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Weekly Update 14 November 2014

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• Today appears to be all about what the funds want, pretty much to the exclusion of all else. CBOT corn has pushed to a new rally high, soybeans and wheat have followed. History suggests that fund follow a three day pattern of entry/exit in positions, and today is dat three! Whether this will be significant, or not, we will no doubt witness tomorrow.

• Early today we considered the estimated fund corn net long, about 190,000 contracts, and compared it with last year’s net short of around 150,000 contracts. Our thought process questions how long the funds will wish to hold the current long as US export demand erodes and longer term climatic forecasts suggest favourable S American moisture as El Niño builds/persists. In a similar reflective mood we also considered US wheat prices, which have rallied strongly, and our thought process leads us to conclude that US exports are endangered to a point where USDA end stock estimates are potentially woefully below their eventual level. US Gulf soft red wheat was this morning around $22 premium to French vs. $18 a week ago and some $10-$12 above Russian levels. This will have worsened during the day! US exports will be reduced as a result!

• Regardless of the competitive disadvantage which the US market is building for itself, we have to live with the market – because it is real, for now. However, we can only continue to point out the oddities which persist, the biggest being the $85 discount which Brazilian soybean meal enjoys compared with US Gulf on a FOB basis (reported to be a  record although we cannot confirm this). Markets cannot, and will not, tolerate such an arbitrage for long, and we are confident that market forces will prevail and return us to some normality before long.

• US weekly export data is delayed until tomorrow on account of the veteran’s day holiday, but Brussels pushed ahead with the trend of another big week of wheat export licences. This week’s total reached 588,429 mt bringing the season total to 11.547 million mt. This is 1.009 million mt (9.57%) ahead of the same time last year. Corn imports for the week were 79,000 mt bringing the year’s total (October to September) to date to only 414,000 mt which is about a third of last year’s volume and suggests an annualised figure of around 3.5 million mt.

• Wow! Today has been a BIG day from a price movement perspective, we have seen CBOT Dec ’14 soybean meal trade close to a $32 range, first hitting fresh post harvest rally highs before turning lower and closing $10 off the lows. Funds have been hugely active, and there has been a suggestion that today may well produce a grains volume record.

• One positive, from a consumer perspective, aside from the lower close has been the strength of producer selling on the rally. Both US and S American farmers have been active sellers with strong cash movement, there has even been a suggestion that Argentine farmers have sold as much as half a million mt of old crop soybeans on the latest uptick in prices. The Nov ’14 soybean contract is scheduled to expire in a few days and there is expectation that deliveries will be made due to strong prices as well as the big crop.

• It is noteworthy that S American soybean meal cargoes are being booked into the southeast US, reportedly to a pig producer, the additional margin generated calculates to around $35/$40/mt as well as assuring supplies. Additional cargoes are being worked. Argentine crushers have, according to what we have picked up, secured sufficient soybeans to meet meal export demand through to year end, and it seems very likely that the US will be a destination.

• In an interesting “aside”, the Russian Agricultural Minister reported Russian winter acreage to be up 2 million ha at 16 million ha and also “guaranteed” the crop to be safe. He did stop just short of  assuring us that the rouble wasn’t weak and that Russian troops are unaware of Ukraine’s existence! Sometimes stories are just made for repetition.

• Brazil’s Conab cited late rains, which are optimising output potential, as responsible for their latest update to soybean production. Their most recent 2014/15 crop estimate stands at  89.3-91.7 million mt, which is slightly narrower that last months 88.8-92.4 million mt figure. Conab’s figure, if realised, would still be a record despite being below the USDA’s latest 94 million mt figure.

• Post report day and there has been little fresh news! Chicago folk lore often refers to Turnaround Tuesday, and this has applied today too with the soybean complex leading the way. Cash soybean meal basis continues to be firm in the east, and this has triggered some technical follow through buying that has supported the market and made new rally highs. It has been reported that consumers in the eastern US are continuing to pay up for rail deliveries, albeit on a somewhat reduced volume than last week.

• From a good news perspective, there is talk that Russian winter wheat conditions have improved lately on account of warmer weather. The US$ has found some stability at Monday’s highs, energies are lower again and equity indexes have made new highs. This must beg the question as to how comfortable are the funds with their longs given the outlook for record global agricultural output.

• It has been noticeable that Ukraine’s FOB corn prices have dropped this week, possibly coincidental that the USDA increased their output by 1 million mt. Maybe, just maybe, we are seeing a return to crop production fundamentals – at last!

• US weather conditions are forecast to be bitterly cold, a negative for the market, in the coming week although this is predicted to change afterwards with seasonal temperatures scheduled to return. The S American weather outlook remains unchanged with the next 8-10 days dry across Paraguay, S Brazil and Argentina, which will allow planting to progress rapidly in generally favourable soil conditions. Normal rains are forecast to return to S Brazil and Argentina in the 10-15 day period whilst daily tropical rains continue in N Brazil. The long term outlook through Nov-Jan suggests above normal rains across N Argentina and S and C Brazil. This does not suggest any critical crop issues in S America in the first half of the growing season.

• To conclude, the current price premium which continues to persist in nearby soybeans and meal is causing us to scratch our head. Given record US and S American stocks, which does not appear to be disputed anywhere, and the strong correlation between W Hemisphere stock/use and prices, something has to give before long. Panic soybean meal buying and the historic carry out tightness in soybeans does warrant a premium but we cannot help but believe that sub-$9.00/bu soybeans will be a reality at some time in very early 2015 (neck on the line Jan/Feb, latest March) as global demand switches to S America.

• It feels perfectly valid to suggest the report held a couple of surprises but no significant change to either US or global balance sheets. The theme remains the same, oversupply and large stocks, and potentially more so in the absence of adverse S American weather. Our belief is that we are at or near the upper end of a post-harvest price rally.

• 2014 US corn yield was trimmed slightly to 173.4 bu/acre, 0.8 below the October estimate whilst soybean yield was increased to a record 47.5 bu/acre. In summary, corn yield was deemed slightly supportive whereas soybean yield was seen as slightly bearish. For the record, US wheat output was trimmed 9 million bu on resurveyed data.

• US 2014 corn production was lowered 68 Mil to a still record large 14,407 million bu and US 2014/15 corn stocks were lowered by 73 Mil to 2,008 Mil to account for slightly higher domestic use. This validates a December contract seasonal high of $3.60-3.80 but does not change the structure of an adequately supplied market!

• Global corn, soybean and corn end stocks remain large by any nearby comparison. 2014/15 world wheat stocks are up by 7.2 million mt from last year’s 192.9 million mt, corn is up 25.7 million mt at 191.5 million mt with 2014/15 soybean stocks up a huge 23.5 million mt at 90.3 million mt.

• Clearly the word “shortage” appears largely irrelevant in relation to US or world corn, wheat and soybeans and despite short term US soybean pipeline filling lasting price rallies seem doomed to failure and short lived. Prospects for a lasting bull run based upon reduced crush rates or nearby tightness can not last when the US is facing its largest soybean end stocks in around six years. S American weather, should it turn adverse, is the one potential threat and at this time this looks unlikely with continued suggestion that (mild) El Niño conditions are set to continue at least until the end of the year favouring S American crop prospects. Fund appetite for reduced longs/increased longs looks vulnerable to liquidation if our outlook proves correct.

• It should be borne in mind that NASS will not update figures for corn and soybeans in December, the next major report is scheduled for release on January 12 when final corn and soybean production will be published along with December 1 stocks. There is a very strong likelihood that December stocks for corn, wheat and soybeans will be well above last year and justify our bearish stance.

• Our recap of the November ’14 USDA Report can be downloaded by clicking on the link below:

USDA Nov 14 Recap

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Weekly Update 7 November 2014

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Fund positions

• US soybeans return to the $10.00/bu plus level on better than anticipated US export sales.
• Corn and wheat US export sales lacklustre demonstrating lack of price competitiveness.
• US soybean meal exports slip into negative territory on cancellations as expected.
• US$ pushes to four year highs pressuring commodity prices and crude falls.
• EU weekly wheat exports 560 kmt, 10.9 million mt year to date. Questions over whether there is sufficient quality available to reach USDA’s annual projections.

• Yesterday’s dip below $10.00/bu for Dec ’14 soybeans has not lasted long as prices moved back and forth with the soybean complex higher as we approach the close. Better than expected soybean export sales with China picking up a further 58 million bu was the highlight with corn and wheat demonstrating a clear uncompetitiveness and net soybean meal cancellations amounting to 124,000 mt as trade is shifted to S America. (Detail follows below.)

• The US$ shrugged off early weakness and pushed to new four year highs whilst crude oil has fallen a further $0.50-$0.70/barrel on US$ strength. Markets are drawing breath ahead of Monday’s USDA report and consequently there is little in the way of dramatic news today. If we see, as expected, a higher soybean yield in the report it could well validate $10.60 as the season top in the Jan ’15 soybean contract.

• US export data was released today as follows:

Wheat; 265,800 mt which is below estimates of 325,000-525,000 mt.
Corn; 478,100 mt which is below estimates of 600,000-800,000 mt.
Soybeans; 1,613,000 mt which is above estimates of 900,000-1,100,000 mt.
Soybean meal; MINUS 122,900 mt which is below estimates of 100,000-250,000 mt.
Soybean oil; 13,900 mt which is within estimates of 5,000-30,000 mt.

• Brussels granted a further weekly wheat export certification figure of 559,186 mt, which brings the season total to 10.959 million mt. This is 1.084 million mt (10.98%) ahead of the same time last year. Whilst the pace remains ahead of last season there are questions over whether there is sufficient export quality wheat left to meet the USDA’s annual number, which would require a further 17 million mt!

• Our early view on the US wheat market could not be construed as bullish as the surge in the US$ and outside markets look weak as does other grains. There seems to be further doubt about longer term prospects for US wheat exports, due to lack of competitiveness, and it feels as if this is beginning to weigh on sentiment and in turn prices. It should be noted, however, that early US wheat prices remained within their recent upward price trend channel, and it remains to be seen whether they can break out of it, to the downside, before we can say that the latest upward price move is over. Concerns still linger over reports of the poor start to the Russian wheat crop and its pre dormancy status, which is potentially a limiting factor on next year’s output.

• In corn the initial thoughts, as with wheat, focus on the strong US$ as well as the newly built fund net long position, which could both point to lower prices in coming weeks. There is evidence of technical weakness starting to build in corn and this, coupled with producer hedging, suggests further weakness is likely.

• Soybean prices have been pressured by fears of additional producer selling now that the short covering bout seems done, farmers are keen to capitalise on prices that have improved significantly from recent lows. Farmer selling in S America is also reported to have been huge in recent days, and the feeling right now is that the only supportive factor is the lingering US logistic issue. Weakness in crude oil prices, which have fallen to levels not seen since 2011, is adding to negative tone in early markets, as is recent news of bird flu in China.

• Egypt’s GASC purchased a further 235,000 mt of wheat for mid-December shipment, with 55,000 mt from Ukraine and the balance, 180,000 mt, from France. This tender follows hot on the heels of last weekend’s single cargo purchase secured from France. The only unsuccessful offeror today was Russia, and today’s traded level was a touch lower than the last weekend trade. Given what was offered/traded today it feels as if Egypt will have a very limited choice  going forward, and with question marks hanging over French quality it may be that they are not going to be too thrilled with that!

• In terms of Russian wheat, aside from the GASC tender, the news that the Central Bank’s decision to limit its intervention in currency markets has sent the Rouble crashing to 45 vs. US$. That is a 35% decline since the summer. As a consequence it seems the Russian farmer may well begin to behave like Argentine farmers and hold onto crops, and we will likely see acreage expansion in coming years. (Good news or bad? That really depends upon your perspective – grower vs. consumer)

• Prices have rallied as the day progressed, ostensibly on an oil pipeline explosion and fire in Saudi Arabia which some have suggested could be terrorist related although the Saudi government have stated that the incident was a “mishap” during maintenance work. Regardless, crude oil rallied sharply and corn markets  followed higher with other CBOT markets following. Continued US$ strength has seen an influx of capital into the US with equities strengthening and gold and commodities pressured.

• The next USDA report scheduled for release on Monday is suppressing fresh risk positions.

• Saturday saw Egypt pick up a single 60,000 mt cargo of French wheat, which was cheap compared with the other offers shown. Markets have a “toppy” feel to them as the US soybean meal tightness seems to be fading as additional supplies get through to consumers. There is NO shortage of soybeans or crush, just railway locomotives and an overall tightness of available trucks. The peak cash meal prices would, if they continued, attract S American imports, which is the last thing the US wants or needs.

• The US crop condition report showed winter wheat at 59% good/excellent which is unchanged week on week but behind last year’s 63%. The crop is 90% planted unchanged from last year and!% ahead of the five year average. The corn crop was reported to be 65% harvested, up from last week’s 46% but still behind the longer term averages. Soybeans were reported to be 83% harvested, an improvement on last week’s 70% and equal to the five year average.

• Commodity brokerage Intl FCStone reported their latest US Crop forecast and reduced 2014 corn output to 14.783 billion bu from 14.958 estimated last month. Yield was trimmed a touch to 178.0 bu/acre from 178.4 last month. It also pared US 2014 soybean output to 4.033 billion bu from 4.066 billion bu a month ago, with yield at an unchanged48.4 bu/acre. FCStone’s data is reputedly based upon a survey of its own customers as well as utilising USDA harvested acreage estimates. This is one of the first private forecasts to be issued ahead of the USDA’s next report scheduled for release 10 November.

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Weekly Update 31 October 2014

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Fund positions