• Managed funds as of last Tuesday were short a combined 355,000 contracts of corn and wheat, which is by far a record. In our view there are more than enough questions over 2018 US and global grain surpluses to trigger periodic short covering rallies and, really, not until late spring will S America’s corn export potential be solidified.

• Following a higher start to the morning, soybeans quickly turned down, shrugging off the morning’s export sales announcement and inspections data. Soymeal is where funds still hold the largest position, and it was the meal market that lead prices lower. Commodity fund traders were estimated sellers of; 8,000 soybean, 3,500 soymeal, and 2,000 soyoil contracts. Ahead of the morning open, the USDA announced export sales totaling 14.6 million bu to China. Other trade news for the morning included the weekly inspections data that showed that soybean export inspections were well above expectations and totalled 65 million bu last week. Cumulative inspections for the year are now at 950 million bu, or 141 million (13%) behind last year’s export pace. Funds started the week cutting back their meal position and selling out the rest of the soybean position ahead of the end of year holiday season. The near term Argentine weather forecast are favourable, while the extended outlook turns hot and dry. Key chart support sits just under the market.

• Corn futures ended steady again, and unlike beans are not extracting weather premium from price. As we have mentioned in recent days recent and upcoming rainfall in Argentina is incredibly important, but so too is the US Gulf market’s position in the world market. Real weakness in cash prices in Argentina isn’t expected until the first crop is harvested in early February. In the meantime we fully expect the US to be world’s go-to origin. US exporters also sold another 168,000 mt of sorghum to China this morning, and China’s appetite for US sorghum will not be slowed at current prices. There is still a sizeable margin for sorghum imports, and room for an additional rally in sorghum prices worth $20-30/mt, basis US Gulf offers. Sorghum basis across the interior US is atouch stronger this week, and the goal of that market is to secure additional acres in 2018. Note, too, that excessive heat in E Australia may trim sorghum yields there. Funds maintain a sizeable net short position (still near-record large), and there are enough questions over S American surpluses and US acreage to keep downside risk limited at current prices.

• US and European wheat futures ended slightly higher, mostly amid a noticeable lack of new selling. As of last Tuesday managed funds were short a near-record 158,000 contracts in Chicago, and were short a record 32,000 contracts in Kansas. Meanwhile, HRW basis levels continue to strengthen and there are hints that a much colder (or seasonal) temperature pattern lies in the offing in Ukraine and S Russia in late December. Without near perfect weather next spring, the US balance sheet will be tightening further, perhaps substantially. Meaningful rainfall remains absent from the Plains forecast into the opening days of January, and close attention needs to be paid to overnight low temperatures next week, and longer term, and an unstable Polar Vortex is likely to trigger additional rounds of frigid temperatures through the winter. A demand spark is so far absent, but funds’ short positions in mid-December suggest a vast majority of bearish news has been accounted for. New selling must be led by the cash market, which unlike recent years is firming.
  

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Weekend summary 15 December 2017

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Fund positions disaggregated data

• Next week’s Argentine rains are extremely important for their corn/soy yields. Weather modeling argues that some damage has already occurred to the Argentine first corn crop that will pollinate in the next 21 days. Also the delay in soybean seeding is also producing a modest yield drag. The maps below reflect Argentine soil moisture as of December 11. In particular, subsoil moisture has been in fast retreat in the past two weeks, thereby raising the importance for a soaking, not just passing rainfall event. 

• It has been a morning of grain vs. soy spreads as hedge fund managers start to come out of long held positions. Funds have spread long soybeans against grains going back to late summer, which has generated profits. Funds desire to close a modest portion of the position which has pressured the complex and produced a bid under the grains. The volume of Chicago trade has been low and most are not looking for any excitement into the holiday’s unless S American weather forecasts change. Chicago brokers estimate that funds have bought 2,300 contracts of corn and 2,100 contracts of wheat, while selling 4,800 contracts of soybeans. In soy products, funds have sold 3,100 contracts of soymeal and bought 800 soyoil. Chicago meal and soybean prices are also being pressured by chart based considerations with soybeans under an uptrend line and January meal testing the November 30 low at $322.50. A drop below this support would potentially confirm a top.

• Rumors of a potential reinstatement of the $1.00/gallon US Biodiesel tax are being heard this morning. This is due to several ag state senators fighting hard for its return in early 2018. Senator Grassley from IA has been a strong proponent of the biodiesel credit and congressional staffers are raising their odds that the tax credit could return and be retroactive. It is something to watch heading into the Christmas break.

• The Rosario Commodity Exchange raised their wheat crop estimate to 17.3 million mt from 16.3 million, left their corn crop estimate unchanged at 41.5 million mt, and slightly adjusted their soybean crop estimate up to 54.5 million mt from 54.4 million due to larger seeding. USDA Argentine crop estimates are all higher. 

• The lack of any truly fundamentally-supportive developments in the USDA numbers allowed the grain/oilseed markets to slip lower yet again. While the USDA failed to lower their U.S. corn export projection, the expected increase in ethanol demand was not nearly enough to excite the market, while the lowering of the U.S. soybean and wheat export projections simply brought further highlight to the weak export picture. Without a dramatic change to S American weather prospects, the latest reports may set the stage for continued defensive price action into the USDA’s January 12 all-important set of reports.
  

• On the sharp break in Kansas and Chicago wheat futures, cash basis levels have soared amid tightening supplies of quality wheat. We do notice that Kansas cash wheat basis is now at its best levels in three years amid the recent $.50/bu basis advance. The basis rally has caused Kansas wheat to trade at a premium to Chicago wheat for the first time in a month. Funds appear to be willing to build on their net short in Chicago more than in Kansas. The cash basis rally is the first sign that one needs to be careful about being too bearish wheat with key support noted in Kansas futures basis March around $4.00.

• It has been a low volume and slightly higher trade in Chicago corn, soybeans and wheat this morning. Surprising soymeal vs. soyoil spread trade is occurring as soyoil futures retreat back to last week’s low. Wheat has been the morning upside leader on short covering and reduced precipitation chances for the parched Plains next week. Chicago volume has been modest and a mixed to slightly higher close is expected. December Chicago futures contracts go off the board today with either January or March taking their place on the spot continuation charts.
  

• The US Central Bank will likely announce an interest rate hike this afternoon, just before the Chicago close at 1:15 PM CST. Chicago brokers estimate that funds have bought 2,600 contracts of corn and 1,900 contracts of wheat, while selling 1,200 contracts of soybeans. In soy products, funds have sold 3,500 contracts of soyoil and bought 1,100 meal.
  

• Brazil will allow Russian wheat imports via decree, which Brazil hopes will help normalise meat trade with Moscow. The US is the loser of the decision with US HRW wheat unlikely to be sold to Brazil in future crop years when there is a shortage of Argentine HRW wheat. The move further helps Russia solidify its position as being the world’s wheat exporter.
  

• Goldman Sachs Inc is reaffirming its bullish call on commodities and raw material prices for 2018. Goldman is forecasting returns on commodities at 10% and expects a bullish landscape based on the GDP expansion of emerging nations. In particular, Goldman is forecasting that energy prices will rise 15%, which should be favourable to the US biofuel industry. We feel that hedge funds will position long in key commodity markets in late 2017 and early 2018.
  

• Argentina will place an 8% tax on biodiesel exports starting in 2018. Over the years, the Argentine Government has moved back and forth with taxes that range from 0-12%. The latest hike should not be a surprise; in fact, we do not expect the tax to have any impact on US duties on Argentine biodiesel that will be officially ratified into US law for the next five years in February.

• There is something of a demand bull story developing for soyoil amid limited biodiesel imports (duties) and a US mandate of 2.1 billion gallons. Cash US soyoil stocks are tightening amid the enlarged domestic demand. Chicago corn and wheat futures are higher as open interest surged on Tuesday and funds are holding a large net short position. US corn exports are showing new life amid higher S American fob offers. Next week’s Argentine rains will be important in terms of amounts and locations. 

• The USDA December Crop Report was seen as mixed to slightly bearish with WASDE deciding to cut US wheat and soybean exports in the 2017/18 crop year, while raising ethanol demand in corn by 50 million bu. In aggregate, the December WASDE report is unlikely to alter prevailing Chicago sideways price trends, with the only real winner being US biodiesel which saw a noticeable rise in use while exports were trimmed. The WASDE report will fuel oil/meal spreading and potentially, some exodus from long soybean/short corn spreads. We look for a mixed Chicago close with all eyes focused on Argentine and S Brazilian rainfall totals next week. WASDE lowered the 2017/18 US corn end stocks by 50 million bu amid the record pace of US corn ethanol demand in recent weeks. WASDE raised the US corn ethanol demand estimate to a record large 5,525 million bu. The increase in US corn ethanol demand reduced US corn 2017/18 corn end stocks to 2,437 million bu. The US average farm-gate price range narrowed 5 cents on either end of the forecast to a net average of $3.20. This is $.16/bu lower than last year.
  

• World 2017/18 corn end stocks were raised slightly by 500,000 mt to 204.1 million mt. We note that based on strong Chinese demand, WASDE did raise US sorghum exports by 50 million bu to 260 million. US sorghum food/seed/ industrial use was cut by a similar amount leaving US sorghum end stocks at 21 million bu, a slight 2 million rise from November. Research maintains a trading range of $3.35-3.75 for March Chicago corn futures. US wheat end stocks were increased by 25 million bu to 960 million bu amid a like reduction in US wheat exports to 950 million bu. Russia’s wheat exports were raised by 500,000 mt to 33.50 million mt, which is still 1.5-2.0 million too low in our opinion. The US wheat export prospects going forward depend upon European wheat sales/exports and future Russian weather patterns to determine if record loadings can continue. US wheat has regained export competitiveness, but its opportunities going forward are all tied to the future Russian and European export pace. We see March Chicago wheat trading a range of $4.10-4.50. 2017/18 world wheat end stocks were forecast to rise 1 million to a record large 268.4 million mt. The 2017 Canadian wheat crop was raised 3.0 million to 30 million mt with the Australian crop holding at 21.5 million mt. We also note that European wheat production was raised 1 million to 152.5 million mt with exports holding steady at 28.50 million mt. World wheat prices look to trade in a $175-205 range into Q2 2018. US 2017/18 soybean end stocks were raised 20 million to 445 million bu.

• WASDE cut US 2017/18 soybean exports by 25 million to 2,225 million bu with a 5 million bu increase in the residual. Such US soybean end stocks argue for a trading range of $9.65-10.10 for spot Chicago soybean futures with normal S. American weather. However, soyoil should gain on soymeal with WASDE raising their estimate of US 2017/18 biodiesel use by huge 500 million lbs to 7,500 million lbs. WASDE cut US soyoil exports by 300 million lbss and domestic use by 200 million leaving end stocks at 1,616 million lbs. We argue for tightening supplies of US soyoil going forward with the marketplace making sure that US soyoil exports are tepid at best. The 50 day moving average crosses at $.3414 basis January soyoil futures. This is the next upside price target. 2017/18 world soybean end stocks were raised to a record large 98.3 million mt, up 400,000 mt largely due to the US export cuts. WASDE left their Brazilian soybean crop estimate at 108.0 million mt and the Argentine crop at 57.0 million mt. Most would argue for a 1-3 million gain in the Brazilian forecast and a like cut in Argentina, leaving the overall S American soy crop unchanged.

• The USDA December report is producing a modest recovery as the market was unable to garner any downside momentum. However, at the end of the session, traders will be left with the same oversupply with diminished US export demand. Only adverse S American weather can spur enough fear to engender a lasting recovery. Our mindset remains one of selling Chicago rallies with one eye on the upcoming rains across Argentina and S Brazil next week. These rains are very important that they actually materialise.

• Chicago prices are weaker at midday with wheat sagging to new contract lows on continued technical selling amid large world supplies. Favorable weather in the Black Sea is allowing Russia to export record tonnages of wheat, which is stealing “sales thunder” from the rest of the world’s exporters. The drop in wheat is pressuring corn, with wetter forecasts for Argentina and S Brazil producing liquidation in soybeans. The market expects that WASDE will raise their end stock forecasts for soybeans and corn due to sagging US export forecasts. The mentality of the markets is bearish, with most pointing to world weather as offering the only hope for a lasting recovery. Our research and belief continues to suggest that at these price levels there is minimal benefit or profit potential in taking short positions. Patience is advised with uncertainty surrounding S American weather forecasts. Cash basis levels are again starting to gain as farmers shut their barn doors.

• Brazil’s CONAB will be out in the morning with their updated corn and soybean crop estimates for Brazil. The data will be ahead of the USDA report. The trade is looking for a modest increase in crop size to 109-110 million mt of soybeans. The corn crop is expected to change little based on the importance of safrinha production. Limited progress was achieved between the Argentine Government and the US Commerce Department last week. The Argentines are trying to negotiate a lower duty or a complete end of the duty on their soyoil based biodiesel imports into the US. A final 5 year ruling is expected from the US Dept of Commerce in early February.
  

• The bearishness in Chicago is thick this morning as wheat values push to new contract lows. Almost everyone expects a bearish report from USDA on Tuesday. It is the market’s reaction to the report that will be the most interesting. This is not a place to join the bears in our opinion, and we await additional weather rallies with La Niña forecast to persist.

To download our weekly update as a PDF file please click on the link below:

Weekend summary 8 December 2017

Our weekly fund position charts can be downloaded by clicking on the link below:

Fund positions disaggregated data

• Funds have been trimming net short position in grains, and adding modestly to their net long in soybeans. Still, the combined position is historically short, and we advise caution against turning bearish on breaks. A vast majority of the S American growing season is yet to come (recall Brazil’s drought in 2016 began in late January), and the short side of the market remains pretty crowded.
  

• Soybeans were higher overnight, but found selling right from the morning open that kept soybeans and meal down through most of the day. The break in meal offered support to the soyoil prices on meal/oil spreads. Commodity fund traders were estimated as net sellers of 5,000 soybean and 4,500 soymeal contracts, and bought 4,000 contracts in the soyoil market. The Commitment of Traders report confirmed that funds had added to their soybean position through last week. Funds were estimated as net long nearly 55,000 futures contracts and were net short 1,751 contracts in the options market. Hedgers used the rally to 5 month highs for sales, taking their hedged position (net short) to the most in 7 weeks. Hedgers were net short near 120,000 contracts vs. 245,000 a year ago. The USDA’s WASDE and the Brazilian crop report will be released on Tuesday, and are expected to feature slower US exports and a larger Brazilian crop. After the reports are released, S American weather will drive Chicago soy trading into early 2018.
  

• Corn futures today ended slightly higher, and largely shrugged off a much wetter Argentine pattern predicted by the GFS weather forecast at midday. Indeed, the EU model this afternoon failed to validate the GFS’s solution, particularly in C Argentina, and instead rainfall over the next 10 days will be rather scattered. Some rain will fall, but not enough to reverse the trend in soil moisture. Sunday night’s forecast is key, particularly as the models start to peek into the latter part of December. We maintain that any meaningful pattern shift there will be difficult over the next 30-45 days amid ongoing cool equatorial Pacific Ocean temperatures. Otherwise, the managed funds as of Tuesday were short a net 161,000 contracts in Chicago, a number roughly in line with expectations, if perhaps a bit smaller. Short term direction will upon whether heavy rain finally appears in Argentina’s 10-day forecast, and we note that 45-day precipitation across much of Argentina’s Corn Belt ranges from 40-60% of normal.
  

• US wheat futures find newer contract lows today, as the delivery period has proven rather bearish and as there is an otherwise lack of fresh news. Managed funds as of Tuesday were short a net 119,000 contracts, vs. 123,000 the prior week, and are likely short some 130,000 contracts today. Some kind of short-covering rally is expected before year’s end. EU wheat futures and cash prices attempted to rally slightly today, and so comparable Gulf HRW will be offered Monday at a $3-4/mt discount to German/Baltic origin, and surpluses in N Europe continue to dwindle. Domestic Russian prices remain stable, the US market has corrected sharply, and we fully expect Russian fob offers to stay at $190- 195/mt into early 2018, which is not bearish relative to current US futures prices. A needed demand driver is still absent, but amid funds’ short, developing drought across the Central US, and competitive Gulf prices a bearish stance is not advised.

• It has been another down day in Chicago. Export sales were decent, and better than expected in soybeans, while the midday GFS weather forecast has added heavy rainfall to S Brazil beginning late next week. Argentina’s forecast is little change, and is still dry and rather hot into the latter part of December. Outside markets are mixed, with crude up $.60/barrel, which is rallying gasoline’s premium to ethanol further. Through the week ending November 30, US exporters sold abroad a net 35 million bu of corn, up 11 million from the prior week and some 8 million above the pace needed to hit the USDA’s forecast. Wheat sales totalled 12 million bu, nearly double the previous week but still disappointing. Soybean sales totalled a respectable 74 million bu, up 40 million from the previous week and the highest since mid-October.

• For their respective crop years to date, the US has exported 902 million bu of corn, down 27% from last year; 642 million bu of wheat, down 10%; and 1,335 million bu of soybeans, down 16% from a year ago. No changes are warranted to wheat and corn export forecasts based on pace analysis, but the overall sum of foreign soybean demand remains lacklustre. A downward revision in coming WASDE reports is logical, but we wonder if the USDA requires more input on S American production before starting the process. Recall beans sales and shipments beyond Apr/May can vary substantially based on S American balance sheets.

• Russia has announced it will spend roughly $34 million in grain transportation subsidies in an effort to boost export capacity in 2018, and which may also help boost domestic prices, which as of last week are down substantially (about 15-20% in Ruble terms) from this week in 2016. The battle between uncertain, and largely concerning, S American weather, and next week’s WASDE report, which will again confirm sizeable stocks of major crops will sustain choppy trading, and only in late winter will a majority of S America’s crop-critical weather have passed.
  

• Stats Can data on Wednesday and next week’s rain event in Argentina have weighed on the markets recently. The entirety of South America’s growing season lies ahead!