- Midday comments:
- Wheat markets made some early gains based upon some short-term weather issues which may potentially impact crops in Australia and Argentina as well as some fund short covering/profit taking, both of which were seen as supportive to prices. The Aussie weather issue relates to some dryness which may take the shine off yields, whereas Argentina (and Brazil) have seen some heavy rains that may result in quality or acreage losses. Informa Economics forecast the Australian wheat crop at 23.9 million mt which is a 900,000 mt reduction from their last figure and compares with the USDA’s 25.5 million mt. Their estimate of the EU crop was increased by 2 million mt to 153 million mt. Despite the foregoing it is hard to dispute that global supplies are big, in fact very big, but there remains the issue of how much of it will make milling grade given the quality issue in France. The outlook for the global 2014/15 wheat crop remains that is set to be the biggest on record with Russian and Ukraine output the largest since 2008 and second highest on record. Forecasts have been growing, and there is no suggestion that the growth is yet complete!
- Corn markets received early support from wheat, talk of reduced acres next year and a possibility of some harvest delays by the end of this week. Despite active soybean/corn spread selling, which is supportive to corn, the overwhelming US crop prospects remain the dominant longer term driver of this market in our opinion. 2015 corn production costs look to be above market prices, and this bodes badly for corn acres which are likely to switch into a mix of soybeans and wheat depending upon geography. The lower corn yielding states are most likely to follow this pattern
- Soybeans found early support to start the week from a variety of factors including the oversold market conditions, frost conditions in N Dakota, dryness in N Brazil and a slowing of harvest in the central and eastern corn belt due to heavy rainfall. Despite these issues, private forecasts continue to support an average US yield of 48 bu/acre plus, which is keeping big carryout numbers in the forefront of the market’s mind. 2015/16 looks as if US soybean acres could grow, which when added to the potential growth in S America (5% is commonly quoted right now) suggests that long-term price upside looks fragile to say the least.
- Evening update:
- The market has continued to push higher throughout the day with feature short-covering across much of the commodity spectrum as Friday’s USDA crop report looms large in trader’s minds. Funds appear not to be making fresh purchases, rather they are “managing” risk on their net shorts, particularly as market technicals are looking a touch more positive in the recent price upswing, as well as the potential for the USDA to spring a surprise later in the week.
- Whilst recent trade in the form of short covering has not been a surprise (indeed we would have been surprised if it was NOT taking place) we are surprised at the voracity of the market appetite. There is a concern that the USDA may incorporate FSA data reducing both planted and harvested corn and soybean acres, and the market is positioning ahead of that possibility.
- Our longer term view remains that we doubt the season lows have yet been scored in corn, soybeans and wheat just yet. There still appears to be too much supply in the world to fuel a significant price rebound, and we have not yet reached the 50% US harvest mark which will (we believe) further confirm this point. At that time we would expect to see the market begin another leg down in price.