- HEADLINES: Market trades both sides on EPA announcement concern over 2020-2021-2022 biofuel mandates; US export sales ok.
- Investment flows have been the theme of the past several days of Chicago trading. Some argue that the inflow is due to early Index Fund rebalancing or the pre-roll as some call it. Others suggest it is new funds coming into the space due to inflation. All we know is that open interest is rising from a 4 year low across Chicago which suggests that it likely is new investment. In year-end reports to fund shareholders, managers will want to see some exposure that helps counter budding inflationary pressures. Bitcoin is not approved by many investment committees, but commodity futures fit the bill. We look for additional fund flows into the ag commodity space into yearend. It is the degree that determines Chicago price action on a day-to-day basis.
- And it is always difficult to figure out the index fund rebalance since reports of how much new capital comes or leaves the space is lacking. This makes estimating the rebalance an educated guess, and in past years the rebalance has shown that the impact on price is always less than originally feared. The biggest re-balance in Chicago is soymeal. But following the big up day yesterday, soymeal open interest declined which argued for short covering. Our bet is that much of the meal rally is due to massive shorts that were covered. Soymeal was the short used against long beans, corn, and wheat.
- Chicago brokers estimate that funds have bought 3,500 contracts of wheat, 6,500 contracts of corn, and 4,500 contracts of soybeans. In soy products, funds have bought 1,900 contracts of soymeal while selling 2,100 contracts of soyoil.
- The soyoil/soymeal spread should be getting close to a bottom. Soyoil will again start to the bullish leader of soy products following the EPA mandate announcements that has produced headline risk. US soybean crush operations have ramped up which is producing additional soymeal/soyoil. The meal production will more than offset the extra demand produced by spot shortages of lysine. The additional soyoil production is being exported overseas to make sure that strong crush margins can persist into early 2022.
- US Export Sales for the week ending November 11 were: 14.7 million bu of wheat, 35.6 million bu of corn, and 50.8 million bu of soybeans. For their respective crop years to date, the US has sold 503 million bu of wheat (down 130 million or 20%), 1,298 million bu of corn (down 90 million or 6%), and soybeans 1,271 million bu (down 608 million or down 32%). The US soybean sales pace is not gaining, and USDA remains far too high with their annual soybean export estimate. We would note that Canada imported a record amount of US corn this week at 12.3 million bu with total purchases rising to 60.8 million bu. We look for Canada to import 6.0 million mt of US corn due to its dire drought and the lack of feedgrains. The competition for supply continues to ramp up for corn/soy in the Dakotas, Nebraska, and Minnesota. Premium basis bids are expected to persist well into early 2022.
- Industry sources report that EPA is expected to announce 2020-2021 and 2022 biofuel mandates before the weekend. No exact timing of the announcement is being offered. The mandate announcements have been anticipated for weeks. The key will be the 2022 mandate since the blending for 2020 and 2021 is nearly completed. By 2007 Energy Bill Law, the Biden Administration must announce the annual mandates by the end of November. There is headline risk when the EPA makes the announcement.
- The midday GFS weather forecast is like the overnight run with below normal rainfall for Argentina and the far southern areas of Brazil over the next 10 days. Moderate to heavy rains will persist across N Brazil with totals of 3-6.00” into Nov 28. The best chance of rain is for Santa Fe during the middle of next week.
- Fund flows cause rallies, but when the buying ceases, prices correct. Cash soybean/corn movement has picked up on the rally with farmers willing to reward the market. However, if a drought were to develop across Argentina/S Brazil, much higher Chicago values would be justified.