- It has been a mixed morning in Chicago with corn, soy and wheat futures trading either side of unchanged. The volume of trade has been abysmal as the market searches for lasting direction. Traders are starting to understand that the market needs data/news to sustain a trend. This is not occurring with the US Government closed. Otherwise, direction is based in cash market trends. Chicago soybeans started lower but were unable to break on the comment from US Commerce Secretary Ross that the US/China are “miles apart” on any trade agreement. The US Government naysayers/China hawks have been out in force since late last week as everyone knows that the “art of the deal” often involves throwing out adverse/chaotic news ahead of any negotiation. That is occurring, but in the end, it is the President of the US that will make the final decision on a deal or no deal on trade with China. Amid the complexity of the issues of IT/IP, our bet is that US/China negotiations will be extended.
- Secretary Ross suggested it is too early to say whether the Administration would push negotiations beyond the March 2 deadline, but economically it is in the best interest of the US/China to keep talking. And like the G20 Argentina meeting, the US will demand that China buy additional ag or energy to prevent the US from raising tariff rates. For China, spending on something is better than spending on elevated tariffs. Our bet is that China will secure grains and likely LNG (liquified natural gas) if the trade talks are extended.
- Brazil’s Parana State estimated their soy crop down at 16.8 million mt vs 19.1 million mt in early December. The loss of 2.3 million mt of production or 12% of yield was based on adverse hot/dry weather. The loss helps confirm a Brazilian 2019 soybean harvest south of 117.0 million mt.
- Chicago brokers estimate that funds have sold 2,100 contracts of corn, 1,400 soybeans, and 1,500 contracts of Chi wheat. In soy products, funds have sold 1,000 contracts of soymeal while buying 2,100 contracts of soyoil.
- Political polarisation has many doubt that the US Government will reopen this month. This means that key reports for cattle will likely not be assembled, such as the annual stocks report as the survey was not sent out. The USDA Outlook forum is also in jeopardy. US TSA workers could collectively walk out for nonpayment, but it is the lack of funding for the US food stamp program in early March for over 42 million people which would likely finally force a political compromise. The US Government cannot hold political hostage forever.
- The midday GFS S American weather forecast is wetter for E Brazil vs. the overnight run. The long-held pattern of a high-pressure ridge across Brazil and a low-pressure vortex across Argentina persists. However, the ridge is weaker allowing several weak cold frontal passes late next week. Confirmation from the midday EU weather model is demanded, but the GFS is featuring better rain chances in the 7-10 day period for parched E Brazil. Argentine rainfall is also heavier as the jet stream is displaced southward. Heavy rains of 4-10” will drop across Central Argentina causing localised flooding (if the forecast is correct). The overnight forecast featured less rain and more uncertainty. The excessive Argentine rains need to be followed with crops in their reproductive phase.
- Chicago traders lack data/direction. World wheat cash prices rising amid a sliding S American soybean basis. March corn has support below $3.75 while the 200-day moving average offers support for KC Mar wheat at $5.09. We look for a continued mixed Chicago trade heading into the weekend with US/China trade and S American weather forecasts featured next week.
- Rosstat, Russia’s Federal Stats Service, released Dec 31 on-farm wheat stocks overnight. These numbers made clear that Russian wheat supplies are smaller than previously thought, particularly near export terminals. On-farm Dec 1 wheat stocks in S Russia were down 42-45% from last year. Stocks were down nationwide, but any real surplus now exists only in the far north Ural and Siberian regions. Exporters will be forced to pay even higher costs to fill export orders moving forward with harsh winter weather adding to their woes. Assuming domestic use is stable and with July-January wheat exports largely known, we estimate Feb 1 total Russian wheat stocks at 31.1 million mt, down over 30% from last year. Feb 1 wheat stock/use is the lowest since 2007/08 and sits barely above 2007/08.
- This is bullish for Black Sea grain prices. We have previously highlighted that interior Russian wheat and flour prices have been moving higher, and rapidly so. The USDA forecasts Russian stocks to reflect just 28 days of use in 2018/19. This suggests interior prices there will hit a peak of 12,400-12,600 Ruble/mt (a new record), vs. current prices of 12,000 in S Russia. Assuming current costs, this puts replacement at $245-250/mt which is above spot fob export offers. Exporter margins have been erased entirely. The only way to relax wheat prices is to boost implied days of use. At this point, this can only be accomplished by dramatically slowing exports, perhaps to 32-33 million mt vs. USDA’s 36.5. this will leave only 7-8 million mt to ship between now and July vs. 17 million last year. And it would be costly to move the wheat from Siberia via rail or truck to the port areas of SE Russia.
- We also again need to highlight the effect of tight Russian wheat stocks on next year’s balance sheet. Beginning stocks in 2019 will be cut in half. Assuming even record area and trend yield, total Russian wheat supplies in 2019/20 are pegged at 82.5 million mt, up a modest 1.1 million on the current year. Perfect weather is needed to keep Russian exports next year at 35 million mt. And notice that days of use rises, but only moderately. 36 days of use is a far cry from 2016/2017. Our point is that the wheat market has found a long-term price plateau between $4.75- 5.75 basis spot CME/KC futures. This price range is expected even amid normal N Hemisphere spring/ summer weather. Black Sea fob prices are not expected to drop below $215/mt anytime soon. Recall in 2016/2017 Black Sea fob prices ranged from $175-185/mt. Our upside in spot futures is; $5.50-5.70 vs spot KC wheat futures. Any new China demand would produce outright bullish US wheat futures into mid-year.