• Much of Argentina is parched, drier than a year ago. The map below, on the left, shows topsoil moisture while the chart to the right is subsoil. Notice that subsoil moisture is currently only 20- 40% of normal, meaning that upcoming rainfall will be highly important for crops during the last half of December. 

• Following firm overnight trade, soybean futures rallied to strong gains on Tuesday. Weather models project limited rains across key growing regions for Argentina and S Brazil, which fueled fund buying through Tuesday’s trading. Soymeal led Tuesday’s rally on concerns that Argentine meal exports could be reduced by a smaller Argentine crop. At the close, funds were estimated as net buyers of; 9,500 soybeans, 7,000 soymeal, and 1,000 soyoil contracts. Soymeal trade data for October was disapointing. US exports totaled 781,746 short tons, a 16% decline from last year, and the slowest October export figure since 2011. While the USDA has a long history of underestimating soymeal exports, it appears that the current forecast is not likely to increase without a big jump in shipments. We expect Chicago soy markets will continue to add weather premium until the S American weather forecast changes. However, US soy supplies are record large and we would believe that Argentine dryness would have to cut 10% off yield expectation to justify a rally above $11.00.

• Chicago corn inched to minor gains, and March is positioned firmly between its 50-day moving average and its contract low. Weather premium needs to be sustained until/unless it rains in Argentina and S Brazil, but the trade is also beginning to position for next week’s WASDE, in which large US and global stocks will again be confirmed. There is little to do other than wait for clarity on Jan-Feb S American weather, but we do mention that newly updated climate outlooks indicate ongoing heat and dryness in Argentina through January. Wednesday’s EIA report should again include near record US ethanol production through the week ending last Friday, and still there is no indication of any real slowdown in ethanol export demand. Brazilian cash ethanol prices continue to move higher, and the rally has more than offset Brazil’s 20% tariff on imports from the US. China also looks to ramp up its blending program, which at first will be comprised of imported ethanol. The battle between slow exports, but strong biofuel consumption and adverse S American weather will, in our view, sustain fair value at $3.48-3.65, basis March Chicago futures.

• US wheat futures ended lower, as again markets were unable to find much buying interest at technical resistance price levels. Funds returned to adding net short positions. Traders across the globe are beginning to wind down for the year, but there remains no compelling evidence for a major move in either direction. Ongoing warmth in the Black Sea, where temperatures remain some 15-20 degrees above average, will sustain Russian shipments in the weeks ahead, but managed funds’ net short position this evening is pegged at 120,000 contracts, little changed from last week and still sizeable relative to history. While Russia wheat prices continue to do very little, higher protein markets elsewhere have rallied decently in the last two weeks. German fob prices are testing multi-week highs, and contacts suggest the rally there is fundamentally based. We remain close to contract price lows, and the US wheat balance sheet will be tightening in the years amid the loss of acreage and a lack of substantial yield growth. 

• The morning started out green across Chicago, but has turned mixed at midmorning as the grains slide back into the red. Soybean futures have held in the green on the prospect of Argentine and S Brazilian dryness and on bullish technical considerations. Soyoil and grain prices are back lower, but funds are nearing a point of being sold out of their market length in soyoil. Continuing a trend from the overnight, the volume of Chicago grain has been active as the US stock market pushes to new highs on proposed US tax legislation. Inflation is a subject being talked about by commodity traders, but until there is actual statistical evidence of inflation, many traders are loath to make any new bullish positions. Chicago brokers report that funds have bought 4,700 contracts of soybeans and 6,600 contracts of soymeal, while selling 12,000 contracts of corn and 1,200 contracts of wheat. In soybean products, funds have sold 3,000 contracts of soyoil and bought 6,200 contracts of soymeal. Our next upside price target for January soymeal rests at $350/ton.
  

• For the week ending November 30, the US exported 23.1 million bu of corn, 15.0 million bu of wheat and 66.2 million bu of soybeans. The corn and wheat exports were below trade expectations. For their respective crop years to date, the US has exported 309.2 million bu of corn (down 232 million or 43%), 839.7 million bu of soybeans (down 119 million or 12%, and 469 million bu of wheat (down 33 million or 6,5%). US corn and soybean exports are lagging the pace of the WASDE annual forecast, but we doubt that any big change will occur in next week’s December WASDE report with so much unknown about 2018 S American crop prospects.

• Argentine fob corn offers continues to rise on threatening weather and limited US farm selling. US Gulf fob corn is now priced at a discount to Argentine origin for January, which should start to pull demand to the US. The US has a good shot of being the world’s cheapest corn offer from now through late winter, a big boost for potential future US corn sales. If Chicago traders were really worried about dry/warming Argentine and S Brazilian weather, the Chicago rally would be led by corn. The Chicago corn market touched the 50 day moving average and is down nearly 4 cents at midday. The first Argentine corn crop will be pollinating in 2-3 weeks as sources tell us that stress is building. If Chicago was really worried about La Niña weather, its corn that is being adversely impacted. Currently It is not, which tells us that the worry is not all that great and that it is all about “fund order flows” for now.

• The market appears to be struggling with dry Argentine and S Brazilian weather forecasts. It is early in the growing season, but La Niña is building in strength and we see no evidence of a pattern change at midday. The worry over Argentine drought is likely to worsen heading into the end of December. Worrisome weather is confirmed by Chicago option volatility rising today as the market prepares for greater supply uncertainty. Corn and soyoil should be nearing a trading bottom while beans try to fill an open chart gap at $9.9575 basis January futures (which we have mentioned previously!).

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

Weekend summary 1 December 2017

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

Fund positions disaggregated data

• Extremely cold ocean water continues to pool across the Eastern Pacific with each week being cooler than the last. This unusual broad build-up of cold Pacific ocean water to the west of S America looks to maintain a dry flow across Argentina and S Brazil for weeks to come. Exceptionally wet weather conditions will likely occur across N Brazil. The continued combination could pose elevated risks for summer row crops into early 2018. Our concern for S American weather is increasing amid the deepening cold across the equatorial Pacific.
  

• Choppy, but generally lower trade unfold across the Chicago soy markets as the trade responded to the EPA’s announcement for upcoming biofuel targets. Soyoil tried to rally on the news, but faded as the EPA data did not offer any surprises. January soybeans turned down and slipped under it’s 50 day moving average, while the January crush spread rallied to a new high and traded over $1.05/bu. Funds were estimated sellers of; 6,500 soybean and 3,000 soyoil contracts, and buyers of 3,500 contracts in the soymeal market. Funds continue to pile into meal/oil spreads. The November WASDE estimated 2017/18 soyoil usage for biodiesel at 7,000 million lbs, or 13% more than in 2016/17. The history of the December WASDE estimate against actual soyoil demand, shows that over the last 5 years the December forecast has on average been within 4% of actual biofuel demand. With today’s announcement being only 50-150 million lbs better from the July proposal, we do not anticipate any significant changes from WASDE in December. Census will be out with their Crush report on Friday, which could show a deeper decline on stock based upon marginal imports. We are becoming more concerned on S America weather with heat to arrive in December for dry Argentina and S Brazil. Consequently, we see price breaks as buying opportunities.

• Corn futures rallied 2 cents amid a focus on an intensifying La Niña and rising cash prices in S America. First notice day has come and gone, interior basis levels are steady to firmer, and it is likely that a secondary low has been scored, at least until/unless a more normal pattern of rainfall develops in Argentina. Recall December is a key month for first planted corn there. US export sales through the week ending Nov 23 totalled 24 million bu, down 19 million from the previous week, but roughly in line with the pace needed to reach USDA’s annual target. Argentine and US Gulf cash basis levels are pretty even, and the next round of meaningful weakness in S American cash markets will likely not occur until late winter, when the earliest planted fields are harvested. The USDA’s 1,925 million bu forecast looks a bit more accurate. Spotty showers in Argentina through the weekend will satisfy current moisture demands, but longer term there is still an elevated risk of heat and dryness, which climate outlooks are beginning to show, and the question thereafter is just how long La Niña lasts. Funds are huge shorts, which in itself presents an elevated risk potential.
  

• US wheat futures were unwilling to follow corn higher amid slow US export demand and huge Chicago deliveries. Following several weeks of decent export business, a second consecutive week has passed with sales below what’s needed to hit the USDA’s target. Gulf HRW is somewhat more competitive now, but lasting rallies will again harm Jan-Mar potential without a similar rally in Black Sea cash prices. US export sales through the week ending last Thursday totalled a meagre 7 million bu, half of the required pace, and amid ongoing warmth in Ukraine and Russia we doubt much improvement lies ahead in the next couple weeks. There is increasing evidence to suggest high quality exportable surpluses in N Europe are dwindling fast, but this has so far failed to spark much interest in US HRW wheat. We maintains that a secondary bottom was scored early this week, and an expanding Plains drought needs watching, and should expand amid a strengthening La Niña. However, rallies will continue to be modest short covering affairs unless adverse S American weather bulls corn prices. 

• Defra’s first official UK Supply and Demand estimates for this season, released earlier today, suggest tighter domestic wheat supplies for the second consecutive season. The balance between availability of wheat and domestic consumption is forecast at 2.648 million mt in 2017/18, 18% lower year on year. This is 118,000 mt lower than the wheat balance forecast in the AHDB Early Balance Sheet in October and reflects the very latest information available. Total availability of wheat, at 18.530 million mt, is slightly higher (50,000 mt) than the amount forecast by AHDB in October, due to an upward revision in imports. However, this is offset by higher forecast domestic demand. Wheat consumption in animal feed is estimated at 7.396 million mt, 217,000 mt higher than the AHDB forecast last month.

• GB animal feed statistics for September 2017, released by Defra earlier this month, showed higher usage of wheat in compound feed year on year, as well as compared to July and August this season. Furthermore, poultry data published last week revealed record number of UK broiler and layer chick placings in October, which bodes well for wheat demand in feed. As a result, Defra forecast wheat demand in animal feed to increase by 1% (88,000 mt) this year compared with 2016/17. After taking into account the operating stocks requirement of 1.6 million mt, the estimated surplus of wheat available for export or free stock in 2017/18 is 1.048 million mt, down 35% year on year. Looking back, the current forecast is the lowest since 2013/14.

• There is a contrasting situation for domestic barley supplies, compared with wheat. Defra forecast the 2017/18 surplus of barley available for free stock or export at 1.713 million mt, 21% higher year on year. This is slightly lower (68Kt) than AHDB’s forecast in October.

• Fund managers have been right to bet on long soybeans vs. corn (or wheat). The soybean/corn chart below  reflects that soybeans have outperformed corn since late summer. Record large world soybean demand along with aggressive Argentine corn sales has helped the soy/corn ratio. In addition, if there is a La Niña weather problem in S American this winter, soy will continue to gain on corn with the ratio potentially reaching above 3:1. Plainly stated, US corn lacks a demand story in coming months. It is all about S America going forward. 

• January soybeans traded in just a 7.25 cent range for the day, and finished down half a cent. While soybeans were quiet, more active trade was noted in soy product markets and spreads. January soyoil had support above the 200 day moving average, but could not get above the 50 day moving average. Funds were estimated sellers of 500 soybean and 1,000 soyoil contracts, while buying 3,500 contracts of meal. While US soybean exports have slowed dramatically in the last several weeks, and are starting to cast doubt on the potential for annual exports, China continues to process beans at a record pace. Last week’s soybean crush was estimated at just under 2 million mt, which was the largest weekly figure of the year. The cumulative crush rate is now estimated at 16 million mt, and the current pace is right on track to reach the USDA’s annual forecast of 94 million. US exports have been slowed by late season S American exports. Brazil has exported nearly 2 million mt in November with 1.4 million scheduled for December. World soy demand is record large; January soybeans have held in a broad range since September, which looks to continue into late in the year. S American weather and crop size will determine prices into year end. Our view is that there will more than likely be a number of strong weather rallies.
  

• Corn futures rebounded ahead of first notice day on Thursday. Fundamentally, what news is available is modestly supportive. Argentine cash basis levels continue to rally, the pace of US ethanol production is record large, and there is evidence that this winter’s La Niña could be stronger than initially forecast (much more attention will be paid to Argentina rainfall during December). Also, funds still hold a record net short corn position. US ethanol production through the week ending Nov 24 totalled 313 million gallons, down just slightly from record production in the previous week. Cumulative US ethanol production is 4% above last year, vs. the USDA’s projected 1% increase. US ethanol export interest continues as world energy markets remain firm. Parts of Argentina will benefit from good rainfall in the next 24 hours, but many key parts of the Corn Belt will miss out. We have previously highlighted that even sub-trend yield there won’t materially affect its exportable surplus, but no doubt weather premium will be added if dryness persists during December.

• US and European wheat futures ended higher, and in the US pre-first notice day liquidation has ended. Black Sea cash prices are unchanged, but European values are higher, and still there is talk that Northern Europe’s hi-pro exportable surplus is dwindling fast. On paper, Gulf HRW is more competitive than it was just weeks ago. There is just not a lot of input available to trigger any meaningful selling below $4.10, basis spot Chicago futures. Otherwise, it was a pretty slow news day but more attention will be paid to Plains dryness in the months ahead. The EU and GFS weather models have eliminated the chance of rainfall across the Plains next week. The equatorial Pacific has also cooled dramatically, and some models predict a rather strong La Niña through Jan/Feb, which historically correlates with warmth and dryness across the Southern HRW Belt. Plains soil moisture surpluses are eroding. Like corn, farmers will not be willing sellers at current prices, and a 15-20 cent rally is anticipated.

• Tuesday was another mixed day of trade, with markets reversing Monday’s trends. Soyoil recouped losses as the palm oil market stabilised, which took meal lower on spreads, while soybeans settled down, but well above the early morning lows. Soybean crush spreads ended lightly mixed, with January trading over $1/bu at the high and closing down a quarter of cent at $.9925/bu. Funds ended the day as estimated sellers of; 3,000 soybean and 4,500 soymeal contracts, and buyers of 4,500 in soyoil. The new crop soybean/corn ratio ratio this week is slightly less than it was a year ago, at 2.6:1, but still well above the long term average of 2.3:1. With harvest wrapped up, producers are turning attention to crop production plans for next year. The question going forward is whether the current new crop price ratio is enough to pull in additional soybean acres. Major moving averages sit just under the market around $9.85, while strong rallies above $10 will offer the next selling opportunity.

• Corn futures fell another 2 cents amid a lack of news, a higher US$, weaker crude, and as the USDA’s long term projections lack any bullish fodder. Assuming normal weather trend corn yields will reach 190 bushels/acre by 2027, and even despite a lack of acreage growth US end stocks will stay near 2.5 billion bu. Finding world market share is the goal, and this of course requires a major change in world currency relationships or adverse S American weather. In the near term, however, we maintain that neither the bulls nor bears will have much lasting momentum. Argentine cash basis levels continue to rise, and have rallied rather quickly, and on paper the US Gulf market is becoming more competitive. The EIA’s report on Wednesday is again expected to include near record ethanol production and ongoing export interest, Brazilian ethanol is now quoted at an 8-month high $2.15/gallon, vs. US Gulf ethanol at $1.50.

• Another round of Egyptian wheat business has come and gone with yet lower prices, and as such Black Sea offers through March are down slightly. Egypt bought two cargoes of (once again) Russian wheat at an average fob price of $193/mt, down $1.50 from its last tender in mid-November, and it remains clear that world cash wheat prices continue to decline from highs posted in late summer. However, the US market very quickly is priced to sell, SRW is quoted at a multi-year low $177/mt. Lower protein HRW is priced at parity with comparable German and Baltic supplies. It is likely that managed funds early this morning were short a net 125,000 contracts, and as interior US basis strengthens, a bearish outlook can not be advised at current prices. US wheat is competitive in a range of $4.25-4.40, basis March Chicago, and N Hemisphere crop establishment is now key. We would note that the USDA’s baseline numbers show a steady contraction in US wheat end stocks into 2020 amid a lack of acreage/yield growth.

• Total area of crops continues to expand across Argentina due to profitable margins and tax promises. On January 1st, the Marci Government has promised to reduce their soybean export tax by 0.5% in each month going forward. The Argentine Peso sits a near record low vs. the US$. The combination of lower taxes and a weak currency has been a potent stimulus for Argentine farmers to expand their seeded area. The extra acres could reduce some of the yield drag amid regional dryness.
  

• It was a mixed day of trade in Chicago that left January soybeans 2.75 cents higher at the close. Chicago soyoil prices followed Malaysian palm oil futures to losses, while oil share spread unwinding lifted soymeal prices back to the best prices in more than a month. Commodity fund traders were estimated buyers of; 4,500 soybean and 5,200 soymeal contracts, while selling 6,000 soyoil futures. The US weekly export inspections report was delayed, and the results were disappointing. Soybean inspections were at the low end of estimates at 58 million bu, or the lowest since early October. The previous week’s inspection total was revised up by 5.3 million bu, while cumulative inspections of 768 million bu are now 120 million (14%) behind a year ago. The USDA will release US 10 year Baseline projections on Tuesday, which will feature preliminary estimates for new crop acreage, while the EPA is expected to release its 2018 biofuel mandate before Friday. Record large December 1 US soybean stocks look to cap rallies above $10.00 while the unknowns in the coming S American growing season looks to support breaks to $9.50.

• Chicago corn fell 3-4 cents as December’s first notice day is just ahead, and as the major weather forecasting models are in general agreement that needed rainfall will impact Argentina in the next 5-7 days. Recall very early planted corn begins pollinating in Argentina in mid/late December, and weather is becoming more important to yield determination. More rain will be needed (a majority of the crop will pollinated in February), but concern over lasting dryness is being eased. Otherwise, the market lacks a spark to drive funds out of what is still a massive short position. As of last Tuesday managed funds were short a net 210,000 contracts, down 20,000 from the prior week, but still historically large. Cumulative US corn export inspections at 285 million bu (through to mid November) are down 40% from this week a year ago. The US corn export pace is slow amid keen S American competition. Argentine rain is noted, and simply put, until there are hints of major US/world balance sheet changes the market will remain stuck between $3.30-3.60 basis spot futures. No change to the EPA’s ethanol US blending mandate is expected.

• Climate outlooks through to late December suggest a more normal pattern of precipitation may lie in the offing across the drier areas of the US Plains. With favourable weather ongoing in the Black Sea, there are just not many threats to the newly planting N Hemisphere winter wheat crop. World cash markets are slightly higher and contacts suggest hi-pro milling supplies are getting rather tight in Northern Europe. A host of tenders worth upwards of 1 million mt will close on Tuesday. In that sense today’s lukewarm reaction in the cash markets is somewhat disappointing. However, we look for a bottom in the wheat to be scored in early December. Interior US HRW basis continues to narrow, significantly so in some locations, and as German/Baltic prices rise the US is much more competitive for Jan-March exports. Winter wheat ratings fell for a third consecutive week (50% good/excellent, vs. 52% last week), which highlights that rain is needed across the whole of the Western US, good/excellent ratings are at/below 40% in MT, OK, SD and TX. Funds as of last Tuesday were short a net 109,000 contracts, unchanged on the week.

• The morning has been mixed in Chicago with soybeans trading to a new rally high while the grains trade either side of unchanged. The strong seasonal price trends for the day ahead of Thanksgiving appear to be working. Funds have been active in buying soybeans/soymeal and selling of the grains. The oil share traders have been unwinding their long soyoil and short soymeal spreads which is adding to the upside vigour in the marketplace Producer selling is lax from the US, but stepping up in S America with the Brazilian real priced at 3.245:1 vs the US$. The wheat market is giving back a portion of Tuesday’s Russian radiation gains based on the lack of impact on world grain production going forward. Our inclination is for a mixed Chicago close heading into the holiday.

• Brazil is offering soybeans, soymeal and soyoil for export during December and January. Seasonally, Brazil is normally sold out in this position, but last year’s record large soy crop harvest is helping to keep Brazilian soy products flowing. We would note that Brazil is offering fob meal at $26 under Chicago with the US Gulf at $9 under. Brazilian soymeal is $17-18.00/mt cheaper than the US Gulf. And Brazil is offering soyoil at $32/mt discount. Brazilian soybeans are offered at a $6/mt premium, but Chinese crushers prefer the higher quality Brazilian soybeans and there is a freight advantage vs. the US Gulf. Brazil looks to export some 2.7 million mt of soybeans during December according to the freight line-up.

• Chicago brokers estimate that funds have bought 6,000 contracts of soybeans and 2,000 contracts of corn, while being flat in wheat. In soy products, funds have bought 5,400 contracts of meal and sold 2,100 contracts of oil. It is all about chart based buying today, December options expire on Friday and short holders are also securing futures to cover their risk.

• Tuesday was another dull day of trade in Chicago soy markets, with January holding in just a 5 cent range through the day, and ending only marginally lower. Soymeal was $1-2 weaker as soyoil bounced back on a recovery in palm oil stabilised. The palm oil market had been trending lower through November and fell sharply on Monday as India announced plans to double the palm oil import tax. At Tuesday’s low, December and January palm oil were down nearly 10% from the late October high. India is the world’s largest palm oil importer, with the latest USDA estimates showing India to import 9.5 million mt or 14% of total world production. October imports reported on Monday were slightly better than a year ago near 750,000 mt. Early estimates are for imports to fall 10-15% under last year over the next several months. The break in palm oil this week has pushed the spot soy/palm oils spread near multi year highs with US soyoil near a 6¢/lb spot premium. The US soyoil premium is based on biodiesel demand which is outstanding. US soybean weekly export sales data will be released on Friday. Chinese demand is only so-so, and US 2017/18 soybean export estimates are at least 100 million bu too large. January soybeans should trade a $9.50-10.0 range.

• Corn futures found support on the third (and perhaps last) day of fund short covering. Another week of strong ethanol production is expected in Wednesday’s EIA report and liquidation of December futures will continue ahead of 1st notice. Whilst US ethanol prices are in retreat, Brazilian origin ethanol continues its rally. This week Brazilian ethanol is quoted at $2.11/gal, a 9-month high and also a 43% premium to US Gulf ethanol, which more than offsets Brazil’s newly established tariff on imports from the US. A counter-seasonal decline in US ethanol stocks is possible in the weeks ahead. However, it should be noted that the EU and GFS weather models include enough rainfall in Argentina for early crop establishment, and precipitation and temperatures are not overly important until early/mid-December. Also, competition for world market share will be ongoing unless drought strikes Brazil again in in the April to June period. Corn values look to be range bound into 2018.

• The highlight of the wheat market day was of course widespread media coverage of Russia confirming that a radioactive leak originated there in late September. The trade is scrambling to know what this means for supply and demand, particularly with many well versed on catastrophes at Chernobyl and Fukushima. However, cash markets only barely moved, and in the meantime the goal for all major exporters is to find market share. The key is that this does not seem to be a power plant melt down! Any future impact will likely be modest. Russian fob offers are higher this afternoon, but only by $.50/mt. Paris milling wheat rebounded from 3-month lows, and overall the world cash wheat market has been inching lower, with exporters in France, Germany, Russia and the Baltics offering wheat at $190-194/mt. Notice that comparable Gulf HRW is not priced competitively. Dryness in the US Plains, Spain, France and North Africa will of course be watched, but we see nothing that will alter the long-established sideways trend in the near term.