• Adverse weather for world crop production is supporting Chicago corn and wheat, with trade uncertainty over China providing back and forth price action in the soy complex. The volume of trade has been active with funds on the buy side of the market so far. A deepening drought in the Western US Plains, Brazilian winter corn area, and now the Black Sea is underpinning corn and wheat values. Chicago has been the leader on short covering with hard wheat futures in tow. May Chicago wheat is back testing the March highs at $4.185 with a push above this price likely to cause a push to closer to $6.00, a test of the 2017 highs. July corn is above its key chart based resistance at $4.02 while the soybean market lags. Soybeans are uncertain whether the US will be able to negotiate more than extension of the dispute in meetings later this week. China is not showing any willingness to negotiate either intellectual property rights or a promise for reduced annual US trade deficits with the US. Our bet is for a higher close today with the market adding weather premium to price for a diminished Brazilian corn and Black Sea wheat crops. Seasonal price trends are up into mid May to mid June.

• Chicago brokers estimate that funds have bought 3,900 contracts of wheat, 7,200 contracts of corn, and 2,800 contracts of soybeans. In soy products, funds have bought 2,800 contracts of soymeal while being on both sides of the soyoil market.

• The Black Sea and Brazilian weather forecasts are little changed from the overnight run with ongoing dry weather offered for the next ten days. The developing SW Russian and Ukraine dryness is a worrisome trend.

• The midday GFS weather model forecast is drier across the northern portion of IA/S Minnesota with rain totals of no more than 1.00” with SE IA, N IL, and S WI still seeing rains of .5-1.50” with a frontal pass due from late Tuesday into Thursday. Kansas and much of the Plains see just a few spits of moisture this week which deepens the drought with rising temperatures. The best chances for a Plains rain event does not occur until the final days of the 11-15 day forecast, but our confidence that far out is extremely low. The Midwest will see fair/warming temperatures from Friday into the weekend with a few showers early next week. That rain does not look exceptionally heavy with totals of .2-.6”. Any corn seeding delays will be modest with additional Midwest dry weather next week.

• Adverse Brazilian and Black Sea weather looks to support any Chicago corn/wheat correction. US/China trade negotiations will determine late week soy price action. Our concern is that China will be unlikely to sign any US sponsored deal since they do not see that they are doing anything wrong. As such, the grains will gain on soy with wheat being the upside leader on a shrinking Black Sea crop.

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Weekend summary 27 April 2018

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

Fund positions disaggregated data

• Chicago corn, soybean and wheat futures have been strongly higher this morning on the potential for reduced trade tensions with China, limited US farmer selling (busy planting their new crops), and worry that world wheat production is starting to decline. Moreover, a cargo ship has collided with a dock in the export hub of Rosario in Argentina which has added to the rally. Chicago has a firm tone this morning and a higher close is expected, but the highs for the day likely formed as the Rosario port collision was rumoured.

• Chicago brokers report that funds have bought 12,000 contracts of corn, 5,500 contracts of soybeans, and 4,800 contracts of Chicago wheat. In soy products, funds have bought 4,600 contracts of soymeal and sold 3,000 contracts of soyoil. The funds continue to pile into a larger net long position in soymeal and a huge net short position in soyoil. FAS did not announce any US daily sales. China remains starkly absent as a US soy buyer which is likely a “trade posture” ahead of next week’s meeting.

• We would remind that that China will be out on holiday from Thursday through Monday, with European and other Asian clients out from Friday through Monday. The May Day Holiday is a big spring holiday for everyone but the US. This along with key moving averages being crossed this morning, has sparked a large amount of new speculative buying. 

• Producers report that seeding has become active across C IL, MO, IN, and the southern half of IA. Producers across the north (including the Dakotas) are hoping to go later this week. IL farmers report that they will be able to plant 10% of their corn crop in a day, and should the weather hold, they could be completed with their seeding by May 7-8. 

• The Chicago wheat market is starting to pay more attention to conditions of key overseas producers. The Eastern Australian drought is deepening with the forecast calling for another two weeks of heat/dryness. The Argentine farmers are fretting about too much rain, while Europe is warm/dry with soil moisture being short. And in Russia, crop estimates are falling with most at 73-78 million mt vs last year’s harvest at 85 million. It is hard to be bearish of wheat in May.

• A cargo ship has collided with a loading dock on the Parana River which has caused some damage to the northern loading dock. The southern dock is operational, but some estimate that it will take 4-8 weeks to fix the northern dock damage. More information is needed for a full assessment of damage.

• The midday GFS weather model update shows that the forecast is drier across the W Plains with the GFS model shifting rain potential to the Midwest and Delta. There is a good chance of soaking rain across E OK, but otherwise, the Plains drought looks to deepen with temperatures warming. Highs next week look to reach the 80s/90s which will add acute stress to HRW Plains wheat. The Midwest will see a chance of rain next Tuesday/Wednesday with totals of .25-1.00”. This rain will not produce any lasting seeding delay. The good news is that the N Plains and N Midwest will be dry next week which will facilitate a more active spring planting pace. The 11-15 day forecast is drier and more in line with the European model solution.

• It feels as if a seasonal low was scored on Monday, and higher prices are anticipated into late spring. However, there will be setbacks on the improved Central US weather forecast and the rapid spring seeding campaign.

• Ag markets have rebounded from overnight losses as for the first time in days. FAS announced that US exporters have sold 130,000 mt of beans to Argentina, of which 60,000 is for old crop delivery. Spot crude is flat at midday, and updated weather forecasts maintain complete dryness across nearly the whole of Brazil’s safrinha corn belt over the next 10 days.

• There is talk that US trade representatives are considering a trip to China to discuss ongoing barriers in person. Not much else is known about this trip, but in the meantime ample concern persists regarding the pace of new purchases of soy made by China over the next several months. Trade remains a serious issue, and will keep new buying limited until progress is made or unless another round of cool/wet weather develops mid/late May.

• Australian cash wheat prices this week have found yet newer seasonal highs at $231/mt out of South Australia for nearby delivery. Still no rain is advertised in any part of the Aussie wheat belt in the next two weeks. Rainfall in South Australia, New South Wales and Queensland (roughly 60% total wheat production) since January rests at just 10-50% of normal, and now there is some concern over a slow transition to a weak El Niño by late 2018. The loss of HRW production in the US, and an ongoing tight wheat balance sheet in Australia will push yet more consumption to the Black Sea, and likely keep fob offers there well supported on breaks. We also note that HRW basis in Kansas City this week is even with KC futures, and positive basis is very possible just after harvest. This reflects a noticeable change from recent years. HRW basis in KC on this week a year ago was a negative 45 cents. Our point is that chasing breaks in wheat is not advised at current prices. Seasonal price pressure in Russia is not due until early summer.

• Key on Wednesday will be whether US crude stock levels shrink yet again, and another week of solid US ethanol consumption is expected. Futures-based blending margins have now exceeded the levels of Hurricane Harvey, which is impressive, and ethanol futures below $1.50 are cheap. There is talk that the US and France are close to reaching a deal with Iran, possibly avoiding new sanctions, but fundamentally we doubt that OPEC will ramp up production in the near/medium term. Crude is, in our opinion, fairly priced above $60/barrel.

• The midday GFS weather model update hints at regional shower activity in the Central Plains late next week and into the following weekend, but so far no other model has followed this trend, and amid last week’s fine-tuning of Plains rainfall, confidence beyond 6-7 days is limited. In the meantime, mostly dry weather and steadily warming temperatures will be established across the whole of the Central US into May 1. High temperatures next Tuesday/Wednesday are forecast in the 60s and 70s as far north as NE, IA and IL, and as far east as IN. Soil temperatures in IL continue mostly in the upper 40s, but excellent seeding progress will be made beginning early next week.

• The markets’ back and forth price action continues, and is expected to remain as such into the release of the May WASDE report, because there is just no compelling evidence to support large new positions. Longer term, however, a heavy burden has been placed on N Hemisphere yields, and Brazilian weather needs very close watching.

• Markets are widely mixed at midday, with the soy complex weaker amid another day lacking any new export sales announcements and with grains steady to higher. Plains rainfall over the weekend was a bit spottier than expected, and midday models lack any follow up rainfall into the first week of May, suggesting any drought improvement will be shallow and brief. NASS’s crop report this afternoon is expected to lean a bit bullish (and Central US temperatures currently range in the low 50s and low 60s) , but the trade is well aware of coming warmth, which looks to begin during the latter part of this week. Macro markets at midday are similarly mixed. Spot WTI crude is down $.25 at $68.20, well off session lows. The US$, however, has extended its rally, with a host of major exporting currencies (Russia’s Ruble in particular) declining in value. And like last week, other fresh meaningful news is tough to come by, thus allowing for speculative position squaring more than anything else.

• We would mention that broad support in energy markets continues, and futures-based ethanol blending margins have found new rally highs at just over $.06/gallon. This compares to $.04 in early March and flat to negative margins in April a year ago. Production and total ethanol disappearance will stay elevated relative to recent years. 

• Stats Canada publishes its first new crop Canadian acreage estimates on Friday, and it is expected that intended canola (rapeseed) area this spring reaches a new record 24 million, vs. 23 last year. Other cropped area is expected to be steady to lower. The N American weather pattern through early May includes a fairly slow warming east of the MS River, and across the Lake States, but much of W Canada will see highs this and next week reach into the mid 70s. Farmers will be active across the Prairies beyond the next few days.

• The whole of Brazil’s safrinha corn belt will see little to no rainfall in the next two weeks, elevating odds that the wet season there has ended entirely. Assuming the forecast verifies, we peg April 1-May 7 precipitation in Mato Grosso, Mato Grosso do Sul and Parana at a meagre 2.2”, vs. 5” last year and 4.5” on average. Note that April/early May rainfall in 2016 was 2.7”.

• The midday US weather forecast is little changed from the morning run. Below normal temperatures continue for another few days, but a much more seasonal temperature profile will be established by Sunday/Monday, and this warmth will be much more lasting. Mostly dry weather persists across the whole of the Central US into May 2-3, after which the GFS forecast hints at widespread soaking rain across the far E Plains, Midwest and Delta.

• In recent days market focus has been on improved US weather and ongoing China-US trade issues. Structurally, it remains that big N Hemisphere crops are needed to turn bearish, and so we caution against chasing breaks.

• Managed money cut their net long ag position to 281,000 contracts, down 15,000 in the past week. The attached charts reflect this position, as most fund managers are holding tight to long corn, soymeal, and soybean positions. The positioning of funds is different from last year when they were short 360,000 contracts and built a record short in late June. The risk in the current market is one of a deepening of the trade dispute with China and long liquidation. The large fund length caps rallies without a strengthening cash market. The US wheat market is vulnerable to short covering amid a deepening Plain’s drought. 

• Soy futures were mixed at the end of the week, with soybeans sliding lower on thin market news and light technical trade. Old crop soymeal contract moved the other direction and were steady/higher at the close, which put crush spreads up 7-9 cents. The Buenos Aires Grain Exchange on Thursday estimated harvest progress at 40% complete, well ahead of last year but also right inline with the five year average. Early reported yields have average 2.46 mt/ha (37 bushels/acre) or 31% under last year. The Exchange slightly increased their abandonment rate to 4%, though we note that the last two major droughts have seen abandonment at 6-8%. The Exchange estimates a yield of 2.21 mt/ha or just under the USDA’s 2.29 mt. Seasonally slow export demand and large supplies has weighed on soybean prices this week. On the other hand, soymeal exports remain strong which is driving margins and processing rates. Until the crop is planted and more is known about growing season weather, we see the soybean trade stuck in broad trading range.

• The corn market continues to remove weather premium, and increasingly it looks like a majority of the crop could be seeded by the middle of May if current weather forecasts verify. Soil temperatures will be slow to warm across much of the Plains and Midwest, but highs look to reach into the low/mid 70s in the first week of May, and there has been research showing corn crops can be seeded ever faster given improvement in technology and management practices. Argentina’s harvest is also occurring smoothly. This is of course mostly due to a smaller crop size and accelerated maturity this year, but Argentina could satisfy its domestic needs in the next 2-3 weeks, and as such export offers have become more aggressive, and are slightly below Gulf corn for July and beyond. Brazilian cash basis firms as concern is mounting with respect to expanding dryness there. We anticipate corn prices to ebb and flow as summer approaches, but caution against turning bearish on breaks. Dominant long term features of the corn market include another potential for contraction in global corn stocks in 2018 without perfect weather, and there is a growing concern that Brazil’s wet season has ended prematurely.

• US wheat futures ended sharply lower ahead of this weekend’s rain event, and as follow up showers are possible in the first week of May, although the weather models are in poor agreement on this as of right now. Also of note, the US$ rallied, while major exporting currencies ended weaker. Russian profitability is rising, which may boost farmer sales. US wheat remains poorly positioned in the world markets. Funds in Chicago on Tuesday were short a net 50,000 contracts, down 5,000 from the prior week, but we estimate their net short position this evening closer to 75,000, a ten-week high. It’ Is tough to get overly bearish given such a large fund short, and a close eye needs to be kept on EU AND Black Sea cash offers to measure downside risk. US Spring wheat seeding through Sunday should reach 6-8% complete, vs. 34% on average on April 24. Winter wheat ratings should be little changed and still historically low, though won’t fully account for coming rainfall. There is just no compelling reason for spot Chicago wheat futures to trade outside of $4.75-5.10, basis July, and HRW production remains concerning. Much more rain is needed, and recent dryness, heat and cold have taken a dramatic yield toll. This is no place to be taking a short position in our view.

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

Fund positions disaggregated data

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

Weekend summary 20 April 2018

• Wheat has been the morning upside leader, with corn following and soybeans trading either side of unchanged. The volume of Chicago trade has been diminished as traders debate the impact of weather and politics on price. Traders fear that President Trump will raise the Chinese on their pending duties on US sorghum, by announcing a list of $100 billion of potential tariffs against Chinese goods at some point. And President Trump indicated that returning to the TPP (Trans Pacific Partnership) was not in the interest of the US. Bilateral trade agreements look to be the new working model for US trade into 2020. We anticipate a firmer close in the wheat market with the summer row crops closing mixed. Few have any real passion for new positions until more is known about May Midwest weather and whether the US places actual tariffs against Chinese goods in late May. FAS did not report any new sales today. New US daily sales announcements have been lacking for the past week. Cheaper S American corn, European wheat and S American meal is keeping fresh US export demand constrained.

• Chicago brokers report that funds have bought 3,200 contracts of Chicago wheat, 2,500 contracts of corn, while being on both sides of the soybean market. In soy products, funds have sold 2,100 contracts of soymeal while buying 1,900 contracts of soyoil.

• Brazil has announced that it has harvested 90.5% of its soybean crop with remaining bushels to be cut in far Southern and Northern Brazil. Bahia has harvested just 62% and RGDS just 70% of their soybean crops. All other areas are either finished or nearly so with cutting the 2018 soy crop.

• Open interest (OI) in May Chicago futures is historically large. May corn OI was 338,032 contracts, May soybeans 25,990 contracts, and May Chicago wheat OI at 85,615 contracts. We note that 1st notice day is only eight trading days off and liquidation is expected with option expiration on Friday. Fund length and large May open interest will act on a drag on Chicago rallies.

• US farmers have invested heavily in planting equipment in recent years and most producers can seed as much as 10% of their corn crop in a single day. Thus, when weather allows with warm/dry conditions, Chicago is not going to react favourably as seed reaches the soil. Midwest corn yield drag does not occur until after corn is seeded after May 10-15. Thus, Chicago will not place much weather premium in price until the calendar reads May 1. US ethanol production fell to 1,009 thousand per day from 1,034 last week.

• The GFS weather forecast for the US is like the overnight run and drier across the Central Plains with rainfall totals of .25-1.50”. Any rain that is greater than 1.00” (across Kansas) is no more than 40% of the area. Rains across the remainder of Kansas looks to range from .15-.85”. Rains across OK/TX have also been trimmed to traces to 1.25”. Some secondary light rain is possible from late Monday/Tuesday across Kansas and the North Central Midwest. Mostly dry weather is evident across IL/IA/IN/OH. Soils will be drying and producers will be waiting for warming soils before planting commences. Warming and dry weather will favour the start of active spring seeding late next week. 60- to 70 degree temperatures stream northward from Texas to the Dakotas and east to Illinois after Apr 25. The extended range forecast is changeable.

• Chicago lacks direction as traders are waiting for fresh news on the US/China trade and Central US spring planting conditions. HRW wheat will not see enough rain this weekend and frequent rains will be demanded through heading. The Plains Quality Wheat Tour starts on the 30 April. Our bet remains one of sideways trade without any passion, at least into May 1. We look to buy any price break as planting starts.

• Chicago futures are lower at midday as traders take off risk ahead of the weekend with rain slated to drop across the S Plains late next week. Kansas wheat has been leading the decline in recent days as the market extracts weather premium. The rain will be important for wheat values late next week, but the models appear to becoming confident in its arrival. The tone of the market feels heavy at midday as weather/political concerns exist. The market is uncertain on the US’s reaction to Syria and what will happen in the rain forecast for the Plains and Midwest. Moreover, US/China trade issues are likely to deepen as progress in the past two weeks has been nearly nil. Research view has been sideways with extreme volatility continuing. Don’t chase rallies or sell sharp breaks is our view. 

• Chicago floor brokers report that funds have sold; 6,000 contracts of corn, 4,600 contracts of soybeans, and 4,200 contracts of Chi wheat. In soymeal, funds have sold 2,800 contracts of soymeal while being flat in soyoil. The funds continue to pile into a larger net long soybean/meal/corn position.

• There were no new sales announced thru the USDA Daily Sales reporting system this morning. This was a surprise to some traders. Rumours continued to cicrulate  that Argentina had purchased additional US soybeans, but US exporters have not offered such confirmation (other than the cargoes that sold late last week and Monday). One cannot pencil a profit on US soybeans into Argentina with the products to be exported The lack of a crush profit will keep Argentine import totals of US soybeans subdued for now. This is not to say that a break in US soybeans would cause the calculation to go positive, but we doubt that Argentine crushers will take on the risk without a healthy import margin. Brazilian fob soybean basis has corrected sharply this week as US and China headlines on trade were replaced by other political issues like Russia and Syria. Brazilian fob soybean offers are at $1.30 over for July (compared to $1.95 over last Friday), while US soybean fob rose to $.92 over. The spread at $.38 over is far less than $1.00 plus from last week. EU crushers are not interested in shifting their sales to the US at such a fob vs fob spread. Note that Brazilian soybeans normally trade at a $.15-.20/bu higher value vs the US due to its higher soyoil content.

•  Chicago corn prices have had trouble rallying this week to the surprise of the bulls as the Midwest seeding is delayed. However, Brazilian fob corn has declined and is now cheaper than the US Gulf at $187.50/mt for July. US Gulf corn is priced at $194/mt, or $6.50 higher. The Brazilians are starting to aggressively offer corn and offering a cheaper alternative to US corn.

• The midday forecast is cooler than the overnight solution with the Plains rain pulled northward by 100-150 miles. Three storm systems will be passing through the Plains and the Midwest over the next 14 days. The first storm (this weekend) will produce a blizzard across the Plains and the Upper Midwest. Snow totals look to exceed 20” in some locations. Rain totals elsewhere range from .15-1.25”. The remainder of the Plains sees just a few spits of rain while temperatures drop to late winter like levels of the 20’s and 30’s. A weak second storm is evident for the NW Lake States on Wednesday/Thursday with potent looking system for next weekend. This system looks to produce .3-1.25” of rain for the S Plains (coverage 40-50% of the HRW wheat crop). Additional systems to follow with cool temperatures lasting into late April.

• Traders are cutting their risk in a host of markets, excluding energy where this week’s close will be the best in years on Mideast political concern. This is a headline marketplace and we see no reason why that will change. This week, Brazil has become a more aggressive seller of winter corn, while soybeans were not able to poke above their winter spot high price. In wheat, its all about Plains rainfall amounts.