- Prior to our review of today’s trade we thought it worth a look back on how we arrived at today’s starting point:
- Generally sluggish US wheat exports added to yet more discussion around higher than expected Russian output has helped keep the overall fundamental market outlook on the bleak side. To counter this, continued wet weather in France as well as some flash export sales from the US could lend some support but the weight of Russian harvest pressure is dragging the all important cash values lower still with Russia undercutting pretty much every other origin around the world.
- Weekly US spring wheat condition was reported to be 70% good/excellent, the same as last week and 2% ahead of last year whilst the ten year average stands at 66%. There are suggestions that the average yield could well be the best in over 20 years! US Winter wheat is 83% harvested, bang on the ten year average.
- Concern does exist over dryness in Australia, more specifically in Queensland and New South Wales. Whilst there is plenty of time left in their growing season, any continuation of dryness will leave room for crop output to be downgraded, the USDA’s latest forecast stands at 25 million mt, which is already 1.5 million mt below last year. That said, a two or three million mt reduction in the Aussie crop will not have a huge bearing upon global supply as it would sit at the higher end of annual the output range since 1996. On a more positive note (from a UK centric perspective) it appears that the UK may well be in a position to “steal” milling wheat business from France into Algeria in the coming year. Recent wet weather in France being the main driver behind the potential switch. With an estimated UK wheat crop of some 16 million mt, compared with 11.9 million mt last year, the total exportable surplus will grow and it will be up to price to determine the actual volumes that finally leave our shores.
- Soybean markets have been in short covering mode in the light of limited rainfall in the ten day forecast although crop condition and early crop tour reports suggest the potential for record or near record output exists – barring major weather driven disruption. Clearly the crop would welcome soaking rains in the next couple of weeks although the current lower temperatures do reduce transpiration and evaporation and places a reduced stress upon the crop, although this needs to continue into mid-August.
- Soybean condition slipped to 71% good/excellent from 73% last week although the ten year average is only 58% at this time of year. The reduced condition was widely expected and markets have not reacted as it was already factored into prices. There is little in place right now to suggest any sharp move away from the USDA’s last estimated yield of 45.2 bu/acre.
- Soybean export strength continues strong each week. The latest USDA release announced private exporters sold 486,000 mt to China with the bulk from the US, and only 66,000 mt from “optional” origin.
- From a corn perspective, the market has only seen a relatively minor bounce, but dryness is of less concern with the crop pollinated, and it will require harsh weather conditions to avoid very high yields. Recent short covering, on short term dryness, lack of farmer selling and a technically oversold market all conspired to support the market yesterday. Double digit gains in soybeans added to the (crazy) high soybean/corn ratio, which continues to raise many an eyebrow, and tends to suggest there is more downside in beans than corn – maybe!
- Weather and crop conditions generally suggest a bearish lean to the market albeit this is old news. An updated yield forecast is needed as fresh input to a stale market, and this will come in the August report. Many continue to talk of 170 bu/acre plus, and we would expect to see some upgrade in the USDA’s next release. Again, as with soybeans, the corn crop would welcome a rain event of significance in the coming fortnight although lower temperatures will leave crop stress levels well within comfort zones right now. The supply outlook remains bearish in the absence of adverse weather conditions.
- The latest crop condition figures showed a 1% drop in the good/excellent proportion, to 75%, which was in line with expectations and compares with the ten year average of 60%. The crop is 78% silking compared with the five year average of 75%.
- From a macro perspective we could well be looking at a second Argentine default in 12 years, which is hitting their exchange rates. Both Rosario and Buenos Aires Grain exchanges are using lower planted wheat acreages than the government (4.2 million ha vs. 4.5 million ha), despite which would still see a decent crop, the government is still not opening export licences and the market is dead as a consequence.
- In conclusion, the market is clearly trading nearby weather in the US, and unless we see a really hot and dry August any further rally in prices looks to be unsustainable. Higher prices right now will add a stimulus to increased S Hemisphere new crop plantings, which can only be interpreted as longer term bearish.
- Today has seen markets giving back a lot of yesterday’s gains with red the predominant pricing board colour. Wheat in Minneapolis has dipped to contract lows and is likely to drag Chicago lower and with no sign (yet) of a harvest low being set in Black Sea regions as supplies flow steadily and surely to ports and growers report much better than anticipated yields. Our view is that if US wheat can not form a seasonal low, it would be unlikely that corn and soybeans are there yet either.
- Prospects for rain look better with the main forecasts in agreement over the next ten days and cool temperatures likely into early/mid August. Cool and dry conditions followed by rain would be exactly “what the doctor orders” for soybeans as they reach bloom and pod filling and producers continue to report excellent crop condition.