- HEADLINES: Crude surges; GFS weather forecast trends wetter in Argentina; Wheat importer demand returns.
- Chicago ag markets are higher at midday in thin volume as the trade debates CONAB’s first round of cuts to Brazilian corn and soy production against the midday GFS’s wetter 6-15 day forecast in Argentina. The models are having trouble fine-tuning the coming pattern shift, with the GFS forecast now offering upwards of 5-7” to portions of Buenos Aires Jan 21-26. This is overdone, but not until later this week will the market have a clear idea of exact precipitation totals and coverage in Argentina, Paraguay and S Brazil in late January. What is known is that crop stress in Argentina this week will be incredible. A lasting period of soaking rain is desired in February. Additionally, this week just 29% of soybeans in Parana, the second largest producing state in Brazil, are rated as good/excellent. This compares to 82% a year ago.
- Demand has also surfaced. US exporters sold 100,000 mt of soybeans to Mexico for 2021/22 delivery. Turkey tenders for 355,000 mt of optional origin wheat, while Algeria is seeking a nominal 50,000 mt of milling wheat. South Korea bought 129,000 mt of corn (optional origin) this morning, and so there is no sign that importers are balking at current prices.
- The recent slowdown in physical world wheat trade will be short-lived as trades made in late Dec will be executed in the weeks ahead.
- Russian interior wheat and flour prices have moved very little over the last 30 days, with spot cash flour still perched at or near all-time record highs. Replacement wheat costs in Southern Russia are calculated at $202-205/mt, which along with normal fobbing costs and an export tariff of $100/mt suggests downside risk in Black Sea wheat prices, and thus the world market, is low. We maintain that wheat is an intermediate bottom. Australian domestic prices have also followed world futures higher. This suggests record Southern Hemisphere production has been digested.
- Spot WTI crude at midday is up $2.90 to $81.10 as energy markets are unafraid of Omicron’s impact on global economic growth and as there remains a need to boost production worldwide. Spot gasoline is up $0.07/gallon. Rising energy prices will keep intact global plans to boost biofuel production/consumption and EIA’s report on Wednesday is expected to feature another week that ethanol production exceeds the level need to meet the USDA’s forecast by 10-15 million gallons. Ethanol production margins have fallen sharply from November’s peak. The decline is logical given the spike in profitability in margins in mid-autumn boosted the industry to roughly 95% of capacity. Yet even margins just above break-even will sustain large weekly grind amid the need to prevent additional stocks contraction. Recall US ethanol stocks on Dec 31 were down 8% from the prior year.
- Based on trade estimates, the market looks for a modest hike in 2021/22 US wheat end stocks due to lower exports but does not expect any changes in US corn and soy balance sheets, setting the stage for potential surprises. It is Dec 1 corn stocks and winter wheat seeding that will have the market impact on Wednesday. The USDA, as usual, will be slow to adjust S American crop sizes.
- The midday GFS weather forecast is wetter in Cordoba in the 8–10-day period and is much wetter in Argentina Jan 21-26. Cumulative rainfall of 4-6” is forecast in Buenos Aires in a 48-hour window Jan 24-26, while near zero rain was forecast there this morning. The GFS forecast appears incorrect, but close attention will be paid to each/every model release over the next 2-3 weeks. Elsewhere, a favourably drier pattern develops in Central Brazil. Moderate showers and cooler temperatures are probable in N Argentina next Mon-Thurs.
- The importance of S American crops cannot be understated this season. Be prepared for excess volatility as fair value will be changing rapidly. However, bullish seasonal price trends are expected to hold into Northern Hemisphere seeding.