• In a general sense, world raw material prices are rising, to the exclusion of the ag commodity sector. Funds are holding a near record short position in agricultural futures as general ag prices slump. For some reason, food prices are not participating in the world economic growth cycle. Historically, it is food that leads as emerging nation wealth leads to enlarged spending on calories. Some argue that it is abundant world grain supplies and the prospect that NAFTA could be dismantled to the detriment of US trade. One could argue that US ag should be participating in the commodity reflation.
  

• It feels like Chicago fund traders have hit the “pause button” with corn, soybean and wheat futures trading mixed at midday. The volume of trade is far less than Monday’s fund inspired selling spree. That selling was met with strong end user pricing as evident by the 40,000 contract rise in Chicago corn open interest. March corn is back hugging $3.50, March Chicago wheat back to $4.30, while the soybeans languish on intra-market spreading. March soybeans are holding their prior lows against $9.55. We would point out that funds fired considerable bearishness at corn, soybeans and even wheat with large sales on Monday. The market absorbed the selling and is recovering this morning. This tells us that there is scale down pricing from end users, and that even if Friday’s USDA report is bearish, the downside risk appears limited, this is no place to side with the bears. Chicago floor brokers estimate that funds have sold 3,000 contracts of soymeal, while buying 2,400 contracts of wheat and 4,500 contracts of corn. Funds have also bought 1,000 contracts of soyoil and sold 3,000 contracts of soybeans.
  

• Egypt’s GASC received seven offers for wheat with one offer seeming very cheap at just above $192/mt. The offers came once the Government offered assurances that demurrage would not be an issue with any new sales. World exporters object to paying demurrage on any wheat that is sold as fob. Egypt secured 115,000 mt of Russian wheat in the tender.

• Australian Statistical Bureau estimated the 2016/17 wheat crop at 30.4 million mt vs ABARES estimate of 35.0 million million mt, previously. We note that WASDE pegged the 2016/17 Aussie wheat crop at 33.5 million mt, so the difference between the Australian Stats agency and its own estimate is only 3.1 million. We would note that WASDE does not have to follow the Aussie Stats Bureau and can maintain their own estimate of 33.5 million mt. Nonetheless, Research argues that WASDE should lower 2017/18 Aussie wheat exports by 2 million mt to 15.5 million due to its high fob prices amid static world wheat demand. Unfortunately, the loss or gain of 2-3 million mt of Aussie wheat from more than a year ago does alter the bearish outlook for world wheat prices going forward. The world is still awash in wheat with Russia continuing to be aggressive on offers.

• Soybean rust concern is increasing across Central Brazil amid all of the recent rains. The rust is causing producers to reduce their soy yield estimates.

• Chicago is likely to keep chopping sideways into Friday’s report. Brazil’s CONAB will be out with their crop estimates on Thursday followed by the USDA on Friday. We look for a Brazilian soy crop of 111-111.75 million mt from CONAB, up 3-3.75 million from the USDA’s December forecast. Chinese December trade data will also be out overnight along with the Index rebalance at the close in Chicago.

• The fear of a bearish USDA January Crop report returned this morning with the report release being just four trading sessions away. The chant of a “big crop” always gets bigger could be heard across the Chicago trading floor as traders fear a new record yield in corn and a bump higher in US soybean yields. Funds came out of the box with new sales while end users are loath to take coverage unless prices are back near last week lows. Chicago continues to trade in a range. The big question for the bears is whether funds return with additional selling from Friday’s USDA data. Our leaning is not to join the record fund short position, but a bullish catalyst is certainly lacking at the moment to change direction in Chicago futures. Chicago floor brokers report that funds have sold 14,000 contracts of corn, 6,500 contracts of soybeans, and 500 contracts of wheat. In soy products, funds have sold 5,000 contracts of soyoil and 3,100 soymeal.
  

• The Index Fund roll/rebalance starts at the close today. Funds will be buyers of wheat which has helped that market partially recover.

• China has announced that it has cut its poor population by two thirds over the past five years. There were just 30 million of China’s population living below the poverty line in 2017, compared to 99 million in 2012 (according to the Chinese media release). China hopes to bring this total down under 20 million by 2020 and the Government eventually hopes to eradicate poverty. The Chinese expansion of income will boost demand for food and industrial metals. Aquaculture has exploded within China and now produces 2/3’s of the world’s farmed fish. The expansion of food demand is noteworthy and is one reason why the CRB index has turned upwards.

• The USDA January report is just four trading sessions away and fund managers appears intent on “piling on” in their growing net short position. Our concern is that if USDA does not offer any bearish surprises, who is going sell the market lower. Farmers in the US and S America are not willing to sell cash grain on a break.
  

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Weekend summary 5 January 2018

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Fund positions disaggregated data

• Argentine FOB wheat prices are once again the cheapest in the world as the US market has turned higher following the current arctic chill and potential freeze damage that may have harmed the Plains HRW crop. Notice in the graphic below, US SRW wheat prices are still well below all other world exporters, which offers the potential for additional gains. We would note that European wheat exports to date are exceptionally slow, and at some point when French farmers start to unload their stored cash wheat, the EU will become a more aggressive world wheat exporter. US cold weather cannot bull the world wheat market it seems.

• It seems that several days of gains are unwinding in Chicago as corn, wheat and soybeans all sag this morning. Traders are debating sluggish US corn, wheat and soybean export volumes and whether 2018’s S American corn and soybean output will reach last year’s volumes – or not. The USDA’s last WASDE put 2018 Brazilian soybean output at 108 million mt and Argentina at 57 million mt. The trade consensus appears that the Brazilian crop will be 2-3 million above the USDA’s last and that Argentina will be below by 1-2 million. The net result being a combined harvest in the order of 165-167 million mt, which is below last year’s 172 million result. In a market enlarged by greater global demand a crop of this size would put support into market prices, and we would estimate that level at $89.50/bu basis spot Chicago futures.

• In corn the argument is even stronger with Argentina’s crop seen at 39-40 million mt, some 2-3 million below the latest  WASDE, and many doubtful that Brazil will produce 92 million mt. Combined corn output of 129-131 million mt would be some 8-10 million below last year.

• Hedge fund managers see Chicago grains as a cheap play and they could become larger investors following the Jan 12 USDA Crop Report. The macros are bullish for raw material prices. The Baltic’s main ocean freight index surged 6.25% today to $1,341.00. 2018 World freight rates/indexes have been rising amid strong demand for raw materials from emerging nations. The trend is likely to persist into Q2.

• Managed funds are holding their largest net short ag position at year end on record, and the 5th largest net short for any week on record. This heady fund net short ag position started in June, and accelerated into the end of the year. The fund short itself is not bullish, but it will add to upside market velocity if a fundamental trigger point such as adverse S American weather were to develop. The market is set up a little like late June if the January WASDE report does not hold any surprises.

• Morning trade in Chicago has been mixed with corn, wheat and soybeans all trading either side of unchanged. Crude oil pushed above $61/barrel for the first time since June 2015with the CRB Index testing its prior monthly high. The next target for March WTI crude oil futures is $62.58 the early May 2015 top. If this resistance level is reached, and breached, the next upside target would be $75-$80/barrel. Inflationary talk is rife in Chicago and the question of what it means for the grains is, as of today, unresolved. Next week’s January WASE report may offer some clues although it seems the majority are anticipating a bearish report for corn and soybeans. Maybe a neutral or positive report would be construed as bullish.

• First fields of soybeans are being harvested in N Brazil with producers in Mato Grosso reporting yield levels of 55 bags/ha, around two bags below last year. The harvest will be slow to move south based upon planting dates. China appears keen to receive soybean offers for Feb/Mar shipment with some new demand being met by the US. Brazil is slow to offer based upon late planting and a relatively depleted old crop “pipeline”.

• There is a bull story developing in soyoil amid lower yield and a sharp rise in biodiesel demand. Soyoil should gain on soymeal with normal Argentine weather. However, the forecast looks more concerning and drought issues are likely to emerge by mid January. We anticipate hard wheat gaining on soft in the weeks ahead on winterkill concerns and historically low seeded acres. This is no time to be overly bearish corn, soybeans or wheat.

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Weekend summary 22 December 2017

• Chicago prices are mixed at midday with the grains firmer while the soy complex is weaker. The soy complex is still suffering from fund long liquidation in soymeal while funds enter a larger net short position on soybeans and soyoil. It has been a largely technical week with traders squaring positions ahead of the coming Christmas Holiday. Normally, like Thanksgiving, there tends to be some sort of bounce into the long holiday weekend with the shorts always more nervous about their positioning. Chicago brokers estimate that funds have bought; 4,100 contracts of corn and 1,900 contracts of wheat, while selling 3,800 contracts of soybeans. In soy products, funds have sold 3,100 contracts of soyoil and 1,200 contracts of meal. Fund traders have come out of long soybean vs short grain spreads, and are now entering a net short soybeans position.

• US sorghum sales are soaring with another 17.2 million bu sold last week. For the crop year to date, the US has sold 158.4 million bu of sorghum, which accounts for 61% of the projected annual exports. China remains on a purchase pace that they could easily run the US short of sorghum. USDA has already sharply curtailed US sorghum feed and industrial use, making any future monthly reductions difficult. US corn will be left to find larger tonnages of US feed and industrial demand based on the void that stronger sorghum prices are now leaving. US elevators/banks report that US farmers have been larger sellers of cash corn/soybeans as their need for cash increases, and bankers force sales before the New Year. This could account for a portion of the open interest increase in Chicago corn futures in the past two weeks. A “give up” mentality prevails in the country as farmers give up on the prospect of a Chicago rally.

• It is all about the technicals with soybeans lower and the grains firmer. Fund managers want to see if March corn can close above its 20 day moving average at $3.5125 and if better rains can fall across the parched areas of Argentina The holidays and the end of the year loom with many traders loath to take on new positions. The grains should bounce.

• According to the Kansas City Federal Reserve Bank, there is one thing that we can count on in the year ahead; higher fixed and variable lending rates. Whether it is an operating, machinery, or farm land loan, the cost of capital is rising as the US Central Bank raises interest rates and banks foresee greater risk in farm loans after several tough years. Whether this will start to cut into US ag productivity is uncertain, but something to monitor closely in the year ahead.

• Thin demand ahead of the holidays/end of year, and scattered storms across Argentina left Chicago soybean prices drifting lower into midweek. Preliminary volume data showed just over 233,000 contracts traded on Wednesday, which is the thinnest day of trade for the month. Commodity funds were estimated sellers of 5,000 soybean and 4,500 soyoil contracts, and bought 500 in soymeal. In the December WASDE, as the USDA raised their estimate for biodiesel use, they took from export and domestic use, to leave the year end soyoil stocks forecast unchanged. The change in biofuel demand was a nod towards changes in EPA mandates and the Commerce Department’s barricade to Argentine biodiesel imports. Lower domestic food consumption is a trend that has been in place since the late 1990’s. Per capita soyoil food consumption peaked in 1999, and has declined by an average of 2% per year. The USDA’s December forecast implies 2017/18 per capita consumption will decline by the average rate of 2%, and would be the lowest since 1983. S American weather is mixed, but should the EU model be correct, one has to be careful being bearish into yearend.
  

• March corn rallied another 2 cents, driven by another week of enlarged US ethanol production, competitive offers at the Gulf and an otherwise lack of fresh news. The weather models are coming into agreement on Argentina’s weather pattern, and while regional showers of .25-.75” are probable in Cordoba, the remainder of the country looks to face another 10-day period of dryness and warming temperatures. March’s futures 20-day moving average rests at $3.51, a level to be closely watched ahead of the holidays. US ethanol production through the week ending Dec 15th totalled 317 million gallons, down from the previous two weeks, but still some 4% above the same week in 2016. Ethanol stocks are at a lofty 937 million gallons, but ongoing export demand is noted, and has accelerated a bit since late November. Production margins have collapsed amid weakness in ethanol prices, but ethanol’s discount to gasoline is perched at the levels triggered by Texas Hurricane Harvey. Overall, US corn appears to be finding new incremental domestic use, and we expect export sales to be solid in the weeks ahead as Brazilian offers cease and Argentina fob offers are rising. We remain neutral, but need to keep an eye on threatening Argentine weather.
  

• US wheat continues its slow but steady rally on the backdrop of US weather concern and a weaker US$. It is impossible to quantify winterkill and frost/freeze losses, but conditions in the next 10 days will be ripe for talk of damage. Low temperatures this morning fell into the upper 20s across the Plains, and the forecast has trended cooler in all US wheat production areas in the 8-15 day period, and snow cover will be particularly lacking across the S Midwest and S Plains. The EU and GFS weather models are in general agreement that lows in MO, IL and KY will reach the teens and lower beyond December 28. Otherwise, take note that US Gulf SRW has fallen to parity with Argentine wheat, previously the world’s cheapest origin, and there is becoming a noticeable difference between lo-pro and hi-pro world cash offers as supplies in N Europe dwindle. US export sales on Thursday are estimated between 425-550,000 mt. Fund short covering is likely to be a theme heading into year end, and longer term trend/above trend N Hemisphere yields are needed to sustain world end stocks above 260 million mt vs. 268 in 2017/18. 

• Corn cash and futures prices continue to do very little, but at the same time other grain markets are inching higher. Corn has solidified itself as the cheapest feedgrain, in both the US domestic and world export markets. The question ahead is whether abundant corn supplies act as a weight on rallies in other markets, or whether rising wheat, sorghum and world barley prices act as a boost for corn. At the least, 2018 planting intentions, in the Plains especially, are much less certain than they were 45 days ago.

• Tuesday was a slower, but lower day of trade in the soybean and meal markets, that left January soybeans 5.5 cents lower at the close. Funds sold 7,000 contracts in soybeans and 4,500 in meal, and were buyers of 2,500 contracts in the soyoil market. While soybeans and meal have been down this week on fund liquidation, soyoil has traded firm on spreads. Uncertainty over upcoming biofuel demand continues to frustrate the soyoil trade. The USDA’s balance sheet shows that if their soybean crush rate is met, that the soyoil balance sheet will be fine, while a number of analysts contend that the USDA’s biodiesel forecast is still too low. While the USDA has done a good job forecasting biodiesel demand in recent years, the cancellation of soyoil receipts in Chicago has become concerning. Quieter Chicago trade is expected to unfold in the rest of the week, with attention to S American weather forecast.
  

• March corn traded in just a 2-cent range, unable to rally or break amid competing fundamentals. The trade is also debating the accuracy of even the near term forecast in Argentina, and as of this evening the EU and GFS models are still very much at odds regarding rainfall there in the next 5 days. The midday GFS was very wet; the afternoon run of the EU model is nearly completely dry in Buenos Aires, La Pampa and Cordoba. We have detailed in recent reports how soil moisture deficits persist in Argentina, and follow up rain is needed. Otherwise, in spite of weather, S American cash corn continues to rally. Fob basis in Argentina in just a matter of weeks has doubled from $.25/bu in early Oct to $.52/bu currently. Without renewed weakness in S American markets, which isn’t expected until February, we doubt much downside risk exists in Chicago futures. A close above $3.51, March, is mildly supportive.

• Spot Chicago wheat nearly touched its 20-day moving average at $4.26 but ended just short and settled the day a bit weaker. Kansas futures ended higher, and very modest premium to Chicago is noted there. Wheat-specific news is lacking, and like corn S American weather will be the market’s primary driver, but a close eye wil be kept on US temperatures next week. Snowfall expected prior to next week’s cold event. Trace amounts are possible in E CO, W KS and NE, but otherwise complete dryness will continue across the Plains into early Jan. The EU and GFS models are in general agreement that overnight lows in OK, KS, NE and CO will fall into the single digits in the period December 24-26, with another round of possibly colder readings due December 29. It is impossible to quantify winter damage, but such temperatures amid lacking snow cover is far from ideal. However, abnormally warm temperatures will persist in the Black Sea, exports will be ongoing and Russian fob offers are unchanged for an 6th consecutive week at $191-192/mt, vs. comparable Gulf HRW at $198.