• Chicago markets return after a long weekend and it has been wheat that has shown the way lower with front month futures as much as 3% lower on the day. Corn is also lower although not as much (front month down 2%) and soybeans dropped less than 1%.

• It seems that favourable US weather is weighing on the market and news that the wheat harvest in Oklahoma is under way and producing both good yields and quality also impacted prices. Clearly we need to see conditions remain dry to allow progress and to that end forecasts appear to be playing ball right now with conditions looking good into mid-June.

• We are in a position where weather premium is currently in the process of being removed from current pricing as weather outlooks, regardless of which model is used, can be described as unexciting!

• Corn planting data will be released later tonight, but expectation is that we will see corn at 94-95% planted and soybeans at 70%. Corn condition is expected to be 71% good/excellent with wheat ratings steady to higher.

• We are at a stage in the season where weather, which has largely been an incidental issue in the past few months, will become a much more significant determinant of pricing. Crop critical weather will be watched closely and July (corn pollination) weather will be important to say the least. Weather will be less significant for wheat given global supplies.

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Weekend summary 27 May 2016

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Fund positions

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

Wheat: 344,700 mt, which is within estimates of 300,000-700,000 mt.
Corn: 1,627,300 mt, which is within estimates of 1,250,000-1,750,000 mt.
Soybeans: 606.900 mt, which is within estimates of 600,000-1,000,000 mt.
Soybean Meal: 187,200 mt, which is within estimates of 100,000-275,000 mt.
Soybean Oil: 34,600 mt, which is within estimates of 50,000- mt.

• Brussels has issued weekly wheat export certificates totalling 755,414 mt, which brings the season total to 29,879,121 mt. This is 1,92 million mt (3.0%) behind last year.

• Favorable weather, and vegetation health at or above last year, has been well documented across Europe and the Black Sea. Warmer weather is desired across W Europe as the crop begins the grain fill stage, but damaging cold is not projected. Weather across the Black Sea regions will be nearly perfect through the first week of June. We project a moderate hike in combined EU and Black Sea wheat yield in the next one to three USDA WASDE releases, and amid lacking demand growth, surpluses will continue to build. Already the USDA projects combined EU, Ukrainian and Russian production to exceed domestic use by 67 million mt, vs. a surplus of 70 million in 2015/16. It looks like the EU/Black Sea wheat surplus could reach a record 71 million mt in 2016/17 with normal early summer weather.

• The full combined balance sheet is below. Notice that despite an 1.3% drop in area, total EU & Black Sea supplies will be a record large 283.7 million mt, up 4 million from the USDA’s estimate amid a 1 million mt production gain in Russia, a 1 million mt gain in Ukraine and a 2 million mt boost in Europe. Domestic use is projected slightly below the USDA, as EU feed consumption will likely be cut amid larger available corn supplies. End stocks are projected higher by a like amount. Combined exports (if achieved) at 71.5 million mt are the largest on record, which amid steady/weaker global trade will leave little room for US export demand growth. New crop cash prices are already weakening, and it’s left to the US Gulf market to follow if the US’s share of world wheat trade is to be increased.

• World cash wheat prices have turned lower this week, but additional downside risk remains into the N Hemisphere’s spring wheat harvest. The attached graphic shows French fob prices for the last three years, and a fairly strong seasonal trend appears. World wheat markets typically bottom in Aug/Sep, with June to August losses since 2013 ranging from 8-10%, which in 2016/17 projects a seasonal bottom at $157/mt. Interestingly, this also aligns with major exporters’ stocks/use analysis. At this price global wheat will also better compete with corn for feed consumption. The next leg down in US futures will be led by world cash markets. A weaker trend is expected over the next two to three months, and US futures should find a more lasting bottom at $4.00-4.20, basis spot Chicago.

• The International Grains Council (IGC) has released its most recent crop estimates which forecast 2016/17 global wheat output at 722 million mt, a 5 million month on month increase, down from 736 million mt last year. Global corn output was forecast at 1,003 million mt, an increase from 998 million mt last month and also a year on year increase from 971 million mt. Clearly grain supply appears to not be lacking according to the IGC!

• Today has seen a suggestion that Chinese soybean meal is actually very close to calculating into the west coast of the US and this has sparked something of a profit taking move in Chicago in advance of the long weekend holiday break. The $160/ton rally in spot Chicago futures is historic in a non-drought year and from a technical perspective the market is severely overbought and in dire need of correction, but a top is not evident at this time.

• Brazilian and Argentine farmers are smiling! The price of soybeans in Reals or Pesos reached record highs this morning. As we have previously reported, interior and port prices for soybeans and corn have never been higher in local currency in S America. The high corn price is causing domestic livestock producers to ration feed demand, but in the case of looking forward to 2017, producers would seem likely to expand. Importantly, Brazilian farmers are selling ahead. We have heard reports of record forward Brazilian soybean sales for the new crop growing year with a crop that ranges from 102-110 million mt. Its appears to be good times for S American agriculture.

• Headlines:

• Soybeans follow as July soybean meal pushes to a new rally high.
• Spot corn rallies to eleven month high, holds premium to wheat in Plains.
• Wheat follows corn and soybeans higher, but only slightly.

• Fund flows continue with July soybean meal pushing ever higher and soybeans recover with double digit gains. Funds appear to have been piling in from the opening bell and only easing the pace around midday, it was suggested that some may have been trading up to their limits on soybeans and are turning to spread trades as a means of holding even larger positions. Corn and wheat were dragged along despite record large world wheat crop hanging over the market.

• Commercials, and ourselves, are questioning quite what is going on in Chicago! The rally in soybean meal can only be described as “HUGE” and the July premium over December (close to $40/ton) is difficult to digest with US 2015/16 stocks at or around 400 million bu. Bulls may well suggest it is down to Argentine meal quality not meeting consumer specifications. However, whilst some are reported to not be meeting 46.5% protein specs, end users are negotiating contracts at lower levels (44-45.5%) and discount prices are trading.

• China has announced it will be auctioning some 2.2 million mt of state reserve corn and rice on Friday, corn accounts for 2 million mt. Prices are expected to be cheap on an historic basis, attracting feed buyers and it is noted that the sale will be of 2012 crop year output. It is expected that weekly auctions will continue into October.

• The Russian Ag Minister has increased the 2016 grain crop estimate to 106 million mt, some 4 million above the latest USDA number. The increase was put down to favourable growing conditions. Whilst there was no specific crop breakdown, private estimates suggest the 2016 wheat crop to be record large at 63-64 million mt, with harvest starting in two to three weeks. Currently Russia has only one or two million mt of export sales on the books as buyers shy away from commitment ahead of what is looking like a very big crop, not only in Russia but globally.

• Ukraine followed suit with 2016 wheat output forecast at 23 million mt (by the weather office), well above last year’s 17 million mt. Harvest will start in early July. Corn crop estimates are also rising in the face of favourable weather, and estimates are in the 28-29 million mt region.

• As we have seen before, this current market is all about the funds. There is a rumour that some Chicago option trading firms are in financial trouble being short soybean crush and spreads. Weather is good across US and northern hemisphere, but no one cares! It is all about “Risk On” and when this turns to “Risk Off” (we know not when) watch out for fireworks and potentially massive volatility. As “seasoned market veterans” we prefer to watch weather, supply and demand, but have to admit we are wrong at this time as the world awaits the harvest of record wheat and corn crops and another year of massive stocks.

• It is interesting that Brazilian interior prices (in Reals) are reportedly higher than they were in the 2012 drought, new crop planting is some months away yet producers are incentivised to expand acres (some suggest as much as 4-7%). In a time where US and world stocks are large by any measure it feels strange (wrong?) that the market is telling producers to produce even more. It is expected almost universally that US and S American growers will respond accordingly.

• The latest US weekly crop condition report shows corn to be 86% planted compared to the five year average of 85%, soybeans are 56% sown compared to the five year average of 52%. Winter wheat is rated 62% good/excellent, above last year’s 45% whilst spring wheat is 76% good/excellent above last year’s 69% (the best since 2010). The crop is 95% planted above the five year average of 77%.

• With favourable Plains harvest weather, the US could post a record combined US wheat yield amid the strong ratings for both winter and spring crops. This morning’s Central US weather forecast offers a nice combination of rain and warmth over the next few weeks. More rain is desired over the SE US, but otherwise, the forecast is favourable. The rains will hold off for another two or three days across the E Midwest, which should allow farmers extra time to seed corn and soybean crops. The W Midwest has virtually completed seeding with Delta activity picking up strongly starting last Sunday. The three week Midwest forecast shows limited concern with a lack of extreme heat or dryness. The EU crop monitoring unit, MARS, left the EU wheat and corn yield estimates unchanged on the week. Favourable weather looks to benefit EU and Russian grains into mid-June. The US$ was firmer this morning with the Brazilian Real encroaching resistance at $3.60 as new corruption allegations are levelled against the new Temer Administration that may force new high level investigations. Amid a lack of fresh demand news, the markets appear to have have set their seasonal highs with the question being the depth of the correction and whether the much discussed heat/dryness will arrive before the Midwest crop reaches maturity?

• We saw early trade lower as Chicago grain/soybean futures eased with China’s Dalian soymeal closing sharply lower in record volume. The speculative unwind is underway in China with metals and now agri commodity futures coming under liquidation pressure as the losses mount for speculators. The Chinese liquidation is expected to spill into Chicago trade with the soybean complex trading moderately lower this morning. Funds are heavily long with the 50 day moving average in November soybeans noted at $9.80/bu. China’s Dalian soybean futures closed sharply lower with the last trade at $419.50/mt, down $21 from the prior day. A record 7.458 million contracts of soybean meal traded with futures posting limit losses at one point. China’s record large soybean imports are leading to a record large crush rate and an abundance of cash soybean meal. The pipeline expanded as sellers absorbed stocks, but now these cash longs are looking to cut their losses and unload it to livestock producers. Often record hog production margins were cited for China’s soymeal rally, but historically there is no relationship between feeding margins and feed consumption. It now appears that much of China’s soybean and meal appetite was due to speculation and a fall in the value of the Yuan.

• Something of a turnaround Tuesday was noted in soybeans and wheat as spec demand once again reared its head in early trade despite Chinese trade (see above). US crush closures for maintenance helped firm spot basis levels but this would appear to be a very short-term issue. The recent soybean and corn “correction” seems to have provoked a “buy the break” mentality by funds, as technicals point higher at this time. Funds appear to have the desire to add to longs in corn, soybean and product positions, although our own technical analysis suggests we are very finely balanced right now.

• The market is currently divided with funds adding to length at the same time that northern hemisphere weather forecasts remain very favourable. Only one will be correct in the longer term!

• We are looking at extended holiday breaks both in the UK and US next weekend and reduced market exposure by traders would not be unexpected. Soybean meal rallied (again) to new highs before easing. Rumours exist, although unconfirmed, that Argentinian crushers are struggling to make 46.5% soybean meal specifications for export, potentially creating a discounted value product this coming season. Questions over a shift to US supplies at higher prices are being met with scepticism!

• Argentine farmers are more aggressive sellers with some 13.7 million mt reportedly sold to crushers, the third largest figure on record., as quality discounts appear to have been removed/ignored. FOB meal offers for 44/15% protein through to October are easy to find but 46.5% offers are thin on the ground to say the least.

• French and Russian FOB new crop wheat offers are once again in decline as forward sales books remain largely unfilled. Many are questioning what has happened to demand and there are few answers to the question. New crop supplies will become available in mid June, and pressure will doubtless come from the supply side rather than from demand.

• Has the upward momentum in soybean meal ended? Charts are turning lower, and in soybeans, and if the speculative onslaught has reached an end we could well see markets decline, potentially substantially, in coming days/weeks.

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

Weekend summary 20 May 2016

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

Fund positions

• Headlines:

• Soybeans close slightly weaker whilst old crop meal pushes to new high.

• Chicago corn settles lower on summer climate forecast.

• Wheat follows corn lower; global cash prices weaken.

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

Wheat: 748,700 mt, which is above estimates of 200,000-650,000 mt.
Corn: 2,013,800 mt, which is above estimates of 1,000,000-1,600,000 mt.
Soybeans: 714,700 mt, which is within estimates of 350,000-750,000 mt.
Soybean Meal: 165,100 mt, which is within estimates of 50,000-350,000 mt.
Soybean Oil: 101,100 mt, which is within estimates of 60,000-130,000 mt.

• Brussels has issued weekly wheat export certificates totalling 957,439 mt, which brings the season total to 29.123 million mt. This is 1.92 million mt (3.39%) behind last year. The remaining weeks of the season will need to see average weekly sales of 562,716 mt to reach the USDA’s latest total export of 32.5 million mt. Given the weekly average over the last 11 weeks, which stands at a lofty 863,153 mt, this looks to be easily achievable and reflects to some degree the competitive nature of EU wheat in the global market place.

• Thursday’s markets saw a corrective style of trade as it seems that China’s soybean meal markets were running out of steam to some degree on top of the latest NOAA summer weather predictions that looked crop favourable across the US. US$ strength on continued expectations of a summer rate hike added to the overall weaker tone. Soybeans were clearly in an overbought condition, in need of a correction, and the question will be how much of a correction is coming?

• The grains, corn and wheat, are sitting at or close to price support, which, if broken, will likely see lower levels. Pricing in the coming few weeks will be all about weather in the US and northern hemisphere, and the outlook in this respect, both short and longer term looks favourable and without threat.

• Headlines:

• Soybeans trade lower on Thursday whilst meal ends mixed.

• July corn rallies for the fifth consecutive session.

• Wheat ends slightly weaker on global production estimates.

• Thursday saw a mixed and uneventful session in Chicago Thursday with profit taking in evidence in the wake of Wednesday’s move higher in soybeans. Further end user buying has been seen on price breaks, which has seen losses being limited.

• A prominent satellite crop forecasting firm has further raised US and world wheat production potential. Russia’s wheat crop is estimated just above 64 million mt, vs. the USDA’s 63, and has potential to reach 65-66 million mt amid a coming warmer temp pattern there. US wheat is estimated at 2,200 million bu, up another 200 million from the USDA’s estimate in its May WASDE. We note that some producers across the Central Plains speak very highly of yield prospects, with some seeing the best conditions in years. The wheat market is always subject to money flow, and influence from neighboring corn and soybean markets, but we reiterate that fundamental input has trended more bearish over the last week. Without adverse weather in the next 3-4 weeks, the sheer size of US and world wheat supplies will weigh on global grain trade.

• Speculative traders will be reluctant to give up their huge net long positions in the soy complex, with many forecasters leaning towards a hot/dry Midwestern summer, the latest climate update is still rather wet through August, and as elevated Chinese hog prices maintain the potential for export demand growth. We would question whether a record large fund net long position is needed amid US old crop soybean stocks of 400 million bu and new crop stocks of 300 million, and stocks/use levels are projected nearly double those of 2011-2014. US and world grain prices will eventually have to be reconciled with massive (record) world supplies. Soybean meal futures in China, which weakened substantially into Wednesday night’s close, will be watched closely overnight.

• As an aside, the US’ EPA proposed raising the mandated blend level of corn-based ethanol to 14.8 billion gallonsl, vs. 14.5 billion previously. Gasoline consumption has been higher than expected since 2015, but there still exists a blend wall just below 15.0 billion. Whether this proposal becomes a final rule will be debated over the next 5-6 months. US ethanol stocks are in seasonal decline, but still remain rather lofty, and at 886 million gallons stocks are 3% above last year and record high for mid-May. There’s more than enough ethanol to meet any change in the RFS mandate, and already the US is on track to produce 14.8-14.9 billion. The EPA’s proposal is therefore not likely to have any material effect on the US corn balance sheet.

• Headlines:

• Soybean meal pushes to new highs pulling soybeans with it.

• Corn inches higher with fresh longs punting on better exports.

• Wheat follows corn and soybean markets to modest gains.

• The morning started with prices green pretty much across the board despite little fresh news input although there was a suggestion that Europe was returning to the soybean meal market; in addition, the continued uncertainty over the timing of China’s reserve sales added to upward momentum.

• Outside markets were supportive with a weaker US$, which reversed early gains and crude oil was once again higher by $0.30/barrel.

• Russian farmers are reported to have seeded some 2.1 million ha of corn vs.1.8 million last year and spring wheat planting has reached 4.3 million ha vs. 3 million a year ago. The next ten days is forecast to have a warmer patter across the whole of Europe and Black Sea regions which will allow corn planting to speed up and aiding wheat development. Recent cooler conditions have slowed wheat growth a touch and we should see some “catch up” in coming days.

• Clearly the soy markets is the “star” at present. US crush margins are positive, there remains uncertainty over quality in Argentina and the USDA has end stocks pegged likely until July or August before we will see any material changes. The grains have followed soy higher but not to the same extent. Our inclination not to chase the soy rally is based upon weak cash basis markets in soybeans, both interior and Gulf. The longer term prices will be dictated by weather more than anything and there is little in the way of threat from that corner at present.