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Fund positions

• Interestingly today we saw Chicago markets turn lower following what was seen as supportive USDA seeding estimates. The market decided to focus upon the WASDE price forecasts instead, which were a season cash average of $4.20 in wheat (down $0.80/bu), $3.45 in corn (down $0.15/bu) and $8.50 in soybeans (down $0.30/bu). Prices are clearly well below last season and 2016 US farm income is expected to decline for the third consecutive year – a first.

• For the record, the USDA’s 2016 area figures came in as follows:

Wheat 51 million acres, below estimates of 52.411 and down from 54.644 year on year.
Corn 90 million acres, above estimates of 89.648 and up from 87.999 year on year.
Soybeans 82.5 million acres, below estimates of 83.302 and down from 82.65 year on year.

• Egypt’s GASC secured 300,000 mt of wheat in an overnight tender for late March/April shipment. The purchase included 60,000 mt of French, Argentine and Ukraine wheat (each), and 120,000 mt of Romanian wheat. The French wheat was sold at $175/mt basis fob, which is some $11/mt above replacement. Sellers appear to be more willing to take on the risk of ergot fungus and late payment as this may be one of the last tenders by Egypt in the 2015/16 crop year as their new crop harvest commences in April.

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

Wheat: 486,200 mt, which is above estimates of 200,000-400,000 mt.
Corn: 1,066,300 mt, which is within estimates of 700,000-1,200,000 mt.
Soybeans: 328,600 mt, which is within estimates of 300,000-700,000 mt.
Soybean Meal: 172,600 mt, which is within estimates of 100,000-250,000 mt.
Soybean Oil: 3,200 mt, which is below estimates of 5,000-20,000 mt.

• Brussels has issued weekly wheat export certificates totalling 800,941 mt, which brings the season total to 19,215,804 mt. This is 1,878,151 mt (8.9%) behind last year.

• The bearish market momentum has had little in the way of interruption today, and this does not pave the way for the bull’s immediate return. Our take on price moves is that there is little to suggest corn can make more than maybe 15 cents upturn at this time, unless we see adverse weather conditions arrive to upset things. We would also question whether, or not, the market has fully digested the potential of S American crops at this time as well as what seems to be the largely forgotten issue of slowing (maybe sharply so) US soybean sales and exports, which would be a majorly bearish input as and when digested.

• We have today seen wheat prices slip still further, hitting prices last seen some six years ago and the Chicago market has seen an upsurge in put option purchasing (giving the buyer of the put option the right, but not the obligation, to sell at the strike price – namely a bearish trade) in the May contract. In addition,there has been further fund selling and the cumulative net position will be worth keeping an eye on when this week’s figures are released on Friday evening. There have been many who suggested that fund short positions could not and would not grow in size, and they may be forced to eat their words!

• Financial markets have shown something of a bounce, which may add some support into tonight’s close and crude oil’s attempt at recovery may well help recovery.

• The Paris wheat market saw a dramatic price drop with fresh contract lows once again and physical prices equally weak with fob levels reported at $164/mt. German 12.5% protein wheat is reported to be offered as much as $12 below Russian, and any lingering Black Sea buying interest has evaporated. Feed grade wheat is offered as low as $151/mt with buyers nowhere to be seen.

• In the southern hemisphere we are seeing further non-threatening weather conditions with forecasts suggesting that N Brazil will receive heavy rains in the 8-15 day window, which would favour harvest and boat loading in central Brazil (Santos & Paranagua). Near to below normal rains across S Brazil and Argentina this week with sunshine predicted looks good for Argentine crops, according to some it is almost ideal. At present we do not seem to be looking at S American crops reducing in size.

• In summary, wheat markets continue lower in their attempt to find export demand and a place in feed rations. Corn and soybeans are following but we are yet to be persuaded of their ability to materially break out of the long established trading range. Normal spring planting conditions in the US will see the wheat pressure replicated in soybeans and corn although we will have to wait and see if this becomes the actual position.

• Without looking back into our archives, we recall current Chicago wheat prices are now at our initial downside target levels ($4.30 – $4.40 basis March ’16 futures). Where now?

• Chicago has seen a down day of some magnitude today with wheat pushing to new contract lows with corn and soybeans being dragged lower amid fund selling. S American soybean and corn crops are being talked even higher and weakness in crude oil is adding weakness. The failure of markets to gain sufficient traction to break above recent highs or break out of the range has added to the general weak tone. It has been interesting to witness the willingness of farmers to sell into even limited rallies, which has had the effect of capping upside.

• European wheat markets have reacted in sympathy with prices closing lower amid ongoing concern over potentially burdensome closing stocks in the face of non threatening growing conditions.

• Put simply, consumers appear to be extending cover on price breaks whilst producers extend sales on price rallies. This has had the effect of keeping the market within its range and it will take more definite knowledge of N Hemisphere weather and spring plantings before we see a change of underlying tone.

• Chicago markets have seen some fund short covering that has elevated both corn and soybean prices above last week’s highs in volume tat is best described as uninspiring. Wheat has not followed and is trading in negative territory with less than an hour to go. It seems that a high volume of in the money March soybean put options have expired worthless (when they should have realised the holder a profit) and traders are asking why this is? A mistake or oversight, albeit an expensive one, seems the most likely answer at present.

• Fundamentals in the corn, soybean and wheat markets have not change dover the weekend or today, bearish oversupply and flagging demand patterns continue to point bearish, although lower prices seem tough to achieve due to historically low physical prices creating a floor in prices that seems difficult to break through. Holders of bearish positions are just not seeing prices move lower and therefore profits are not accruing, as a consequence many are simply tired of their position and exiting ahead of the upcoming USDA Outlook Forum conference.

• For those looking for relief in the form of a switch from El Niño to La Niña it seems that disappointment is going to be the order of the day! It seems that El Niño will persist into late 2016 as the Southern Oscillation Index (SOI) suggests a second wind to the phenomenon.

• Argentine old crop soybeans have been priced at a $25-30/mt premium to new crop for some while. The premiums have some suggesting that Argentine old crop soybean stocks are lower than projected by USDA. There appears to be no statistical evidence that Argentine soybean stocks are lower and we are not looking for the USDA to make any adjustment in coming WASDE reports. Argentine farmers are holding old crop soybeans due to the forward Peso price curve and knowledge that the Government will cut the soybean export tax by another 5% in December. The forward Peso rate a year from now is 18 compared to today’s rate of 15 peso/US$. This means that farmers can make 25% on holding any cash soybeans. This is why Argentine farmers have been slower sellers of cash soybeans – not that cash stocks are not there!

• Current price direction in Chicago seems (to us) unsustainable for long as there is too mush supply chasing after too little demand.

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Weekend summary 19 February 2016

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

Fund positions

• Chicago markets have been thin and mixed with corn making an early attempt to rally whilst wheat and soybeans remained in the red. As we approach the close all three markets are trading a touch lower and it feels as if fund short covering has been somewhat slower paced than in the last few days.

• We continue to view S American exchange rates as conducive to acreage expansion going forward, despite rising input costs and this has the potential to weigh on prices looking forward. Current year output has the potential to grow on the back of actual yield date, which is revealing better than anticipated results in Brazil as well as improved weather conditions across Argentina, Paraguay and S Brazil. Rainfall across Argentina in the last couple of weeks has nearly replenished soil moisture levels and last year’s yield has the potential to be at least equalled.

• Rangebound trade has not excited the trade and we have to wait for US plantings and spring weather before the next key direction can be clearly defined. Meanwhile, S American crops appear to be getting bigger as threats diminish. Upside remains limited at this time  – unless we see fresh bullish input.

• The start of the week saw some short covering, which prompted modest price gains and Wednesday has been no different with outside markets continuing to offer support if it were needed. Crude has seen a $2/barrel hike with the US$ marginally lower and equity indexes up as much as 2%.

• Argentina raised its biodiesel export tax to 3.9% from 1.6% as a revenue raising exercise as shipping to the US remains active, and the jump is not thought to be sufficient to alter current flows.

• Uncertainty remains over wheat output in India with latest estimates at 88-92 million mt being higher than expected but the trade anticipates lower production with a 75-95 million mt range. With global supplies at their current level this is not thought to be, or become, a significant issue at this time.

• Technical chart patterns have become somewhat more supportive than previously, and this may continue to lend a degree of strength to prices. As an example we are looking at May ’16 soybeans trading above key moving average price levels although we should not forget the potential pressure from the current and ongoing S American harvest which will continue to dominate the market for the next few months.

• In summary at the midweek point we see the bulls and the bears in a tussle for supremacy in a market that is frustrated by a clear lack of market moving input. Our considered view is that we will see more clarity as we reach March when US planting intentions, weather and S American yields will all be more evident.

• There has been evidence of some active short covering in Chicago markets today which has seen prices higher on something of a bounce, which the technical trade may well view as corrective, relieving something of the oversold situation. At the same time we have seen energies tick lower and some value buyers picking bargains in equities that have seen some gains. However, it is probably fair to say that there is a lack of fundamental justification for higher ag commodities at this time and farmer selling as prices rise seem to back this up. We doubt the sustainability of the current rally.

• It is noted that vessels are arriving in Brazil, as much as 3-6 weeks early for new crop loading, with suggestions that there is little work for them elsewhere. Panamax rates are now below $2,500/day and no-one wants to get to the back of the queue when there are charters available.

• NOPA crush data was deemed bearish with January soybean crush at 150.45 million bu vs. 157.7  million bu in December and 162.7 million last year. This is the lowest figure since 2011 and the big surprise was that soybean oil stock surged to 1,526 million lbs, up 298 million from last year and 45 million up on December’s figure. It would seem reasonable to assume USDA estimated crush figures remain on the high side and that US soybean end stocks could potentially grow still further pressuring price gains.

• It was reported that Egypt rejected 8,000 mt of Canadian wheat on ergot contamination issues. This is clearly remaining an issue and warrants observation going forward.

• The US markets have been closed today due to the President’s Day holiday which as one wag put it, “is where we honor (sic) the greatest hoodwinkers who have ever lived and breathed and prospered in America.” We could not possibly comment! Consequently markets have been quiet and global equities have been sharply higher to start the week on some short covering and reduced levels of concern over European Bank liquidity. Crude oil has seen gains and the US$ is a touch stronger whilst gold has eased back around $29/oz to $1,210/oz earlier today.

• Matif wheat gained in early trade even with news that India’s government estimated their 2016 crop at 93.8 million mt, below their target 94.75 million mt. Trade estimates sit in the range of 80-84 million mt making the government estimate appear large!. Egypt’s GASC passed on a weekend wheat tender citing both high prices and lack of offers as the basis for their decisions – doubtless the ergot debacle remains high in the mind of potential sellers.

• Brazil’s soybean harvest is gathering pace and farmers are selling on the back of good yields as well as sliding Real, any uplift in Chicago will likely see fresh selling impetus in S American selling.