of wheat certificates with the week reaching 681,003 mt, which brings the season total to 9.601 million mt. This is 804,792 mt (9.15%) ahead of the same time last year.

• As an interesting add-on to exports, whilst Matif wheat continues to rally, and it seems this is not on the back of the recent Egyptian purchase, it appears to be on a more technical delivery position. Cash premiums have shown nothing in the way of weakness in the last three weeks despite a rally of close to €20 in futures prices. This was initially explained by “farmers don’t like the prices”, but it is beginning to feel as if “they don’t have the wheat to sell”, particularly given the pace of exports leaving reduced stocks available to sell.

• Having said all this, it still does not feel like there is a big wheat rally in the offing. US wheat remains uncompetitive and there are still fund shorts in place.

• CBOT markets closed firmer on large US soybean and corn export numbers and wheat followed through with additional fund buying. There have been questions asked over the size of the soybean export number given that daily sales data this week has been zero! There has been a suggestion that the data has been “forgotten”, “overlooked”, or (heaven forbid) cajoled by the Chinese to announce the sales on a different date! Frame contract price fixing, and how individual businesses treat them, could also be another explanation for the “surprise” data today. The bottom line appears to be that it is not all new sales, just a reshuffle of existing; 2.1 million mt of new sales without a single daily announcement is as close to impossible as it is possible to get.

• Despite all of the foregoing and the surprisingly resilient price rally, we struggle to see how, with the global grain and oilseed supply position, any lasting bullish trend can be sustained.

• For the first time in many a month we have started to turn somewhat friendly towards the wheat market! Whilst it may be frustrating to suggest this when prices (basis Nov ’14 futures) are some £12.00/mt above the lows, it should be borne in mind that tonight’s close is still more than £45.00/mt below the high levels seen earlier in the year.

• Why the change of heart? Why now? Why did we not see this two weeks ago? So many questions and all perfectly valid; taking the the last questions first, we try and look for lows (naturally) and these can only ever be seen after the market has bottomed and a pattern of reversal has been established. The change of heart was been triggered initially by yesterday’s Egyptian purchase at an average price some $10/mt higher than previously paid. Added to that we have a number of other statistics this side of the Atlantic that suggest a change of trend. Ukraine appear to have shipped/sold their 5 million mt exportable surplus. As we reported earlier in the week, Kazakstan’s exportable surplus seems destined to remain in the fields until next spring, they even appear to be importers in the short term (from Russia). Russian prices, despite earlier thoughts, appear competitive (for now) and the overall picture has a somewhat different feel to it today – even compared with yesterday morning!

• CBOT corn and soy complex markets closed lower with wheat bucking the trend and ending in positive territory, although off the session highs. Cash hedging by farmers has been evident as prices have risen and they ramp up corn and soybean sales, and this has weighed on prices as the day progressed. News that China returned to the US for Dec ’14-Feb ’15 soybeans on the back of slow S American soybean seeding provided some early market price support. Rumour has it that some US soybean meal sales have been switched to Argentina, and more are in the pipeline. Export space will be limited in Argentina but the commercial raison d’être is pretty obvious with both Argentine and Brazilian meal prices below US levels by around $26-$29/mt and the world is heading away from US origination right now.

• Late news tonight suggests that Russian wheat is about to enter winter dormancy in its worst condition in five years. Given the size of the country this is a bold suggestion and most regions have seen normal to slightly below normal precipitation since Sep 1st. However, there are some dry areas in SE Russia and E Ukraine where precipitation totals have only been 20-50% of normal. History tells us that the level of snow cover and spring weather truly determines Russian wheat yield but in the light of our earlier comments and potential change of heart this could become a particularly relevant issue going forward.

• S American weather patters are, at last, changing with N and C Brazil looking set to receive abundant rains in the next fortnight. Some 2-5” is forecast to fall across soybean growing areas which have been struggling with dry/hot conditions since early October, and this is likely to significantly help in restoring lost soil moisture. Soybean seeding ahead of the forecast rains is reported to be progressing as farmer confidence in the forecast grows. S Brazil and Argentina are forecast to see rains in the middle of next week which, if it arrives, will maintain soil moisture at “adequate” levels.

• We maintain the world has an abundance of grain and oilseeds, a bounce off the early October lows has occurred with soybean meal leading the way as pipeline filling has been slower that desired. Funds that have been heavily short in both wheat and soy have exited positions, and (basis estimated daily fund transactions) it seems funds could be close to square on soybeans right now. Consumers appear reluctant to chase the rally, suggesting when fund buying slows/stops a resumption of the supply driven bear market will return. Improving S American weather (dramatically?) and a strengthening US$ into the year end suggests that and sustained bullish trend is unlikely.

• Midday comments:

• After the closing bell last night Egypt’s GASC issued a further wheat tender for late November shipment, the results of which we should know before close of play today. The likely candidates for successful supply are expected to be Ukraine, Russia and France. See below.

• The US Crop condition report issued last night showed corn rated good/excellent unchanged week on week at 74% which compares with last year’s 60%. The crop is 31% harvested, which is 2% below expectation, an improvement over last week’s 24% but behind last year’s 38% and the ten year average of 51%. Soybeans rated good/excellent were also unchanged week on week at 73% which compares with last year’s 57%. The crop is 53% harvested, 2% behind expectation and up from 40% last week’s 40% but below last year’s 61% and the ten year average of 70%.

• Winter wheat in the US is reported to now be 76% planted up from 68% week on week but behind last year’s 77% and the ten year average of 79%. Emergence is being assisted by recent rains in the western Plains and the warmer trend for the remainder of the month will help early growth ahead of winter dormancy.

• Early markets saw support from a short-term uptrend in Dec ’14 CBOT wheat and stronger than expected demand in global wheat markets. In soybeans slower than anticipated S American plantings and slower harvest progress as well as further short covering supported prices despite prospects of yield improvement in the forthcoming November USDA report.

• It feels as if markets are at a pivotal point right now, they will either resume their downward slide and reach or breach their former lows, and this applies specifically to soybeans and corn, wheat will likely follow in the footsteps of corn rather than lead the way. Failing this, some are suggesting we have seen the season lows and the traditional harvest bottoming price action is complete as supplies have spiked and farmer hedging growth has been seen. We continue to favour the view that recent price upside has been fuelled by the slower US harvest and that farmer hedging pressure has been limited so far.

• One further macro(ish) factor is that index funds have been liquidating commodity positions as we approach the end of the year (yes, the year is truly flying by!). This is the third consecutive year in which index funds have performed poorly compared with other indices. The trend towards other investments with lower fees and commissions,whatever they may be, is reported to be growing. Consequently, any further move towards liquidation will likely pressure prices, limiting rallies and supporting the theory of lower prices.

• Evening update:

• The results are in! We saw a three way tie between France, Romania and Russia who managed to supply 60,000 mt each to Egypt in the latest tender which saw a total of 180,000 mt placed. The reported price was an average $10.00/mt higher than the last traded level.

• Markets have traded higher today with soybean meal leading the way as slower than desired harvest pace prevails. Suggestions of yield loss in Brazil as a consequence of slow planting progress has been denounced by Imea the Brazilian government crop reporter who suggested that it is far too early to draw such conclusions. Volume has been moderate rather than large suggesting a degree of hesitancy to follow prices higher – right now. The current “bounce” has now reached $0.70/bu for soybeans, $0.40 for corn and $$0.6 for wheat, and looking back this is not outside norms in the wake of a significant decline, such as we have seen this year. With US end stocks projected to be in excess of 2,000 million bu of corn and450 million bu of soybeans it still feels difficult to justify significantly higher prices or an about turn in price trend. If, in addition, S American weather is trending wetter and yield losses are being denounced, there is an even less supportive atmosphere to the market.

• Current market conditions encourage US farmers to increase soybean plantings at the expense of corn acres in the forthcoming spring planting campaign. The market has to attract corn acres, at the expense of soybeans, presumably falling soybean prices would achieve the desired outcome!

• CBOT markets opened the week on a lower note as improved US and Brazilian conditions pressured prices. Active US harvesting  in the central and western Midwest has been reported although eastern Midwest areas are still experiencing delays due to wet soils and lingering rainfall. Farmers in Brazil are either actively planting soybeans in Mato Grosso or are about to start in advance of forecast rains. Weekend rains were better than expected and producers are optimistic that the wet season has, at last, started across the north of the country.

• It has been reported that funds have returned to the selling table in the aftermath of last week’s short covering rally and whilst some consumers are fixing prices on weakness there is not any large scale buying evident at present.

• Matif wheat futures still have to cope with delivery silos that are reported to be choked with stock leaving Nov ’14 contract holders potentially unable to deliver if they so choose. Whether this is a help or a hinderance to the market right now is something of a mystery but, as always, time will tell. There is a suggestion that as a consequence of early snows in FSU regions we could well see some of the (Kazakstan) wheat crop standing in the fields until spring, which will potentially limit exports to some degree.

• Yields of corn in France are reported to range from good to stunning and it has been suggested the crop could reach 18 million mt.

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Weekly Update 17 October 2014

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