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Fund positions

• Friday saw the USDA’s new crop balance sheets fail to spark fund buying of any significance.

• Assuming trend yields it is probably fair to say that US end stocks will remain at lofty levels and price outlooks are materially unchanged from 2016/17.

• Russian interior wheat prices are lower for the second consecutive week in both Rouble and US$ terms and it would seem safe to assume the latest price rally saw some farmer selling. Consequently we feel safe in suggesting that Russia fob price offers will struggle to hold rallies (above $190.00/mt basis spot) and other origins will likely also struggle to rally in any significant way.

• The wheat chart pattern has also broken down with next support at $4.30-$4.40 basis May ’17 futures.

• The USDA’s Outlook Forum has come and gone without much market impact, and anyway the balance sheet numbers are not too surprising. We view the recent correction in futures as more a function of rising S American crop estimates and the recent modest decline in interior Black Sea cash values. Our longer term outlook still includes a lack of major bullish input without a weather N Hemisphere weather problem.

• The morning was weaker in Chicago as the USDA Outlook Forum’s acreage data triggered selling in corn and soybean futures. The USDA has estimated total major cropped area (corn, wheat, soybeans and cotton) at 235.5 million acres. This is down 2.2 million from 2016/17, but up 1 million from the USDA’s baseline estimates released in late 2016. Corn acreage is pegged at 90 million, unchanged from the baseline; soybean area is pegged at 88 million, up 2.5 million from the baseline and record large; wheat area is estimated at 46 million acres, down 2.5 million from the baseline and accounts for NASS’s winter wheat seedings data; and cotton acreage is expanded to rebound to 11.5 million, vs. 10.5 million in the baseline report. The soybean figure, especially, is viewed as bearish and assuming trend yield, the 2017/18 soybean crop could reach a record large 4,150-4,175 million bu.

• This compares to total consumption in the 2016/17 crop year of 4,080 million bu, and so end stocks could build another 80-100 million bu to 500-520 million in 2017/18 with normal world weather. The USDA has also projected the season average cash price in corn at $3.50, vs. 3.40 in 2016/17. Wheat’s average price is pegged at $4.30, vs. $3.85 currently, with the average soybean cash price forecast at $9.60, vs. $9.50 in 2016/17. Outlook Forum data so far has not been surprising, but does highlight that adverse weather is needed to adequately draw down US and world stocks.

• A host of government and private analysts continue to increase S American crop sizes. The Argentine Ag Ministry now estimates corn production at 40 million mt, vs. the USDA’s 36.5. Safras in Brazil projects total Brazilian corn production at a massive 95 million mt, vs. the USDA’s 88. Agroconsult in Brazil has raised the soybean crop there to 107.8 million mt, vs. 105.3 million mt in early February. It is still a bit premature to raise yields too far above trend, but no doubt weather has been conducive to bumper harvests, and the weather forecasts lack any major threat into the middle part of March, and harvest progress remains ahead of last year.

• The USDA’s data today is slightly bearish, but more important in the near term is favourable S American weather and rising production estimates. With the S American forecast maintaining near normal precipitation in Brazil through to around March 10th, the Brazilian soybean crop is nearly made. Only persistent flooding rain Argentina in late March/April can materially affect S American crop sizes.

• Little of interest has arisen to spark trade in Chicago markets today. Rallies and breaks have failed to follow through with the main trade being corn spreads vs. wheat or soybeans as traders hope for a reduced 2017 US corn acreage in the Outlook Forum later this week. Large Brazilian yield reports continue to keep a lid on rallies and add pressure to reduced levels.

• World importers are seeing cheaper prices from Argentina for corn shipment beyond the end of March. This is going to have other world feed users looking southward for supply. The recent illegal immigration guidelines handed down by the Trump Administration yesterday is maintaining talk within Mexico that they should be switching away from US corn to other suppliers. We note that US corn is the cheapest origin for Mexico, but if the country becomes more combative and nationalistic, one could imagine that some US corn demand will be switched. The US corn market has not paid much attention, but trade switch talk is growing.

• We await the outcome of a further wheat tender by Egypt’s GASC for late March/early April in which ten offers were received, the cheapest from Ukraine. Major global wheat exporters are keen to make sales in advance of the new harvest, freeing up storage space.

• It will be hard for the market to overlook larger S American corn and soybean crops and tepid Chinese demand following the USDA report. March 1st notice day will be interesting in terms of deliveries of soybean meal, soybeans, and KC wheat. All are currently well above their respective cash markets.

• Interestingly we have seen Chicago markets, which saw early gains, ease back with hedge related selling as the S American soybean harvest progresses. Wheat and corn were pressured early, and soybean related selling simply added to this pressure. Whilst there has been some scale down end user pricing the big fund buyers, which could add support, have been noticeably absent. The USDA’s Outlook Forum takes place on Thursday and Friday, and maybe the market is awaiting the outcome. The rapidly expanding S American harvest and export availability is undoubtedly going to impact and slow the pace of US export volumes.

• India is likely to impose new import duties on wheat based on their own record crop and to help protect farm incomes. On December 8th, the Indian government reduced its wheat import duty to zero, which is likely to allow some 4-4.5 million mt of wheat imports, which are the largest in a decade. The new wheat harvest will start later next month and continue into May. Some expect this year’s Indian wheat production to reach a record 97-98 million mt, which will break the prior record of 95.85 million mt set back in the 2013/14 crop year. Last year India produced a wheat crop of just 87 million mt due to a sharp fall in water availability from the monsoon. New duties will come in early March.

• Black Sea wheat prices continue to soften in the new crop position, whilst nearby futures are stable. The price of holding Russian wheat from now until late June is about $10/mt or in US terms some $.37/bu. So far that discount has not persuaded Russian farmers to dump old crop supply nor has government rail subsidies to move it. The reason is that Russia farmers are fat with cash and seem to be in no hurry to raise cash for the new growing season. We suspect that Russian old crop dumping will occur as the snows melt and the new crop greens, and farmers seek additional storage for another large crop. As and when this actually happens we will likely see significant cash market pressure.

• Chicago traders appear to be positioning long corn/short soybeans into the USDA Outlook meeting. However, even with a 2-3 million acre decline in US corn seeding, 2017/18 US corn end stocks look as if they will be well above 2.2 billion bu arguing for prices to decline to $3.75/bu basis December corn prior to planting.

• MARS, the EU’s crop monitoring unit have so far identified no major winter crop concerns in Europe, and that is despite less than optimal growing conditions in some regions. Below average rainfall since the start of the year has reduced soil ,moisture levels in parts of S Germany, S Sweden, Czech Republic and Baltic countries although it was reported that there is no immediate crop concern. Frost damage is also reported to be low, again that is despite lasting cold conditions throughout January in C and E Europe.

• It is, of course, still very early but the latest report supports suggestions that EU wheat and rapeseed production will recover in 2017. Stratégie Grains, yesterday, forecast EU soft wheat output at 143.8 million mt, an increase of some 6% from 2016.

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Weekend summary 17 February 2017

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Fund positions

• Weekly US export data has been released as follows:

• The weekly data was described as “solid”, but US soybean, corn and wheat sales pace will likely slow dramatically as other origins become more aggressive and this forces closure of the US export window. There remains a massive volume of soybeans, corn and wheat yet to ship, (note the difference between sales and shipments, which leaves an unshipped commitment) and with end users already well covered they have little, if any, reason to chase price rallies.

• EU weekly customs data reported wheat exports totalling 495,596 mt, which brings the season total to 16.99 million mt. This is 1.4 million mt (7.7%) behind last year. Barley exports for the week reached 155,139 mt.

• US cash corn basis levels continue to decline as Chicago prices rise amid rising cash supplies. US farmers have been active sellers on the latest rally and livestock feeders, exporters and ethanol plants have at least 8-10 weeks of coverage. In fact, the piles at Midwest elevators are at levels that have not been seen since harvest. Large supplies of cash corn are likely to keep cash basis levels weak into spring planting. The cash market argues that the current futures rally cannot be sustained.

• US longer range weather outlooks suggest no major drought issues across Central regions and indeed look for improvements in current dry areas. Temperatures are forecast to average at or just above normal, which should bode well for spring planting, which is fast approaching.

• Chicago markets have been somewhat mixed today with soybeans and corn easier whilst the wheat market has made gains. Both corn and wheat in Chicago made new rally highs in more normal trade volume as the fund’s aggression appears to have eased a touch for now.

• Why have the funds been so aggressive? Some are trading the moving averages whilst others are betting on improving macros and world economy, and there is a general belief that from an historic perspective ag commodities are plain cheap! There has also been a move towards “nationalism” in a number of key world economies: US, UK and Europe as well as Chinas, which is creating some belief in reflation, which is in turn adding to “value picking” by funds – hence them looking at “cheap” ag commodities. Given this scenario we doubt that the funds will let go of length any time soon and, as such, if they are not sellers it seems that a sharp dip in prices is not on the cards right now. However, it should not be taken that we are on a one way street and downside risk is absent.

• Initially, regionalism/nationalism are positive for economic growth, at least until excessive goods or services try to be exported. It is the trade debate on a world basis that complicates a bullish outlook for commodities. When that economic phase of trade begins, it rests with US President Trump and other world political leaders. For now, world leaders seem to be preoccupied with domestic issues, but we (and others) would be shocked if trade does not emerge as a new global economic topic in the near future.

• China appears to be slowing soybean purchases on account of the widening avian influenza outbreak and Brazilian soybean yields continue to be reported as “off the charts”. US wheat is non-competitive from a global perspective and as a consequence we reiterate our view that now is not the time to be turning bullish.

• Funds regard ag investments (Chicago grains and cattle/hogs) as cheaply priced as a new N Hemisphere growing season begins. With the US stock market at a record high and funds flush with cash, managers are looking for low risk bets. The problem is that as Chicago futures market rallies, the cash markets fail to follow. This is because of the record world supplies of soybeans, wheat and corn that will be available as of March 1st. Also importantly, Chinese import demand for world grain will likely be down some 30-40% this year as higher tariffs are enacted and their own domestic corn market sags to a seven year low. This is leading world corn/wheat trade to slow, curiously at a time when funds are buying? Obviously, either funds or the cash market is wrong! Only time will tell who it is?

• Currently, average ex-farm spot milling wheat premiums in the UK are around the low single figures. There has been less than a £10/t premium for full specification bread wheat (nabim Group 1, ≥13% protein, ≥250s hagberg, ≥76kg/hl) over feed wheat since October. However, UK bread milling wheat prices are historically firmer, with average UK ex-farm prices two weeks ago hitting their highest level in 22 months. As such, the small average premium over feed is much more to do with strong feed wheat prices rather than milling markets themselves. The UK now has some of the most expensive feed wheat in the world. As part of the tighter UK wheat supply and demand picture that we already knew about this season, there has been continued strong demand for feed wheat for both bioethanol and animal feed. Alongside a strong export pace at the start of this season, this is now leading to higher UK feed grain import requirements.

• Firm feed wheat prices, rising up close to milling values, are a sign of the market trying to attract some wheat with milling quality for feed and/or bioethanol usage. The narrower the premium, the more likely wheat with milling potential is to end up in these markets instead, so the narrow premiums are at the same time contributing to the firm prices for UK milling wheat.

• In contrast to the UK situation, the latest Australian government estimates for wheat and barley production released this week are a further sign of the well-supplied global market. Both wheat and barley output for 2016/17 are estimated at record levels (35 million mt and 13 million mt respectively). These government estimates exceed the latest local USDA attaché estimates (33 million mt and 11 million mt) made two weeks ago, as well as the latest official USDA figures.

• Australian barley exports are expected to be particularly strong as a result, providing additional competition for the UK to non-EU destinations at a time when the exportable surplus remains relatively high. On the wheat side, with UK prices already near the top of the pile globally, the question is how far UK prices can continue to rise outside of any world market rally. However, the latest Australian figures could add further weight to world markets.

• Chicago markets started out the session lower and have recovered on new speculative buying. No bullish fundamental news is available, and it just appears that fund managers are continuing to look at grains as cheap and make new investment. We doubt that funds can sustain any lasting bullish run, but it should be noted that the market has not yet technically provided any chart based sell signal.

• Similar to the US last harvest, soybean yields in N and C Brazil continue at record levels suggesting a much larger crop. The Mato Grosso soybean harvest reached 50% over the weekend and yield totals are so strong that it has some talking that Mato Grosso could be gathering a 31-32 million mt soybean crop! Corn yields are also stellar and producers are reported to be very pleased. The harvest is just starting in C Brazil and soybean yield results have some well-placed crop analysts discussing a crop size of 107 million mt or more. Such a crop would make crop losses in Argentina less important with the 2017 Brazilian soybean crop up a potential 10-12 million mt from 2015/16. Note that a 106.5 million mt Brazilian soybean crop would not require record yields that were scored back in 2011.

• Brazilian farmers are delivering on prior sales commitments, with many more starting to write basis contracts. This leaves the producer open on flat price and currency, but it does provide soybeans to exporters/crushers. The recent jump in Brazilian basis is due to strong Chinese loadings with over 2 million mt being exported so far in the first half of February. China looks to load out some 5.5-6.0 million mt of Brazilian soybeans during February, a record.

• Some are suggesting that slow Brazilian cash selling is the reason for the Chicago rally. Yet, Brazilian cash soybean sources are finding farmers willing to deliver on prior cash contracts and sign basis contracts to move newly cut beans. As the Brazilian harvest pushes ahead, we would expect that farmer selling/supply will increase.

• Chicago futures take a breather following their post February Crop Report rally. Funds have piled into a sizeable new net long positons in corn, soybeans, soymeal in the past five trading days. In wheat, funds have covered a large share of their net short position. Surging corn and soybean open interest has reflected this “fund buying spree” which should be reflected in Friday’s CFTC Commitment of Traders report.

• US farmers should be sending fund managers “Valentine’s Cards” as they run up prices for new cash sales and boost revenue insurance program average prices. The US farmer is enjoying the Chicago gains as they are able to profit in two forms. In fact, US farmers are pleased that December corn is again taking aim on $4.00/bu, even with US corn stocks far larger than last year and S American crop prospects looking much improved.

• China returned from its long Lunar New Year break with strong demand for S American soybeans, after a January buying hiatus, that resulted from their fear that newly installed President Trump could take a swipe on Chinese trade. This trade swipe never occurred and Chinese crushers were left short bought. Chinese crushers were active in covering their March/April needs and had several weeks of demand to fill. With Chinese crush margins retreating back near breakeven, their buying pattern going forward will be much more normal.

• Chicago markets act tired with fund demand slowing and the US cash market plugged with supply. Spreads are starting to roll over with active May-March corn spreading. The Mexican Parliament has introduced a bill to source their corn from S America, instead of the US. This bill could be voted on later this week in response to Trump calling for a renegotiation of NAFTA. Amid Brazilian soybean yields improving and China’s worry over avian influenza expanding, the market feels like we are close to a seasonal high. This is no place to be bullish.