• Interestingly we have seen Chicago markets, which saw early gains, ease back with hedge related selling as the S American soybean harvest progresses. Wheat and corn were pressured early, and soybean related selling simply added to this pressure. Whilst there has been some scale down end user pricing the big fund buyers, which could add support, have been noticeably absent. The USDA’s Outlook Forum takes place on Thursday and Friday, and maybe the market is awaiting the outcome. The rapidly expanding S American harvest and export availability is undoubtedly going to impact and slow the pace of US export volumes.

• India is likely to impose new import duties on wheat based on their own record crop and to help protect farm incomes. On December 8th, the Indian government reduced its wheat import duty to zero, which is likely to allow some 4-4.5 million mt of wheat imports, which are the largest in a decade. The new wheat harvest will start later next month and continue into May. Some expect this year’s Indian wheat production to reach a record 97-98 million mt, which will break the prior record of 95.85 million mt set back in the 2013/14 crop year. Last year India produced a wheat crop of just 87 million mt due to a sharp fall in water availability from the monsoon. New duties will come in early March.

• Black Sea wheat prices continue to soften in the new crop position, whilst nearby futures are stable. The price of holding Russian wheat from now until late June is about $10/mt or in US terms some $.37/bu. So far that discount has not persuaded Russian farmers to dump old crop supply nor has government rail subsidies to move it. The reason is that Russia farmers are fat with cash and seem to be in no hurry to raise cash for the new growing season. We suspect that Russian old crop dumping will occur as the snows melt and the new crop greens, and farmers seek additional storage for another large crop. As and when this actually happens we will likely see significant cash market pressure.

• Chicago traders appear to be positioning long corn/short soybeans into the USDA Outlook meeting. However, even with a 2-3 million acre decline in US corn seeding, 2017/18 US corn end stocks look as if they will be well above 2.2 billion bu arguing for prices to decline to $3.75/bu basis December corn prior to planting.

• MARS, the EU’s crop monitoring unit have so far identified no major winter crop concerns in Europe, and that is despite less than optimal growing conditions in some regions. Below average rainfall since the start of the year has reduced soil ,moisture levels in parts of S Germany, S Sweden, Czech Republic and Baltic countries although it was reported that there is no immediate crop concern. Frost damage is also reported to be low, again that is despite lasting cold conditions throughout January in C and E Europe.

• It is, of course, still very early but the latest report supports suggestions that EU wheat and rapeseed production will recover in 2017. Stratégie Grains, yesterday, forecast EU soft wheat output at 143.8 million mt, an increase of some 6% from 2016.

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Weekend summary 17 February 2017

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

Fund positions

• Weekly US export data has been released as follows:

• The weekly data was described as “solid”, but US soybean, corn and wheat sales pace will likely slow dramatically as other origins become more aggressive and this forces closure of the US export window. There remains a massive volume of soybeans, corn and wheat yet to ship, (note the difference between sales and shipments, which leaves an unshipped commitment) and with end users already well covered they have little, if any, reason to chase price rallies.

• EU weekly customs data reported wheat exports totalling 495,596 mt, which brings the season total to 16.99 million mt. This is 1.4 million mt (7.7%) behind last year. Barley exports for the week reached 155,139 mt.

• US cash corn basis levels continue to decline as Chicago prices rise amid rising cash supplies. US farmers have been active sellers on the latest rally and livestock feeders, exporters and ethanol plants have at least 8-10 weeks of coverage. In fact, the piles at Midwest elevators are at levels that have not been seen since harvest. Large supplies of cash corn are likely to keep cash basis levels weak into spring planting. The cash market argues that the current futures rally cannot be sustained.

• US longer range weather outlooks suggest no major drought issues across Central regions and indeed look for improvements in current dry areas. Temperatures are forecast to average at or just above normal, which should bode well for spring planting, which is fast approaching.

• Chicago markets have been somewhat mixed today with soybeans and corn easier whilst the wheat market has made gains. Both corn and wheat in Chicago made new rally highs in more normal trade volume as the fund’s aggression appears to have eased a touch for now.

• Why have the funds been so aggressive? Some are trading the moving averages whilst others are betting on improving macros and world economy, and there is a general belief that from an historic perspective ag commodities are plain cheap! There has also been a move towards “nationalism” in a number of key world economies: US, UK and Europe as well as Chinas, which is creating some belief in reflation, which is in turn adding to “value picking” by funds – hence them looking at “cheap” ag commodities. Given this scenario we doubt that the funds will let go of length any time soon and, as such, if they are not sellers it seems that a sharp dip in prices is not on the cards right now. However, it should not be taken that we are on a one way street and downside risk is absent.

• Initially, regionalism/nationalism are positive for economic growth, at least until excessive goods or services try to be exported. It is the trade debate on a world basis that complicates a bullish outlook for commodities. When that economic phase of trade begins, it rests with US President Trump and other world political leaders. For now, world leaders seem to be preoccupied with domestic issues, but we (and others) would be shocked if trade does not emerge as a new global economic topic in the near future.

• China appears to be slowing soybean purchases on account of the widening avian influenza outbreak and Brazilian soybean yields continue to be reported as “off the charts”. US wheat is non-competitive from a global perspective and as a consequence we reiterate our view that now is not the time to be turning bullish.

• Funds regard ag investments (Chicago grains and cattle/hogs) as cheaply priced as a new N Hemisphere growing season begins. With the US stock market at a record high and funds flush with cash, managers are looking for low risk bets. The problem is that as Chicago futures market rallies, the cash markets fail to follow. This is because of the record world supplies of soybeans, wheat and corn that will be available as of March 1st. Also importantly, Chinese import demand for world grain will likely be down some 30-40% this year as higher tariffs are enacted and their own domestic corn market sags to a seven year low. This is leading world corn/wheat trade to slow, curiously at a time when funds are buying? Obviously, either funds or the cash market is wrong! Only time will tell who it is?

• Currently, average ex-farm spot milling wheat premiums in the UK are around the low single figures. There has been less than a £10/t premium for full specification bread wheat (nabim Group 1, ≥13% protein, ≥250s hagberg, ≥76kg/hl) over feed wheat since October. However, UK bread milling wheat prices are historically firmer, with average UK ex-farm prices two weeks ago hitting their highest level in 22 months. As such, the small average premium over feed is much more to do with strong feed wheat prices rather than milling markets themselves. The UK now has some of the most expensive feed wheat in the world. As part of the tighter UK wheat supply and demand picture that we already knew about this season, there has been continued strong demand for feed wheat for both bioethanol and animal feed. Alongside a strong export pace at the start of this season, this is now leading to higher UK feed grain import requirements.

• Firm feed wheat prices, rising up close to milling values, are a sign of the market trying to attract some wheat with milling quality for feed and/or bioethanol usage. The narrower the premium, the more likely wheat with milling potential is to end up in these markets instead, so the narrow premiums are at the same time contributing to the firm prices for UK milling wheat.

• In contrast to the UK situation, the latest Australian government estimates for wheat and barley production released this week are a further sign of the well-supplied global market. Both wheat and barley output for 2016/17 are estimated at record levels (35 million mt and 13 million mt respectively). These government estimates exceed the latest local USDA attaché estimates (33 million mt and 11 million mt) made two weeks ago, as well as the latest official USDA figures.

• Australian barley exports are expected to be particularly strong as a result, providing additional competition for the UK to non-EU destinations at a time when the exportable surplus remains relatively high. On the wheat side, with UK prices already near the top of the pile globally, the question is how far UK prices can continue to rise outside of any world market rally. However, the latest Australian figures could add further weight to world markets.

• Chicago markets started out the session lower and have recovered on new speculative buying. No bullish fundamental news is available, and it just appears that fund managers are continuing to look at grains as cheap and make new investment. We doubt that funds can sustain any lasting bullish run, but it should be noted that the market has not yet technically provided any chart based sell signal.

• Similar to the US last harvest, soybean yields in N and C Brazil continue at record levels suggesting a much larger crop. The Mato Grosso soybean harvest reached 50% over the weekend and yield totals are so strong that it has some talking that Mato Grosso could be gathering a 31-32 million mt soybean crop! Corn yields are also stellar and producers are reported to be very pleased. The harvest is just starting in C Brazil and soybean yield results have some well-placed crop analysts discussing a crop size of 107 million mt or more. Such a crop would make crop losses in Argentina less important with the 2017 Brazilian soybean crop up a potential 10-12 million mt from 2015/16. Note that a 106.5 million mt Brazilian soybean crop would not require record yields that were scored back in 2011.

• Brazilian farmers are delivering on prior sales commitments, with many more starting to write basis contracts. This leaves the producer open on flat price and currency, but it does provide soybeans to exporters/crushers. The recent jump in Brazilian basis is due to strong Chinese loadings with over 2 million mt being exported so far in the first half of February. China looks to load out some 5.5-6.0 million mt of Brazilian soybeans during February, a record.

• Some are suggesting that slow Brazilian cash selling is the reason for the Chicago rally. Yet, Brazilian cash soybean sources are finding farmers willing to deliver on prior cash contracts and sign basis contracts to move newly cut beans. As the Brazilian harvest pushes ahead, we would expect that farmer selling/supply will increase.

• Chicago futures take a breather following their post February Crop Report rally. Funds have piled into a sizeable new net long positons in corn, soybeans, soymeal in the past five trading days. In wheat, funds have covered a large share of their net short position. Surging corn and soybean open interest has reflected this “fund buying spree” which should be reflected in Friday’s CFTC Commitment of Traders report.

• US farmers should be sending fund managers “Valentine’s Cards” as they run up prices for new cash sales and boost revenue insurance program average prices. The US farmer is enjoying the Chicago gains as they are able to profit in two forms. In fact, US farmers are pleased that December corn is again taking aim on $4.00/bu, even with US corn stocks far larger than last year and S American crop prospects looking much improved.

• China returned from its long Lunar New Year break with strong demand for S American soybeans, after a January buying hiatus, that resulted from their fear that newly installed President Trump could take a swipe on Chinese trade. This trade swipe never occurred and Chinese crushers were left short bought. Chinese crushers were active in covering their March/April needs and had several weeks of demand to fill. With Chinese crush margins retreating back near breakeven, their buying pattern going forward will be much more normal.

• Chicago markets act tired with fund demand slowing and the US cash market plugged with supply. Spreads are starting to roll over with active May-March corn spreading. The Mexican Parliament has introduced a bill to source their corn from S America, instead of the US. This bill could be voted on later this week in response to Trump calling for a renegotiation of NAFTA. Amid Brazilian soybean yields improving and China’s worry over avian influenza expanding, the market feels like we are close to a seasonal high. This is no place to be bullish.

• Early weakness in Chicago markets uncovered fresh fund demand with corn, soybean and wheat futures all rising into midday, and this would be the fourth day of active fund demand. Traders have suggested that fund purchasing in the ag space is expected to ease as the week advances. Funds placed ags on their inflationary purchase list, which is evident in the open interest totals from Friday. Remember that funds are still coming out of their net short wheat positions, while adding to their summer row crop longs. Strong morning volume in corn, wheat and soybeans indicates that funds are still buying, it’s just that the cash selling has increased in the rally to help as a buffer to limit the price rally. We would suggest that fund buyers have just entered these positions during the past week, and they are not expected to change their mind or exit these purchases until it is clear that another favorable N Hemisphere growing season is evident. As such, there will be corrections, but it is difficult to envision a lasting bear trend unless President Trump makes trade an issue.

• S American sources indicate that cash soybean movement is slightly better to start the week as the harvest moves southward. However, the volumes of sales are not large as most hope for some weakening of the Brazilian Real and the Argentine Peso. We would maintain that it will take a push to higher price offers to get the Brazilian farmer to sell larger tonnages.

• Fund managers have decided from a risk vs. reward perspective that that the grains are attractive. The funds are already long some reasonable volume of soybeans, which are showing a profit. Chinese demand is expected to slow into late week as their crush margins retreat. The close will be important today to gauge if the funds are willing to pile into additional length. Our bet is that the entire Chicago complex is getting pricey and that a correction looms. However, we doubt that the funds will want to give up on their recent net long position until corn seeds are planted in the Midwest. We would look for this week’s peak to be scored by Tuesday with prices retreating into Friday.§

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

Weekend summary 10 February 2017

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

Fund positions

US weekly export data has been released as follows:

Brussels has issued weekly wheat export certificates totalling 482,594 mt, which brings the season total to 16.49 million mt. This is 1.15 million mt (6.54%) behind last year. Barley exports for the week reached 41,997 mt, which brings the season total to 2.76 million mt.

Today’s USDA report lived up to its “lacklustre” pre-release billing! Their US wheat export estimate has been increased to 1,025 million bu, which is a 50 million bu hike and dropped 2016.17 stock levels to 1,139 million bu. Corn ethanol production was increased by 25 million bu to 5,305 million bu, which reduced 2016/17 end stocks to 2,320 million bu. Soybean end stocks for 2016.17 were held at 420 million bu.

In world production the big surprise was 2016/17 Indian wheat output, which was reduced 3 million mt to 87 million mt. Brazilian and Argentine corn crops were left unchanged at 86.5 and 36.5 million mt respectively. Finally, the Brazilian soybean crop was left unchanged at 104 million mt whilst Argentina’s crop was cut 1.5 million mt to 55.5 million, which left global end stocks of 1.9 million mt at 80.4 million.

The market has initially viewed the reports as marginally positive for wheat, corn and soybeans, and whilst it is now done, dusted and history it seems that neither the bulls or the bears are going to rush into fresh new net positions on the back of the contents. However, it seems the Brazilian farmer remains reluctant to sell his new crop harvest due to currency, and this could force the Chinese buyers into staying with the US as supplier (for now) and potentially firm Chicago futures. Fresh highs in Chicago corn and soybeans could entice S American farmers into sales, but we will have to wait and see if this becomes the case.

• Interior US soybean cash  basis has been somewhat seasonal, and has been reluctant to follow rallies in Chicago futures, which is interesting. Changes in basis still hinge upon export potential in the final third of the marketing year, which in turn, still hinges upon S American crop size, but at some point bullish momentum will require better performance from the cash market. Recall a year ago that S American weather turned adverse in late Feb/early March, and so weather in the next 3-4 weeks is critical.

• Market one liners:

Soybeans: Demand from China could very soon switch to Brazil.
Corn: We are at the top of the October-February range and require bullish supply news for a breakout higher.
Wheat: Spread trade unwinding and a large fund net short position support a bounce in prices.

• Today has seen Chicago soybean prices maintain their rally whilst the grains are modestly unchanged to either side of unchanged as we approach the close. Rising S American fob basis and active Chinese demand post Lunar New Year holiday have supported the soybean complex today whilst slowing US export demand has seen the grains languish, particularly as corn bumps its head on key chart price resistance levels. Markets are awaiting Thursday’s USDA report and unlikely to swing wildly in the absence of fresh news input.

• It is interesting to note the discount of US fob soybeans to Brazilian prices through to April. Normally, Brazilian soybeans hold a 10-15 cent/bu quality premium for their extra oil content, so this does not mean that China will move their demand northward. However, the fact that the US is in the hunt for world soybean trade has underpinned Chicago futures with US soybean export sales already reaching 91% of the USDA’s annual forecast with nearly 6½  months remaining in the crop year.

• China has been an active Brazilian soybean buyer taking some 12 to15 cargoes (according to our information) in the past few days. This has rallied Brazilian export premiums and allowed the US Gulf to become competitive again. Funds are likely to be big buyers (again) at the close in corn if March is above its 200 day moving average of $3.68. Wheat will likely be in tow. Funds continue to secure the entire Chicago market, even in the face of bearish fundamentals. It is possible that spot Chicago soybeans could retest $10.80-11.00 resistance with March corn targeting $3.75-3.80.

• We cannot help but notice that Russia’s forward wheat market is offered below spot, and we maintain our view that Russian exporters have work to do to alleviate current massive stock levels. Snow cover in key areas of S Russia continues to ebb and flow, with pockets of the region now bare. Europe since Jan 1 has been much drier than normal, and of course moderate drought lingers, and will continue to linger, across the W US Plains. Crop conditions in TX, which will be published weekly from here forward, were pegged at 31% good/excellent, vs. 29% a week ago but vs. 44% a year ago. Wheat will be increasingly exiting dormancy in TX and parts of OK amid abnormal warmth, and the point is that a new N Hemisphere growing season lies just ahead. Structurally, rallies above $4.50 (basis spot Chicago futures) will be difficult without widespread confirmed crop loss, (which is not on the cards today) and consequently we remain sellers of rallies.

• We saw a mixed start to trade in Chicago, which has trended towards marginally higher levels across the board with an hour to go until the close tonight. There is little, if anything,in the way of fresh news today and traders have little to cling onto and determine a clear direction (nothing new there then!). Traders are awaiting the latest reports from CONAB and USDA, both scheduled for release on Thursday.

• Crude oil has eased and the US$ remains firm. Brazilian cash soybean offers are firmer today as close to record exports appear to be able to cope with early harvest supplies. US Gulf soybeans continue to be the world’s cheapest, and this looks to be the case through until April, and until such time as we see declining basis prices in Brazil it is hard to imagine price breaks lasting. This scenario also plays out in wheat where Black Sea cash prices remain strong offering support to the rest of the world in the short term. That said, S American cash corn prices have eased a touch this week and Argentine corn is now offered at parity with the US for March availability, and is a slight discount for April/May.

• The key going forward is the size of the S American crop and it seems the market is anticipating a modest revision higher in  Brazilian corn and soybean output by CONAB later in the week.

• The ongoing transition to S American soybean exports and cheap Gulf corn for spot delivery will offer support on price breaks. However, recent improvement in Argentine precipitation will keep buying limited at, or near to, technical resistance, and so we maintain a neutral outlook into March. The longer term outlook remains a function of S American crop size, and thus April to August US export demand, which will be better known in the next 30 days. If we recall correctly it was early March when soybeans surged to near $12 a year ago. So far, there is no indication of lasting excessive rain in Argentina and soil moisture in N Brazil is much improved from last year.