- The CRB Index held steady on gains from energy and ag markets, while the US$ was little changed. The trend for the US$ appears to be down in 2018 as US Tax Legislation looks likely to stall. A weaker US$ will place a bid under Chicago markets as emerging market economies continue to outperform the industrialised west. One big concern remains China and the reduction of credit availability from the shadow banking sector. A slowing of the Chinese economy would have a big impact on world raw material demand. Research calls for a top in Chicago in the next two weeks with a more sideways trade into the New Year. We would not be chasing rallies with crude oil nearing its upside target of $59-61. OPEC will be meeting in the week ahead and Russia appears to be concerned by the ongoing and large growth in US shale production which has now grown to 9.7 million barrels/day.
- Trade in Chicago soybeans was generally quiet, but firm through the holiday week. January soybeans managed to hold above key moving averages in the first two days of the week, and traded higher into the weekend. Fundamentally, US soybean supplies are record large, while the export pace has turned rather disappointing in recent weeks. However, with the US harvest nearly complete, the market’s focus has turned ahead to the S American growing season and crop yield potential. It is still very early in the growing season, but the size of the Brazilian crop will be key for estimating old crop late season exports. Technically, spot soybean prices broke above and closed near a longer term downtrend line. Commodity funds have been net long soybeans since late September, and the question now is whether this week’s breakout attracts more fund buying or profit taking. It is still very early in the S American growing season, while record large US supplies are known.
- Chicago corn futures ended unchanged, and remain stuck between an excessively large fund short position and a lack of bullish demand news. US ethanol production and exports continue at a record pace, but so far world corn trade is lagging the USDA’s forecast and we strongly doubt that US exports will exceed the USDA’s 1,925 million bu forecast, thereby keeping end stocks at/near 2.5 billion bu. The major weather forecasting models lack agreement on Argentina’s two-week forecast (The GFS is dry, the EU wet next week), and dryness looks to resume in the near term, but amid record carryover stocks Argentine corn exports will be a record in 2017/18 barring crippling drought. Only severe and lasting dryness across the northern third of Brazil in March-May can materially alter the world corn balance sheet. Any significant draw down in US/world stocks awaits the 2019/20 crop year, and whether or not a lasting period of low prices slows acreage expansion worldwide.
- US wheat prices ended weaker, and rallies just do not seem to find any momentum. Amid higher Gulf basis, the US still isn’t seeing much incremental export demand and we note that abnormal warmth will continue in the Black Sea region for another few weeks, allowing Russian exporters to maintain a record pace of export shipments. The world cash market is finding demand at $190/mt basis fob, but seemingly slowed demand above $195/mt. Like corn, the wheat market is stuck until more fundamental input is available. Support will come from funds’ sizeable net short position and less than desirable S Hemisphere weather (Argentine wheat yields are disappointing; too much rain will fall across E Australia in the weeks ahead), while there is no shortage of wheat currently, and high end stocks in the US and Black Sea will buffer against any modest yield loss. Fewer world acres are needed. Wheat is caught in a range of $4.00-4.70 basis spot Chicago futures. It will take a dire weather problem in 2018 to sustain a rally much above $5.70. That means that wheat will remain range bound for the foreseeable future.