• If there was any doubt that fund managers want to be on the long side of the soybean market, today’s price action in Chicago should provide clear notice. Funds have been buyers of the soybean complex from the get go with the grains trading either side of unchanged. March soybean futures has taken back all of Friday’s decline which was based on growing Brazilian soybean crop estimates. The ship line up for Brazilian soybeans is record large at the same time that the US is still shipping out 60 million bu per week. The message is that world soybean demand is robust which for now is countering the supply rise in the Brazilian harvest. Corn and wheat are following, but the recent moisture across the EU and price pressures on the ASW eastern Australian wheat is causing pressure on Chicago. The world wheat market is oversupplied, and without a new crop weather problem, rallies will be difficult to sustain. It feels, for now, as if the Chicago soybean complex is happy to maintain strength.

• Brazil is said to be opening negotiations with Mexico over soybeans and meat according to Brazil’s ag minister Maggi. Mexico is looking for alternatives to US grain, soybean and meat based on the US Trump Administration’s posturing over NAFTA. Brazil is said to be open to selling/exporting more food products to Mexico if the US alters trade policy.

• China’s return was felt overnight as their Central Bank did not raise interest rates. This “no move” sparked a fresh push of investment in commodities. We would note that seasonal corn/soybean price trends turn higher next week and a record large Brazilian soybean crop is being buffered by record large world oilseed demand. With the USDA report anticipated to be neutral/supportive on Thursday, we would caution against turning overly bearish with US and S American farmers remaining tight fisted with stored supplies. CONAB is scheduled to release their updates on Thursday morning.

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Fund positions

• US ethanol production continues to rise to record levels which is indicated in the chart below. This week’s ethanol production of 312 million gallons sets a new record high. WASDE appears to be running too low in its annual ethanol production estimate by at least 25-50 million gallons, and if this trend persists, it could be too low by 75 million. The US domestic demand for corn remains record large.

• Weekly US export data has been released as follows:

• Brussels has issued weekly wheat export certificates totalling 816,936 mt, which brings the season total to 16.01 million mt. This is 1.01 million mt (5.93%) behind last year. Barley exports for the week reached 192.559 mt, which brings the season total to 2.72 million mt.

• An uninspiring day in Chicago in what seems like a “rest” in the wake of yesterday’s strong rally where corn spread trade and reports of dryness in the Plains added support. It should not be forgotten that the US farmer has sold most of his old crop soybeans and adds cash corn sales on rallies. However neither the US or S American farmer is showing much desire to make new crop sales at current price levels.

• It seems that the funds will not let go of the reflation trade and see commodities as cheap on price breaks, and it is hard to argue this scenario. It seems almost impossible to get a fund manager to sell sub $3.50 corn or sub $4.15 wheat ahead of the new N Hemisphere growing season. The US has sold 91% of its expected annual US soybean export package with seven months remaining in the crop year. China will return slowly from its week long holiday, and we would probably bet it will be with their buying shoes on starting early next week!

• Brazil is on track to harvest a potentially record soybean crop, and export commitments so far in January are higher than expectations. The global cash market, however, is not yet providing incentive for a wholesale switch to S America. The graphic below shows Brazilian soybean’s discount to US Gulf, or in the case of this year, Brazil’s premium to US Gulf. Weaker basis is therefore likely to be forthcoming, but in the meantime we would expect solid US soybean sales and shipments through the month of February.

• Chicago markets started trading weaker but quickly rallied into positive territory on the back of fund buying and rumours of fresh Chinese demand. Some Chinese traders are returning from their New Year break and have positions to cover it seems. There is also something of a traditional post New Year seasonal bullishness. It is noteworthy that cash soybean meal is weakening and this is acting as a drag upon futures prices. Finally, there is the issue of fresh Russian/Ukraine military clashes in E Ukraine, which will doubtless put some further strain on the Trump administration. Support for Ukraine will likely come from a financial or trade perspective and global grain traders are watching this closely.

• S American farmers are noting that the Brazilian Real has rallied and that Chicago prices have fallen this week and consequently are not cash related sellers. The lack of cash selling allows for market corrections, but most S American sources argue that it would require new highs for any large scale Brazilian farmer selling. Our bet is farmers will now wait for yield results before selling much in the way of additional cash soybeans.

• This remains a “big crop” vs. “big demand” marketplace and chasing breaks or rallies is still not our recommendation. Corn and wheat are in position to test their recent highs while the weakness in cash soybean meal markets argue that rallies in soybeans will fail. The grains should gain on soybeans, and also soybean oil on soybean meal. Our view remains one of selling strong rallies near their recent highs in the grains.

• Turnaround Tuesday has not materialised as we have seen a more stable day of trade in Chicago markets. Despite improved weather in Argentina there remains a debate in the soybean complex as to whether S America’s surplus will meet or even exceed increased global demand, and thereby whether the US will have to fill any gap in world trade. The key indicator will be global cash prices, which have not rallied since early January. This is a key point to watch going forward.

• There is little fresh news today, certainly nothing market changing and it is far too soon to assume we are about to see a US export collapse on the back of S American surplus production. Also our view of cash markets suggests the US will see export volumes continue at least through February.

• Chicago markets have started the week on the defensive with losses across the board as we enter the final 30 minutes of trading. Volumes have been reasonable and weather models offer a favourable shift in Argentina as the week unfolds as well as forecasting soaking rains across NE Brazil in the early to mid-February period. Early soybean harvest in Mato Grosso (largest producing state) has been slow but yields have been described as “solid”. Similar yields are being quoted across Goias in C Brazil.

• Market one-liners today:

Soybean markets are holding onto huge weather premiums and soybean meal remains overpriced.
Corn traders see good weather in S America and are wary of concerns with Mexico.
Wheat markets will struggle to hold support levels if other grains move lower.

• It seems that weather premium is being extracted from markets today, and we will doubtless see additions and subtractions over the course of the next four or five weeks into early March. As important from a market perspective will be yield reports from Brazil. Neutral market views are our stance right now until such time as we see just how well, or otherwise, S American yields have fared and how their exports pan out in early springtime.

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Weekend summary 27 January 2017

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

Fund positions

• Our latest update on global wheat stocks can be downloaded by clicking on the link beow:

Major Exporter Wheat Stocks (Jan ’17)

• UK wheat premiums to feed barley remain at high levels, in the order of £21.00/mt on an ex farm basis. Whilst not creating records, there is a suggestion that the recent increase in poultry placings could add further pressure to the market. UK wheat prices look to remain well supported for the time being.

• One line summaries:

Soybeans: The threat in Argentina is shifting to dry, not wet and “normal” means down!
Corn: The trade sees growing concern with a big S American crop and weakness in ethanol markets.
Wheat: The US remains uncompetitive in global markets.

• Chicago markets have been lower today with under half an hour to go, soybeans easing to weekly lows and an early rally unable to be sustained on the back of weak US and S American cash markets. Volume has been poor in Chicago as traders tire of back and forth trade with little to show for it.

• US exports were reported as follows:

• Egypt’s GASC has tendered, once again, for wheat and at the time of writing there has been no announcement as far as awards are concerned; we will update accordingly in due course.

• For much of the past seven months, US corn has been the cheapest feedgrain in the world. This has bumped up US corn export inspections by 76% over the prior year in what we have coined the “big crop” vs. “big demand” marketplace. The chart below is reflecting the rise in world feedgrain values with S American offers well above the US until April or May in Argentina. The point is that world feedgrain prices are now rising, and unlikely to relax in a big way until sizeable Argentine corn exports are offered. Corn appears rangebound for now.

• Simplistic market commentary tonight suggests that soybeans will require daily supportive news input to avoid long liquidation and lower prices; corn is extremely overbought and there are fears of increasingly slower trade; the wheat market’s technical action is turning bearish and US exports continue to slow down.

• Away from the US it is now clear that UK wheat is the most expensive in the world having six months ago been competitive to say the least. We are seeing a tighter balance sheet, which is in stark contrast to the globally well supplied market, coupled with an early season strong UK export picture. Last month we saw LIFFE wheat hit a £30 premium over Chicago, which has eased in the last week or so, but this was a three year high. London futures rarely trade at a premium to Paris although this has been the case in recent times, likely as a consequence of French quality this year. There remains room for UK wheat prices to make further gains in relation to other world levels.

• There was a large surge in Index Fund net long positions in US ag futures during the yearly rebalance period. The inflows are charted in the graphic below with the combined ag index fund position at its largest level since late 2014. The biggest index fund flows came into cattle, wheat and corn. The question is whether new funds will continue to be pushed into the ag futures markets in coming weeks? Our bet is that heading into a new N Hemisphere growing season, that fund managers will continue to see US ag futures as historically cheap.

• The overnight rally in Chicago was not sustained as the trade mulled over the US Presidential executive orders signing the Keystone and Dakota pipelines as a vote for oil as against biofuels. In addition there were concerns that retaliation could erupt against US ag exports on the back of President Trump’s America First Platform. Arguably he is not intending to harm ag exports and is indeed working to build demand but there remains potential for trade wars to develop in the wake of US domestic trade defence.

• It is estimated that US farmers have sold more than 75% of their soybean crop and 55% of corn. US and S American farmers are now seeming less willing to cash grains on price breaks, which is limiting downside in these crops at present. Bearishness and downward price trends are consequently difficult to establish despite non-bullish fundamentals.

• Argentine Ag Minster Buryaile discussed cutting Argentine soybean and soybean oil export taxes on Monday. However, our sources suggested that such discussed tax cuts are not expected to occur until early 2018 when soybean export taxes will be reduced .05% per month going forward. However, the talk of soybean and oil tax cuts is causing Argentine farmers to be an even tighter holder of old and new crop supplies, adding somewhat to support.

• We, and others, have not found riches by selling price breaks or buying into rallies as both have been short lived and not sustained. It is our view that the current break will be any different as cash selling is already thin on the ground. S American crop uncertainty remains and the “gap” on the soybean chart remains a strong support level. Today’s move appears “corrective” and that we will return to the range, which we would anticipate lasting into February.