Weekend Wheat Update:

• Wheat futures rallied between 9 and 14 cents on short covering with London and Paris markets also higher (London lower on the week, Paris higher on the week – currency).

• Some winterkill damage is suspected across portions of Nebraska, where snow cover is lacking and where sub-zero overnight lows were recorded.

• Fundamentally, huge old crop supplies remain the dominant market driver.

• It should be noted that French cash prices have posted new marketing year lows this week, as too much supply is chasing far too little demand.

• The following graphic also displays Russian domestic prices in US dollars, and notice that despite being priced well above last year in rubles, the spot market there is quoted at a price equivalent to $4.75-4.80/Bu, which will keep Black Sea highly competitive once the tariff is lifted beyond May/June.

• Better snow cover will be established across the Central US within the next 3-4 days.

• Normal precipitation is projected across the EU, Black Sea and China into mid–March.

• The need to compete with other world origins will likely limit rallies to short covering.

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Weekly Update 27 February 2015

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

Fund positions

Initial 2015/16 wheat SnD’s in major producing, exporting and importing countries and the combined world balance sheet are displayed in the following table:
World wheat supply/demand balance

Assuming a slight boost in world acreage and near trend yields, production is expected to fall modestly to 720 million mt in 2015. This is still the second largest crop on record. Assuming domestic wheat consumption grows by 1% (vs. 2% in 2014/15), world wheat stocks are projected broadly unchanged in 2015. We reiterate that the US and world wheat markets lack a compelling story without adverse weather this spring and summer. Of note, N African and Mid-East production is projected to increase 1.7 million mt (20%) this year, with harvest to begin in the coming weeks.

Projections show total world production to exceed domestic use (albeit slightly) for a third consecutive year, as supplies continue to rebound from the substantial drop in stocks in 2012. World climate outlooks, which were updated last week, do not include any major abnormalities in the next three months. There’s been some talk of winterkill damage across the Black Sea, but we view this as overdone. Precipitation across Europe, Ukraine, Russia and China has been 70-150% of normal over the last 60 days. Temperatures have been within 1-4 degrees of average, mostly on the warm side and major production shortfalls across the Black Sea have historically occurred during the summer months, and center on Central and far Eastern crop areas of Russia.

US and world wheat prices are determined in the export market, and the central theme of the 2015 crop year is a slight boost in surpluses in major exporting countries. Projected combined production in the US, Argentina, Australia, Canada, Europe and Black Sea at 387 million mt is down 2 million mt from 14/15. However, carryover stocks will be 12 million mt higher than the previous year, which will allow the Black Sea, in particular, to dominate world trade in Sep-Nov. Major exporters’ stocks are projected at 75 million mt, up 3 million mt on last year and the highest since 2010. Exacerbating this competition for world market share will be the dramatic change in currency relationships in the last 6 months. The wheat market will be the most affected by multi-year highs in the US dollar. The world wheat balance sheet will be little changed in 2015, but prices are expected to weaken slightly as US exports are capped at 900-950 million bu.

• CBOT markets are all higher with just over half an hour of trading left today in what is becoming a daily seesaw in price action. Clearly, despite Brazilian roadblocks being largely cleared, the market still feels some risk premium is warranted although we continue to believe that this will erode in coming days and weeks.

• The International Grains Council (IGC) has today forecast smaller global corn and wheat crops in 2015/16. They see a 5% decline in corn production and a smaller 2% decline in wheat output. Corn output at 938 million mt is down from current the year’s crop of 992 million mt, but will still be the third largest on record. Large opening stocks will largely mitigate any availability issues, with the IGC stating, “strong demand is anticipated, especially for feed, corn ending stocks are likely to remain comfortable.”

• The current year’s wheat crop was increased by 2 million mt to 719 million mt partly due to an upward revision in Argentina’s crop to 13.9 million mt from 12.5 million mt previously forecast. They said,” prospects for the 2015/16 world wheat harvest remain mostly favourable and only a small year on year decline in production is anticipated”. The 2015/16 crop is estimated to reach 705 million mt.

• The USDA has today released its weekly export figures as detailed below:

Wheat: 459,000 mt, which is above estimates of 200,000-400,000 mt.
Corn: 864,000 mt, which is below estimates of 900,000-1,100,000 mt.
Soybeans: 495,400 mt, which is within estimates of 450,000-650,000 mt.
Soybean Meal: 85,000 mt, which is below estimates of 100,000-300,000 mt.
Soybean Oil: 14,200 mt which is within estimates of zero-20,000 mt.

• Brussels issued weekly wheat export certificates totalling 965,254 mt, which brings the season total to 22,059,209 mt. This is 772,827 mt (3.6%) ahead of last year’s record pace.

• Focus continues to stay on Brazil and logistic issues, and it is noted that there are limited disruptions to grain and oilseed flows so far, and it should be remembered that Brazilian commitments have risen substantially over the last week. We are informed that the crop in Rio Grande do Sul may well reach upwards of 16 million mt, which will be a record by some way. Estimates for the total Brazilian crop remain buoyant and a final output in the range of 94-97 million mt would not surprise us.

• US$ strength and €uro weakness continue to feature in international markets. The former has traded through last week’s high and is flirting with multi-year highs posted earlier in the month. This continues to leave US grains and oilseeds in a difficult position when it comes to competing in international markets. EU wheat continues to search for world demand assisted by the pressured currency.

As we stated yesterday, world corn prices are being led lower by competitive pricing from Argentina and Ukraine. Ukraine appears willing to price Mar/Arp corn at $166/mt, some $8 or $9 below US to shift stocks. Now Argentina and Brazil have been willing to meet the Black Sea offers with their own discounts. This was evidenced in recent days by a sale from Brazil to S Korea. In these circumstances US sales have been tough to conclude to say the least and a corn export window into mid-summer looks nigh on impossible.

March CBOT wheat has hit trendline support and prices in coming days will be pivotal. If support gives way, and global supply pressure suggests that this could well be the case, the next level of support sits at around $4.75.

• Chicago markets closed lower on a combination of profit taking after yesterday’s rally and what appears to be firm action by Brazilian authorities to minimise disruption by truckers. Whether this will be lasting remains to be seen, but the market seems to like the moves. Five Brazilian states have now got authority to impose massive fines upon offending truckers and unblock roadways. Six remaining states are currently reviewing the situation. The flow of soybeans into both Paranagua and Santos appears to be closer to normal than previously.

• It has been rumoured, but not confirmed, that S American soybean meal has been traded into south eastern US. The prices calculate and we would not be surprised to hear confirmation before long.

• In an announcement today Russia confirmed it would not levy a tax on the export of barley or corn, and it would hold the levy at steady levels in wheat. Exports have slowed dramatically in recent weeks as the tax has hit home and it is anticipated that a further1.6 to 2 million mt will eventually be exported bringing the total to 20.5 to 21 million mt.

• Both Black Sea and Argentine corn suppliers are fighting for export trade leaving the US out in the cold, much as their wheat trade has been for much of the season. On this basis it continues to feel as if the USDA has overestimated US export volumes and potentially this may result in an upward revision of end stocks.

• Finally, the Central Bank of Ukraine has suspended currency trade until Friday in the wake of the continued fall in the value of the Hryvnia.

• What the market gives, so it takes back – or so it seems as we witness Chicago soybean and meal markets sharply higher by mid-session today. The trigger appears to have been the Brazilian truckers strike which led to fund buying as key moving averages were hit. Soybeans moved above the 50 day moving average and meal the 200 day average. Corn and wheat have followed and S American cash selling in soybeans has been very evident on the rise. The strike is over a request by truckers to remove taxes on diesel fuel, and this is still being considered.

• Latest news suggests tghat the Brazilian Government has asked their courts to rule on the legality, or otherwise, of the strike. Seemingly a federal judge has been asked to end the strike with huge penalties for truckers found to be blocking roads. The level of fine is without doubt a deterrent, $100,000 per hour, with the authorities being given the power to clear roads. A decision is anticipated today, or tomorrow at the latest. Police in Paranagua are already clearing truck blockages to allow free passage of soybeans and other freight. Most expect the strike to be ended by tomorrow night.

• Egypt once again tendered for US wheat for mid-April arrival and secured 290,000 mt of what is reported to be hard red wheat. The price is reported to average $273.11/mt basis C&F, which compares with the last wheat purchase from France and Romania five days ago at $240.25/mt. The latest deal is priced well below last weeks much commented upon offers which ranged in price from $287 to $336, and were rejected. Clearly Egypt sees value in the credit line offered by the US! The other side of the Egyptian wheat coin is that they need some “quality” wheat to blend with what they have been/are/will be receiving from EU/Black Sea suppliers.

• In Russia bread prices are reported to be 11% up on last year, which pales into the background when compared with the 41% jump in Ukraine. Both nations are reported to be considering additional export controls. Corn offers from Ukraine continue to decline, the Hryvnia slumped another 11% today, and it is becoming increasingly clear that currencies will remain a significant driver of international trade for the forseeable future.

• Today’s price rally in soybeans and meal feels as if it will be difficult to sustain if the trucker’s strike is ended, particularly in the face of the advancing S American bumper (record?) crop harvest. China will return to the market following the New Year holiday celebrations, and most do not expect them to chase the currently elevated price levels. They already have a significant soybean tonnage afloat and was active before the holiday began.

• Monday has seen markets lower both sides of the pond in limited trading volume as fresh trading interest has been limited.

• The impact of impending S American supplies can be seen quite clearly with Brazilian soybean meal offered for March shipment out of Paranagua at a discount of some $62/mt to US Gulf levels. This leaves global importers with little option from a financial perspective and at the same time makes any price uplift of significance in US meal prices difficult to sustain. The Brazilian soybean harvest is reported to be 35% completed in Mato Grosso, expected to reach 50% by the weekend, and supplies are flowing quite freely despite the odd interruption due to trucker’s strikes. Exports are freely available is the message to grasp!

• S American weather lends a bearish pressure as N & C Brazil is forecast to receive favourable harvest weather in the coming week, while S brazil and Argentina are forecast to get regular rains which will improve the later maturing crop. Near to below normal temperatures are forecast for Argentina and S Brazil, again limiting any crop stresses.

• The US$ has rallied to start the week, gold has eased $12/oz and WTI crude oil has shed just over $1/barrel.

• Price outlook for corn, wheat and soybeans in Chicago looks lower from a technical perspective, and we look for a resumption of the soybean downtrend if we see the July ’15 contract close below $9.97 support. Downside targets are $9.35 and ultimately $8.73. Corn could be building a “head and shoulders” pattern, which would be ultimately bearish if fulfilled, but it is early days yet. Pressure from wheat and potentially the soybean downtrend should, as a minimum, cap rallies. Dec ’15 contract support at $4.13¼ has given way today (the market needs to close below this level for it to be validated) and potentially paves the way lower. In wheat we should not lose sight of the fund net short position, also there is no weather premium (and nor should there be at present in our view) which could leave the market vulnerable to a bounce. However, without a weather problem July ’15 Chicago wheat looks likely to drift lower with $4.85½ our next target.

• With the USDA’s Outlook Forum data now consigned to history, and with US wheat and soybean export demand in seasonal retreat, where can bullish news that offers more than a paltry two or three day  short covering rally come from? Many now fear a bearish 31 Mar stocks and seeding report and spring weather driving prices thereafter.

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

Weekly Update 20 February 2015

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

Fund positions

• After the close yesterday Egypt’s GASC tendered for wheat, for mid March shipment,in the wake of its rejection of US supplies earlier in the day. It became clear that they were prepared to accept French grain at 13.5% moisture and continue to do so for another six months, which came as something of a surprise. Jumping forward, the result was that France was awarded 180,000 mt and Romania secured 60,000 mt at an average price of $240.25 basis C&F, which compares with yesterday’s US offers that ranged from $287 to $336 including freight. Little wonder yesterday saw Egypt “pass” on the US offered levels!

• Today has seen the USDA’s Outlook Conference release its new crop acreage projections, and a bullish surprise comes from the soybean seeding forecast of 83.5 million acres, half a million below December’s baseline numbers. Corn was put at 89 million acres, 1 million up from December. The lower than expected soybean acres saw markets jump 15-17 cents with corn following 3-4 cents and wheat tagging along for the ride. Trend following funds jumped on the bandwagon as soybean prices pushed through both 50 and 100 day moving averages. It is probably fait to suggest that Outlook numbers with actuals, last year Outlook put soybean plantings at 79.5 million acres, below intentions of 81.5 and final acres at 83.7. Tomorrow will see more data including balance sheets and it is quite possible that we will see a price reversal – again.

• Brussels granted weekly wheat export licences totalling 930,377 mt, which brings the season total to 21.094 million mt. This is 776,391 (3.82%) ahead of last year. Prices lifted in Paris on the news. The Russian “news machine” is either long new crop futures or needs a hedge against an, as yet, undefined problem with talk of a “more than 40% drop in this year’s winter crop”. The Soviet propaganda engine is clearly not yet dead unlike many in the eastern regions of Ukraine!

• The big picture suggests that in corn we have a marked lack of weather issues in S America coupled with steady demand, which is keeping the market two sided and choppy. There is a lack of direction and uncertainty over US acres (we are now talking the “real”world not Outlook). The big risk sits with fund liquidation as the funds continue to hold a long position. Wheat however appears to offer little short term risk to the bears, demand news could probably not get worse for the US who were humiliated on the global market yesterday with Egypt’s rejection of all offers despite the lure of a credit facility (which we believe is tempting – but not at any price). Soybean prices continue to have the Sword of Damocles hanging over them in the form of the fundamental oversupply position despite today’s Outlook projections offering some short term support. The market has to decide which is the greater long term driver of price direction.