• Media reports that the US and China are seeking to restart talks to avert a trade war has caused a sharp rally in Chicago soy futures this morning. Corn and wheat have followed with both pushing to new highs. Wheat has rallied above its 2017 and May highs with December corn pushing back against resistance at $3.90. A close above $5.54 in Chicago wheat would indicate a technical breakout with the next upside price target being $6.00-6.25. The next upside price target in December corn is $3.95-4.05. US cash sources indicate that there has been an increase in US old crop corn and soybean sales this morning. However, following big sales last week and today, many US farmers are getting to a “sold out” position on old crop and are more reluctant to add to new crop sales until more is known about 2018 US corn/soybean yields. We look for a higher close, but there has been some midday weakness as the GFS weather forecast is slightly cooler/wetter than what was offered overnight. The potential that the US and China will enter dialogue/discussions is a big deal for the US soybean/grain markets. Remember that if the US/China were to avert a trade war, it likely would include US corn/wheat and beef.

• We would caution that US/China talks are just exploratory in terms being able to set times/dates for face to face negotiations. However, after weeks of “no communication” the news that both sides are talking is a step forward. The markets will be closely watching discussions. The risk for the market is now the reverse of April/May in that you could wake up overnight and find that China and the US have agreed to meet face to face for negotiations. We estimate that there is some 15-20 million mt of Chinese soybean demand to be filled if the US/China could come to some sort of trade agreement.

• World wheat prices just keep rising amid a shortage of supply. Sweden announced this morning that its wheat crop will be down 40%. This normally key exporting country will be an importer in 2018/19. Sweden is just a small wheat producer in the EU, but the message is clear that shortages exist and that farmers will not easily part with their drought reduced crop. French wheat for October is trading above $247/mt with November/December at $250.00. The normally sleepy UK wheat market is priced at $266/mt or $7.25/bu. UK wheat is often more of a feed quality wheat so having a price above $7.00/bu should not be overlooked. We note that many wheat millers are short bought and are shocked by the sharp wheat rally. At some point, short bought millers will have to take extended coverage, and potentially pay even higher prices. EU 2018/19 wheat exports may be no larger than 19-21 million mt due to drought. The loss of EU, Russian and Australian wheat production is going to shift trade flows for months to come. US 2018/19 wheat exports are expected to be back loaded.

• The central US GFS weather forecast at midday is slightly cooler and wetter beyond the next five days. The GFS model added some moisture across the NC Midwest early next week with totals of 0.2-0.6”. Temperatures are also cooler through the weekend. The extended range does not offer a lasting ridge of high pressure for the Great Lakes, but rather has this ridge farther west with its position over the Plains by August 10. The midday GFS ensemble model has the ridge farther east over the Plains/W Midwest with heat building. We would argue that this model has a better handle on the pattern. The EU model will be closely watched going home vs its overnight run.

• Tightening world wheat exporter supplies and stocks will push values higher into early 2019. $5.50 Chicago is not currently producing any demand rationing. US corn will see record large exports while soybeans could leap to $9.50-10.00 with a start of US/China trade negotiations. We doubt that Chicago breaks in wheat/corn can be sustained. The US better have a corn yield of 177-179 bushels/acre to meet demand.

• US wheat futures have been the upside leader in Chicago with corn/soybeans following. December corn pushed above last week’s high, confirming an uptrend, while wheat is back testing last week’s high at $5.5175 in Chicago and $5.53 in KC. There has been selling at the old highs, but we expect those highs to be lifted as world cash wheat markets keep rising as there is a growing chance that the US could sell HRW wheat to Algeria in a midweek tender. World wheat fundamentals are just too bullish to hold wheat at $5.50 for much longer. EU, Black Sea, and Aussie fob prices just keep rising as world millers chase supply. And Russian fob calendar spreads keep widening to push demand to other world sellers/exporters. But those “other seller” fob markets keep rising with Russian offers in kind of a game of “leapfrog”. At their current pace, Russia will have sold out of its wheat exportable supply by November or December, so, it has to become more expensive than the US Gulf. Corn and soybeans are following the rise in wheat with growing concern about regional dry spots across the Midwest. These dry areas will need water in early August or US crop conditions will decline. A record US large US corn yield is the one fundamental that is keeping a cap on world feedgrain prices. Any yield less than 175 bushels/acre opens a much more bullish outlook for corn.

• FGIS (Feed Grain Inspection Service) indicated that for the week ending July 26 the US shipped out; 65.3 million bu of corn, 27.2 million bu of soybeans, and 13.9 million bu of wheat. The US corn and soybean exports were above trade forecasts. The US pace for July soybean exports is record large, which along with record large crush is producing stronger than expected demand for US soybeans, despite the US/China trade war. We are confident that US 2018/19 wheat exports will be back loaded. As other key exporters run dry on supply during the crop year, the demand will be pushed back to the US. Global vegoil traders are closely focusing on Indian weather. India is the world’s largest vegoil importer and should a monsoon failure occur, there would be an immediate need for record imports. The Indian monsoon forecast are concerning into late August while a seasonal retreat occurring in mid-September. Although Chicago soyoil futures are pulling back on meal/oil spreading, the loss of EU rapeseed, Black Sea sunseed and Australian canola does not allow for anything less than a normal monsoon. We see strong support in December soyoil futures below $.2875. The midday GFS weather forecast maintains an arid and warm weather flow into August 10.

• The central US GFS weather midday forecast is drier, which is more in line with what was offered by the overnight EU model. The forecast cut rain totals across the Upper Midwest from IA into WI and including MI and N IN. The model added some rain to C IL and S IN. Mostly dry weather is expected the rest of the W Midwest and the N Plains for the next 10 days. Cool temperatures will end on Friday as the ridge of high pressure in the SW Plains builds north and east on the weekend. This ridge shifts the position of the jet stream northward and produces an arid/warming weather profile. In fact, the position of the ridge is right over the Midwest in the 10-15 day period. Note that our confidence in the extended range is low via run to run changes.

• Traders fear a Turnaround Tuesday and are reluctant to chase Chicago values higher at midday. Dec corn ran up against the 50 day moving average at $3.835 while wheat is back to the 2017 and May highs. An increase in US crop condition ratings would cause a break while any condition drop would keep the rally going amid hot/dry EU and Black Sea weather. Wheat should be the upside leader amid falling world crop production.

• Chicago futures have traded mixed in morning trade with the summer row crops pacing an early advance. Short covering in soybeans/corn have keyed the morning rally while the wheat market follows French values slump to modest losses. The volume of Chicago trade is down from recent days as the weekend looms and EU/Russian and Asian traders are either enjoying or starting their weekends. Chicagohas a feel of wanting to wait for this afternoon’s CoT Report and Monday’s Crop Progress and Condition report before deciding is next move. We maintain that seasonal lows in corn, soybeans and wheat were scored in early July, and that values are ready to push upwards heading into the harvest. For the week and at midday values, Chicago wheat futures are up 19 cents, corn is up 7 cents, with soybeans up 23 cents. The market is building on the gains of the prior week and the longer-term charts are turning upwards. One difference this week is that the fear of an ever-building US trade war rhetoric is slowing/ending. The political winds are shifting following the outpouring of support for Trump following the US/EU tentative trade deal. In spring, Chicago rallies were sold amid US trade war fears.

• The difference is that producers/traders had a fear that the US could raise its trade rhetoric against China (or other countries) leading to a waterfall Chicago decline. Now that the markets have digested the bad trade news and the political winds are shifting, the risk is that US trade deals can be completed that could spark a Chicago rally. The trade no longer fears an overnight waterfall decline. This is sparking more speculative and institutional demand in the Chicago grain room.

• This year’s US corn yield is a major deal to Chicago with world corn supplies/stocks in sharp decline. The world corn stock/use ratio is at a multi decade low which spurs an outlook for record large 2018/19 US corn exports. And the trade agrees that this year’s US corn yield will be a new record at 177-179 bushels/acre (we are not yet fully on board with this one at this stage). The industry has this elevated yield based on weekly US crop condition ratings. Yet, as we all just learned with this week’s spring wheat crop tour, temperatures play a big role in yield determination, and normally excessive spring and summer heat is unfavourable. Central US temperatures from May 1 through July 15 were the warmest on record, which should push the industry to consider a trend or sub trend 2018 US corn yield.

• French consultancy, ODA slashed their estimate of EU wheat production to 124.9 million mt, which is well below most private forecasts that now hug 130 million. Including 6.5-7.0 million mt of EU durum wheat production, it would drop total EU wheat production to just 131.5-132.5 million mt vs the current WASDE forecast of 145 million mt. The ongoing decline in 2018/19 world wheat production is becoming noteworthy.

• The central US GFS weather forecast has added rainfall for much of the Midwest. Seasonal temperatures will be ongoing over the next 7-8 days. High pressure ridging does return to the Central US in the 8-15 day period. The mean position of the jet stream will be lifted abruptly northwards beginning August 5-6. Temperatures will warm to levels 2-10 degrees above normal. Extreme heat will be centered across the Northern Plains, Upper Midwest and much of the Canadian Prairies. Highs there will reach the low/mid-90s Aug 8-13.

• A correction was due in world wheat futures, but we are surprised at just how shallow the correction has been so far. Recall Black Sea wheat cash prices surged on Thursday by $8/mt, with Russian wheat for Nov delivery offered at a lofty $240/mt. This compares to $190/mt last winter. Corn/soy markets await NASS’s first guess on US real yields. We maintain that grains will gain on the soy complex amid tightening world exporter supplies, and the need for sizeable wheat/corn acreage expansion in 2019.

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Weekend summary 27 July 2018

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Fund positions disaggregated data

• We have been advising of reduced Russian wheat production and exports for some while, since May according to our records. The key question going forward is what are minimum stock levels (pipeline) of wheat in a country that has 11 time zones. Are minimum Russian wheat stock levels at 7-10 million mt or is it as small as the USDA argues at 4.8 million. At the USDA total, the Russian stock/use ratio would drop to an incredibly tight 7%. This seems too low for the world’s largest wheat exporter with spring wheat stored in abundance in Siberia. The question is important as it gets to the wheat export ability of Russia in the 2018/19 crop year. Russian 2018/19 wheat exports are cut by the sum of any increased stocks!

• Chica Chicago futures are “pulling back” at midday from strong overnight gains as traders understand that the EU will not buy any more US soybeans than before the US/EU trade deal, and that the N Plains Spring Wheat Quality Tour will end today (Tour Results out this afternoon) with US wheat futures then having to focus on the US’s high price compared to other world sellers. Chicago likely formed its high early in the trading session with the bulls expected to take profits heading into the weekend. It seems that wheat, corn and soybeans had reached initial upside price targets and correction lies ahead into the weekend with US weather nonthreatening. The USDA August Crop Report will become more of a market factor next week.

• Chicago brokers estimate that funds have bought 3,400 contracts of wheat and 4,500 contracts of corn, while selling 2,100 contracts of soybeans. In soy products, funds have bought 2,600 contracts of soymeal and sold 2,100 soyoil. US wheat futures have been following the sharp gains in Minneapolis wheat futures in the past two days based on the Tour’s assessment of a smaller US harvest.

• Minneapolis spot wheat futures have rallied near a weekly downtrend line before starting to retreat. And Chicago and Kansas wheat futures rallied back to the spot May and 2017 highs before retreating. With US wheat sales/shipments lagging well behind last year, traders will take profits on the rally and wait to gauge EU, Russia, Canadian, Australian and Argentine crop sizes. For now, wheat should consolidate its gains and await important world wheat crop updates. Remember that Russia is still exporting record tonnages of wheat with July exports likely to equal a record 2.5-2.7 million mt.

• The US$ has leveled off this week with China slowing allowing its Yuan to slowly weaken. The US/EU trade deal has placed a bid under the €uro, but we see no reason for the US$ to substantially weaken with US rates to continue to rise into mid 2019. The EU Central Bank said today they are on hold for the next year. This means that investors will continue to flock to the US. The US 10 year Treasury note is trading at 300 basis point premium to the 10 year German bund, why not reach to the US for a higher yield.

• The central US GFS weather forecast remains generally favourable for summer row crops. A low pressure trough drops into the Great Lakes on the weekend producing cool/dry weather across the Northern and Western Midwest. As the cooler temperatures push southward, a front will develop between the cool air to the north and the warm/humid weather to the south. This is where showers/storms will fire. The best rain chances are across the C Plains and into the S Midwest/Delta with rains of 0.5-1.50”. Rains return across the W Midwest in the 7-10 day period as a high pressure ridge located in the SW US progresses eastward. The GFS forecast wants to produce a more zonal upper air flow in the 11-15 day period and return a chance of near/above normal Midwest rainfall.

• EU wheat futures are extremely overbought and the weaker closer argues for a US futures correction. Whether the correction is one of sideways or a 15-30 cent drop from a high will help define the next rally leg. US soybeans lack a story and a US yield above 50 bushels/acre could push US 2018/19 soy stocks to a record high. US corn has a strong demand outlook, but it is yield that determines when the rally starts in earnest. Analysts corn yield estimates are all closely bunched together at 177-179 bushels/acre (is this a surprise?).

• Other than understanding that $12 billion will be offered to US farmers to support their income (via the adverse impact of US tariffs and retaliation), the details of the USDA program are lacking or in the works. Yesterday’s $12 billion USDA announcement appeared to be rushed, before the USDA had program details fully worked out. This makes it nearly impossible to gauge the impact of the Trump Farm Support announcement on Chicago markets, other than to state that farmers will not be selling cash grain/soybeans or other products until more is known. There are three main categories of the CCC Trump Farm Income Support Program: 1) Direct assistance payments to US farmers, 2) CCC Food and Commodity purchase/ distribution program, and 3) A program geared to promoting US exports abroad. No allocation of the $12 billion was offered by USDA to the three categories, nor where details about CCC purchases or US trade promoting program are outlined. Some wonder if an export enhancement program is returning. The USDA stated that farmers will need to harvest crops to receive payments, and that monies will start to be allocated in September. Farmers complain that their biggest losses were in old crop, not new crop. And now non-US ag industries impacted by tariffs are asking “what about me?” Fairness is a key to success of Trump Farm Aid, but most producers would rather have the Administration negotiate/end tariffs. The $12 billion is helpful, but the real concern in farm country is the loss of the US being a reliable ag exporter!

• Roaring US wheat futures have set the tone for the morning in Chicago with corn and soybeans in tow. Spot Chicago wheat futures are pushing back to their late May highs with Sept futures reaching near $5.50. This was also the 2017 top for spot Chicago wheat. The €200 /MT price for French September wheat futures and $5.50 for Sept KC and Chicago wheat should act as temporary resistance. However, as US and world wheat stocks fall, even higher prices are in the offing. KC wheat futures have already rallied $0.70, but a test of $6- 6.50 appears likely at some point for a seasonal high. We look for a sharply higher Chicago wheat close, with corn and soy futures following. The big question that some are asking is whether corn prices can keep up with the world wheat rally? There is little doubt that US wheat export demand is coming, and that further downward revisions are expected from the primary world wheat exporter production. We estimate that the Russian wheat crop size could drop another 1-3 million mt, another 5-7 million in the EU, and 1-2 million in Canada and Australia. Combined, world wheat exporter wheat production could decline 8-12 million mt with major wheat exporter stock/use ratios falling to their lowest levels in decades. The market needs to encourage 2019 wheat seeding.

• It appears that the wheat/corn spread is heading to up around $2.00-2.25 wheat premium. Corn will be dragged higher until more is known about US yield prospects. US corn has an export demand story with record US corn sales/ shipments to occur into mid-2019. Thus, we expect that corn uncovers market independence from wheat once the USDA August crop report has passed. A yield under 178 bushels/acre argues that corn prices are too cheap and that values need to reach close to $3.90-4.10 basis spot futures. Corn is a developing demand led bull market, but rallies today are capped by 2018 yield uncertainty.

• Chicago brokers report that funds have bought 9,000 contracts of wheat, 7,000 contracts of corn and 900 contracts of soybeans. In soy products, funds have bought 1,600 contracts of soyoil and 1,200 contracts of soymeal.

• Rumours regarding the Trump Farm Aid package are likely to be widespread in coming days. Today’s rumour is that US soybean farmers could be receiving as much as $1/bu for 2018 production. This would amount to more than $4 billion of the $12 billion package to US soybean farmers.

• The central US GFS weather forecast is wetter in the Plains into the weekend, but otherwise maintains a pattern of dryness and seasonal temperatures across the Central Midwest. A deep low pressure trough drops into the Great Lakes on Friday. This will act to restrict heat across the Corn- Belt, but the flow of moisture will be shifted west and south of key producing regions. Heavy cumulative rainfall (2-3”) impacts E CO, KS and NE, and W MO. Below normal rainfall is suggested across; IL, IN and OH into early August. High temperatures will continue in the 70s and 80s. Temperatures will aid grain/pod fill. The extended range 10-15 day forecast is outright wet for the Midwest, but our confidence this far out is low, with the GFS being too wet for weeks.

• Wheat is the story of the day with US futures up over $0.30 with corn/soybeans following. The USDA August crop report is looming, and a sustained US corn/soybean rally will require the report to reflect average yields. Huge US corn export demand looms, but Argentine offers for now are below the US. This means that December corn will struggle on rallies above $3.80. Soybeans are trapped in a range.

• It has been another mixed day in Chicago, with beans higher and grain markets steady to a bit weaker. Markets have done little after early morning trade, and the highlight today is talk that the White House plans to authorize CCC funds to provide emergency relief to soybean farmers. An announcement is possible after the close, but reportedly the Trump Administration plans to provide $12 billion in aid to soy farmers. No other details are available, and possible strategies have been discussed by the private trade for some time, either direct payments, commodity purchases or export enhancement programs. Many favour the purchase of beans from the market, which may be auctioned off at a later date. Direct payments, while helpful in the near term, won’t change supply and demand and thus actual fair value. Exports to non-Chinese origins already are being enhanced by Gulf bean’s $60/mt discount to Brazilian origin. This is the first sign of action by the Administration, but also indicates that US-Chinese trade issues are expected to linger for some time. The authorisation of this money allows the US to maintain a hard stance on tariffs placed on China.

• We would also mention that soybean export demand should be robust in the weeks and months to come. China will stay absent from the market, but non-Chinese importers are short-bought, and will likely be very active in securing supply moving forward. Current Gulf prices are highly attractive to world crushers.  Brazilian corn exports remain sluggish, and the country’s truck freight issues persist. Permanent freight rates were set to be released last week, but now a decision awaits a public comment period. Higher truck freight in Brazil could be maintained into early 2019, which will hinder Brazilian corn’s ability to compete against cheaper US and Argentine origin. This along with falling EU crop estimates will be a boon for US exporters.

• Private wheat crop estimates in Ukraine are now below 25 million mt, vs. the USDA’s 25.5 million. Of note, EU milling wheat futures have shrugged off early losses and look to settle sharply higher, and new highs for the move. EU corn is following. Gulf wheat’s discount to EU origin will widen this evening. Egypt bought a sizable 420,000 mt of wheat for September delivery from Russia, Romania and Ukraine. Crude oil futures have also reversed early weakness, with spot WTI up $1.00/barrel at midday. Uncertainty over Iranian trade will be ongoing, but we maintain that a sizeable boost in crude stocks is needed to turn bearish below $67. Rising gas prices have maintained massive ethanol blend margins.

• The central US GFS weather forecast at midday is wetter in KS into the weekend but otherwise maintains a pattern of dryness and seasonal temperatures across the Central Midwest. A deep low pressure trough drops into the Great Lakes by late week. This will act to restrict heat across the Corn Belt, but the flow of moisture will be shifted south of major producing regions. Heavy cumulative rainfall (2-3”) impacts E CO, KS and NE Fri-Sun. Little to no precipitation is advertised across MO, S IA and IL into early August. High temperatures will continue in the 70s and 80s. Temperatures will aid grain/pod fill. More rain is needed to maintain record potential across the driest areas of the E Plains and SW Midwest.

• Markets have shown strength on breaks, and our bet is that seasonal lows are in. US row crop yields will be very big, but particularly in the case of corn, larger demand will be offsetting. Ocean freight indexes are rising seasonally, and are up 40-75% from late July a year ago. Global economic growth continues. Breaks in corn and wheat are opportunities for end users. Black Sea and European grain markets reflect shrinking surpluses.

• A mixed start has produced a slightly higher midday trade with wheat pacing the rally. Corn and soybeans have followed, with the soybean market seeing some initial selling based on three cargoes of US soybean cancelations from China. The USDA reported that 165,000 mt of US soybeans sold in a new crop position have been cancelled by China, which would take their known sales down to 1,167 million mt for 2018/19. The USDA in their annual 2018/19 balance sheet implied that China would take few/if any US soybeans in the new crop year. The absence of Chinese demand is one reason why the grains continue to gain on the complex. There is a fundamental bull story for corn/wheat until the US/China can mend their trade differences and we look for a firmer Chicago grain close going home.

• Chicago floor brokers report that funds have bought; 4,300 contracts of Chicago wheat, 3,800 contracts of corn, and 500 contracts of beans. In soy products, funds have bought 3,100 contracts of soymeal while being flat in soyoil.

• US wheat exports stand at 96 million bu or down 41% from last year, with soybean exports at 1,900 million bu or down 83 million or down 4% from last year. The US has exported record amounts of soybeans during April, May, June and the first half of July. The big question is the what will be the US export pace during the remaining six weeks of the crop year.

• EU grain prices continue to rise amid the fear of feed and milling quality wheat shortages. French wheat futures have pushed to their highest price level in three years with the move to 193 €/mt. A close above 192 €/mt sets a technical upside price target of 222 €/mt, an open chart gap on the weekly chart that was let back in 2013. Trade sources in Europe have lowered their wheat estimate to 130-131 million mt of all wheat and 7 million of durum, which drops their total wheat crop estimate to 137-138 million mt, vs the USDA forecast of 145 million mt. What is interesting in the European grain market is that German livestock feeders are willing to pay more for 12.5% wheat than the exporters. The 2-5.00 €/mt premium shows how robust EU feed demand is amid the concern for future feed supplies. French corn prices are rising more than French wheat futures amid the concern for feed supplies. Note that WASDE raised their EU corn production forecast to 61.50 million mt in July. Most see this forecast as 3-5 million as too high, which would raise EU corn imports to 18-19 million mt. This would be a record EU corn import pace with Ukraine supplying much of the corn. Ukraine is forecast to export 24 million mt of corn assuming a 30 million mt crop. We see the Ukraine crop closer to 26 million mt with 2018/19 corn exports of 21 million mt.

• The central US GFS weather forecast is similar to the overnight run with a ridge/trough pattern to hold across the US for another 5-6 days before shifting to a broad ridge/trough/ridge pattern. Then this pattern progresses eastward such that in the 11-15 day period a ridge of high pressure returns to the Delta and the S Plains. This ridge will produce new rounds of heat across the south that has to be closely watched. The 10 day rainfall forecast indicates that a trend of below normal rain will persist for the Central US. Soil moisture shortages will deepen across S IA and MO with below normal rains falling across IL/IN. Better rains are slated to drop in the 11-15 forecast with a strong frontal pass.

• The tightening supply of world wheat and corn is shifting the grain market into a bull demand trend. The US could see record large corn exports with US wheat demand kicking in by October as Black Sea prices rise. We remain bullish on corn/wheat with great ongoing trade uncertainty persisting in soybeans. US corn yields are in retreat with 180 bushels/acre off the table, as far as we are concerned, due to the record heat from May 1 into July 15. Nearby upside targets rest at $5.50 for Sept KC wheat and $3.80-3.85 Dec corn.

• The Commitment of Traders data showed that funds added to their net short Ag position last week, selling 29,701 contracts across the ten principle Ag markets. Once again, most of that selling was primarily in corn, where funds sold nearly 25,000 contracts. Across the other 9 markets, funds were net sellers of just 4,750 contracts. Funds were sellers in soybeans, soyoil, KC wheat, MN wheat, and Feeder Cattle, and were buyers in soymeal, Chi wheat, hogs and cattle.

• Soybeans were on both sides of unchanged through Friday’s trade and marked gains of 3-4 cents on a late day rally. Soy product markets were sharply mixed, with meal closing lower while soyoil closed out the week on the daily/weekly highs. Soy crush spreads were 3-4 cents lower for Friday and were down sharply for the week, with August marking a weekly loss of more than 26 cents. The weekly Commitment of Traders report showed that funds were net short 58,400 contracts in soybeans (-5,150), net long 53,380 contracts in soymeal (+2,050), and net short 90,210 contracts in soyoil (-4,850). Funds are reluctant to give up on their meal position. Increased Chinese trade rhetoric from both China and the US seemed to have little effect on the late week Chicago trade. Markets have fully priced in reduced Chinese exports and appear to be turning focus back to supply and demand. The next major even will be the August Crop Report in three weeks, which will have initial soy yield estimates from NASS.

• Chicago corn has rallied 10 cents off its early July low, and has scored a key upward reversal this week. World barley prices remain elevated. Gulf corn is still the world’s cheapest feedgrain for delivery into September. And the market is beginning to understand the potential for export demand over the next 6-8 months given crop shortfalls in Europe, and likely modest downward yield revisions in the Black Sea and S America. The US Gulf’s export capacity, especially amid reduced bean shipments, will further attract importers. Funds on Tuesday were net short 129,000 contracts in Chicago. This is a record for mid-July and compares to a net long of 105,000 on this week a year ago, and amid the loss of 40 million mt of global end stocks. We view the market as well under fair value. A bottom was scored in early July, and a slow demand-driven march higher lies ahead.

• Wheat futures hit yet newer weekly highs on the heels of rising cash markets in the EU and Black Sea. There is again not much new information, but Matif futures in Paris have broken out to the upside. Gulf HRW remains globally competitive into mid-autumn. Black Sea futures suggest Gulf HRW and Russian will be near parity come Oct/Nov. Managed funds on Tuesday were net long 18,000 contracts in KC, down 2,000 on the week. Work indicates that a long position is warranted amid growing export potential. And a year ago funds were long some 70,000 contracts in KC. Market liquidation has run its course, and we maintain a seasonal bottom was scored in early July. Global weather patterns are little changed. Too much rain will fall across Central Russia into the middle part of next week. Complete dryness persists in Australia. Argentine crop conditions this week are pegged at 38% good/excellent, vs. 66% a year ago. Higher prices lie ahead. Another downward revision in major exporter stocks/use is due in the USDA’s August WASDE.

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

Fund positions disaggregated data

• The latest seasonal forecast from the IRI (International Weather Bureau) offers a trend of continued below normal rain for the Central US heading into October. Temperatures also hold above normal levels with the odds of such warmth being better than 60%. The upcoming spate of rain and coolness across the Central US looks to be an interlude, rather than pattern change. The key going forward is whether the drought stricken S Plains and the SW Midwest receives enough rain to reverse the ongoing dryness. HRW wheat seeding starts in just 8 weeks and moisture will be needed for germination.

• The soybean market continued it’s slow and steady recovery, marking another day of modest gains. Soymeal and soyoil followed soybeans higher, and crush spreads fell to new monthly lows. Funds were estimated buyers of 3,000 contracts each in soybean and soymeal, while selling 3,000 contracts in soyoil. US weekly export sales showed a US soymeal export total that was more than double the previous week and also at a marketing year high. According to the FAS’s count, cumulative soymeal exports for the year rest at 9.6 million mt, up 16% year over year. Outstanding sales at 2 million mt are also record large, and 16% larger. The current pace of exports and sales supports the USDA’s July forecast for record large old crop meal exports. On the other hand, new crop sales are the slowest since 2011. Heading into the end of the week markets will remain focused on US weather and international trade talk. A lasting market bottom requires a trade deal between the US/China.

• Slowly but surely, corn futures continue to extend their recovery. There are a few weather hot spots, namely the S Plains & SW Midwest. Our thesis is that corn is cheap relative to record large demand trends. Ethanol margins are healthy. Export potential is growing amid adverse weather in Europe and across Australia’s barley region. And funds are holding an unusual mid-July short futures position. US export sales through the week ending July 12 totaled 25 million bu. This was at the higher end of trade guesses, and is also double the pace needed to meet the USDA’s annual forecast. Argentina corn yields were lowered slightly. The Buenos Aires Grain Exchange cut its official production forecast to 31 million mt vs. 32 previously. Argentine interior cash corn prices are rising sharply as exporters search for supply. Dryness will be ongoing in France and Germany, plaguing both corn and spring barley. We would highlight the extreme tightness in Australia’s barley market. Complete dryness continues across E Australia into August. A vast majority of Ukraine’s corn surplus will likely now go to Europe. More world demand will be driven to the US Gulf and US 2018/19 corn exports could rise to a record 2,450 million bu.

• Wheat’s recovery continues amid firm world cash markets and mounting concern over Australian dryness. There’s zero rain offered to New South Wales through the next two weeks, and a developing El Niño will restrict any major pattern change into the growing season. Strong storms, hail and exceptional heat have been reported in Saskatchewan. US export sales through last Thursday were just 11 million bu. This is up 6 million from the prior week, but slightly below the pace required to meet USDA’s annual forecast. Russian exporters are active amid steep discounts to other origins. We note Gulf HRW’s premium to Russian drops to $10/mt for delivery in November. This spread will likely narrow even more in the weeks ahead. Note that Black Sea futures have hit new rally highs at $218/mt, basis September. Cash moved up to $208 spot. Fine-tuning the world trade matrix will be difficult amid the loss of yield in Europe and the Black Sea, and amid concern over quality in Central Russia. It remains that the US is in excellent position to boost market share beyond the next 30-45 days.

• Corn, soybean and wheat futures have traded either side of unchanged amid a dearth of fresh news. Tough talk on US trade tariffs has not had any price impact helping to confirm that much of the negative tariff trade news is digested. The Brazilian fob vs US Gulf spread along with value compression in corn and wheat futures is offering Chicago support on breaks. Any additional bearishness will have to be generated by US corn and soybean yield prospects. For now, traders are holding steady or trimming their US 2018 US yield expectations. We are looking for a further fall in US crop condition ratings on Monday as seasonal condition trends are lower and regional weather issues exist. The drought across the SW Midwest is nearing levels not seen since 2012. This compares with excessive rains across MN and N IA. The point is that regional areas of US corn has more than one bad day, and traders are debating whether 2018 will produce another year of US record large yields. We look for a mixed close going home. Chicago floor brokers report that funds have bought 2,100 contracts of corn and 1,200 contracts of wheat, while being flat in soybeans.

• US Economic Advisor to President Trump, Larry Kudlow, speaking at the CNBC Delivering Alpha Conference, indicated that Chinese President Xi could end the US/Chinese trade tariffs at any time by just calling President Trump and offering a better deal. We have no idea what a better deal looks like, that would be up to the chief negotiator, The President. Could it be that the US is likely moving into the deal making phase? We maintain that the political pressure will build on the administration heading into the mid-term election

• Hot/dry German weather is causing sharp downgrades on corn and wheat yields. We are told that yields have dropped so far that that it is barely worth going through the cost of harvesting for some. The demand for German feed is likely to be record large in 2018/19 amid the drought. EU corn imports are likely to rise above last year amid reduced EU domestic feed production.

• Argentine soybean and soymeal premiums are firming as supply availability retreats as the last of their corn/soybean yields have been disappointing. US corn fob prices have dropped below Argentine offers for August. The last of the Argentine corn harvest has produced a sharp yield drop.

• The Central US GFS weather forecast is wetter across the E Midwest. Several cold fronts will pass through the E Midwest under a broad ridge/trough pattern. We believe that the GFS model is too wetand currently favour the EU model, which has been the case for much of the summer. The forecast for the W Midwest and Plains is little changed and arid. The overall NW flow through the Midwest should not produce above normal rain. The best chance of W Midwest rain is with a system on Friday and the weekend that produces 0.25-1.00”. Thereafter, the rain chances are limited to the SE US amid tropical moisture. Cool temperatures will persist with highs in the 70’s and 80’s. Lows will range from the 50’s and 60’s.

• The Chinese Yuan is weakening (again) as China looks to maintain their market competitiveness for manufacturing. An export demand story is in the making for US corn, but amid the US trade tariffs, speculators want to make sure that US corn yield is not above 180 bushels/acre. The August USDA crop report looms large for long term price direction. Our nearby view is for US grains to slowly rise, while soy futures chop in a range. Our belief is that Chicago has scored an early seasonal low.