10 March 2023

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  • HEADLINES: Wheat rebounds on short covering and corn/wheat spreads unwind; China rumours noted for US corn/soy; Macro markets have ruled this week.
  • Chicago ag markets are mixed with corn/wheat values firmer while the soy market sags. Macroeconomics has been the driver amid the US March Jobs Report that showed February nonfarm payrolls expanded by 311,000, while a California bank that is favoured by tech starts, Silicon Valley Bank (SVB), was closed by regulators. The bank made bad bets on interest rates while there was a run on their deposits by customers. The result is that the FDIC closed the bank and took control of its deposits. Bankruptcy or a merger is in the future of SVB.
  • The US dollar declined sharply on the employment data/SVB news with fund managers looking at commodities with some favour again. The SVB closure and limited wage growth in the March employment report has some economists wondering if the US Central Bank will hit the pause button after raising their lending rate by 0.25-0.50% next week. The flow of funds has been out of commodities this week following testimony from US Fed Chairman Jay Powell that US rates needed to rise further for longer to get inflation down to their target of 2%. There is more stability today with all eyes being on the Tuesday’s CPI report and the market reaction following the Fed’s rate hike. Just a 0.25% rate rise would be seen as dovish and considered bullish to assets.
  • Chicago brokers estimate that funds have bought 4,700 contracts of corn and 3,900 contracts of wheat, while selling 5,600 contracts of soybeans. In products, funds have sold 2,500 contracts of meal and 3,300 contracts of oil. We calculate funds entering a modest net fund soyoil short for the first time in years. There has also been some wheat/corn profit taking this morning. The big rise in Chicago open interest in recent days is being widely discussed, with varied opinions. We all need to see the CoT report a week from today to draw any real conclusions.
  • Commercial traders reflect that China continues to ask for offers of old crop US soybeans/corn on a frequent basis. The unknown sale of 184,000 mt of US old crop soybeans that was announced yesterday is likely for China as it replaces the 1 million mt of Argentine soybeans that were washed of due to the dire  drought. China can only use US or Argentine soybeans to replace reserve soy sales which means that there will be an additional 800,000 mt of US old crop soybeans that will be purchased with shipment off the PNW. This fact along with the Argentine drought its why we raised our 2022/23 US soybean export estimate to 2,025 million bu, 10 million above WASDE. China is on pace to import 99-102 million mt of soybeans in 2022/23 with vessel loadings calling for record imports during both March/April from Brazil. The Chinese demand amplifies the Argentine soybean crop loss as US soybean stocks will be run down to pipeline levels with crushers fighting exporters for supply.
  • We now think of the Chicago soy complex on a flat price, not a spread basis. The world needs additional soybean, soymeal and soyoil supplies. The downside appears to be limited below $14.80-15.00 May soybeans, $470-475 May soymeal and $0.55-0.56/pound in soyoil. Oil share has come in to 37%, but cash soyoil demand will pick up in coming weeks via renewable diesel and it makes little sense to be bearish. Our point is that the Argentine drought has turned the complex into a flat price, not a product spread trade.
  • The midday GFS weather forecast is consistent with the overnight forecast with hot/dry weather across Argentine crop through Monday before widely scattered showers develop across La Pampa and Buenos Aries. Extreme heat will prevail with highs ranging from the 90’s to lower 100’s. Some better rains start to return in the last half of next week with totals of 0.25-1.00”. The time for the rain to do any good is running out.
  • A weakening US dollar would return funds to the long side of commodities (risk assets in general) following the US Central Bank rate hike next week. The Argentine soy/corn drought decline is bullish longer term and should push soy futures to new highs. We see corn/wheat scoring/forming seasonal lows.
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