• “Reflation” is a topic on every economist’s mind. The chart below reflects world inflationary trends since 2000 with a conservative forecast for 2017 of 3.4%. The New Year looks to be the first time since 2011 that inflationary pressures will build. Since then, the big worry has been stagflation and deflation due to growing world debt, aging western population demographics, and the displacement of jobs via technology. That has all changed with new confidence in the US political leadership amid the mass of $29 trillion of QE that has been pushed by Central Banks. This reflation makes being bearish raw materials a more risky proposition into 2017.

• Technical selling has been the feature in Chicago markets today with the soybean complex taking the bearish lead as yesterday’s $10.20 support level gave way as did a plethora of other support levels including the 50 day moving average. Sell stops triggered and markets fell and the complex looks heavy into the close tonight. Sharp selling in soybeans has impacted the grains, which have also lost ground; Mar ’17 corn futures have tested support, as has wheat, and whilst fund selling in grains is not as robust as in soybeans it remains tough to shrug off 15 plus cent losses.

• We have seen a snap tender by Egypt’s GASC to purchase wheat, and the results are still awaited as we write this. Doubtless we will have a result tomorrow, and will update accordingly.

• It has been down and out throughout today’s trading with fresh fund selling expected near today’s close. China is not showing interest of supporting the market on this dip (yet) and fund related selling could emerge in tropical oil markets. We would argue that new rallies will surface in 2017 on inevitable S American weather scares. Our view is that a broad trading range will continue through until the USDA Crop Report on January 12th. This is not a break we would be inclined to sell heavily, if at all.

• The week has started mixed in Chicago markets although as the day has progressed we have seen the market decline to losses across corn, wheat and soybeans. Early trade saw wheat in Chicago jump on bitter cold conditions across central US regions in trade that was described as active. Both bulls and bears could claim success today! Needed rain fell across Argentina and S Brazil over the weekend, the best amounts reaching ½- 1½ inches across Buenos Aires/La Pampa, and bear traders can claim S American yield potential remains intact. The bulls can claim Chicago have not collapsed on S American rains, and have actually traced in positive territory for much of today. Take your pick!

• One thing seems sure to us, and that is that we will gain some measure of quite how much weather premium is in soybean prices and whether or not it is a demand driven rally that we have been witnessing since late November.

• The US$ has held largely steady overnight and the Chinese Yuan is at 6.96 vs. US$. Dalian soybeans and meal futures closed mostly higher, helping early US prices. China continues to ship its existing purchases giving no concern for defaults or rollover of positions at this time.

• Jan ’17 soybeans have continued to hold $10.20 support, for how much longer? It has been tested more than once!

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

Weekend summary 16 December 2016

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

Fund positions

• Chicago markets traded lower on a stronger US$ earlier although soybeans are now in positive territory as the surge in the dollar lacked lasting impact. January ’17 soybeans bounced off $10.20 support once again as fund buying on the support level resumed.

• The market is leaning bearish, strongly so according to many, with some traders finding frustration that their positions are not working, particularly with rain in the forecast for Argentina and S brazil. 2016’s rallies and declines have added to frustrations as forecasting them has been tough. Now, we are seeing a lack of cash selling on price breaks and this is preventing (or making difficult) Chicago futures declines. US farmers are reported to have sold 66% of their soybeans and S American farmers are unwilling to sell amid the bearish views on their currencies. They will likely want to see their new crops closer to harvest before adopting a more aggressive cash sales position.

• US export data has been released as follows:

• Soybean and corn sales were well above expectations.

• Brussels has issued weekly wheat export certificates totalling 681,597 mt, which brings the season total to 12.18 million mt. This is 306,453 mt (2.45%) behind last year. Barley exports for the week reached 122,749 mt, which brings the season total to 1.88 million mt, which is 3.26 million mt (63.4)% behind last year.

• Frustrated bearish traders are exiting their short positions as wet weather foreacsts for Argentina and S Brazil have not pressured soybean futures. It is inflationary fears and the flow of index fund money which appears to be supporting soybean futures against a bearish fundamental landscape. The grain markets are in a trading range with upside targets at $3.70-3.75 basis March ‘17 corn and $4.30-4.40 in March ’17 Chicago wheat.

• Our latest take on global grain balance sheets can be downloaded by clicking on the link below:

Global Grain Balance Sheets Dec ’16

• US futures based ethanol margins are resting at their best levels in years. The chart below plots these margins excluding costs. Working backwards on costs suggests that most plants are making $1.14/bu of corn or $.39/gallon. The hefty margin of ethanol producers is one reason why Chicago corn prices are rising as US farmers hold onto stored supplies and US exporters and ethanol producers fight for supply. Rising crude oil/gasoline prices are only accentuating the ethanol production gains. Ethanol margins may have to peak before corn prices head back down.

• Chicago markets have been choppy with wheat, corn and soybeans a touch lower in slow volume trade. The Fed announcement has been the main watchpoint, and they did not disappoint with a ¼ point increase with a suggestion of faster paced increases in 2017 as the Trump administration takes over with promises to boost growth through tax cuts, spending and deregulation.

• The feeling this afternoon is that fund managers are wanting to buy breaks rather than sell rallies, with a belief that funds are just not in a bearish mindset right now, despite the global supply and stock position. However, we should point out that Jan ’17 soybeans have held support levels at $10.20 (so far) although there is a looming chart gap below $10.00, which should be watched carefully. There appears to be a lack of S American and US farmer cash related selling on declines, which has allowed Chicago futures to bounce. Recall US farmers have sold as much as 66% of old crop soybeans and S American farmers are bullish on surging US$ strength.

• Weather forecasts remain favourable for S America and private forecasters are increasing their estimates slightly for Brazilian corn and soybean crops. It appears to be the rain in Argentina that could expand soybean and late corn seedings.

• Our leaning remains towards longer term bearishness although we would expect and anticipate rallies into early 2017 on growing inflationary expectation in the US.

• Funds continue to pile into new length in the commodity space as measured by the CFTC Index fund positions in ags. For the year, commodities are up around 18% as an asset class, which has some fund managers taking note. One way to participate is through index fund purchases, and we suspect that funds will continue to push additional investment into the commodity space into early 2017. This is one reason why the ag markets have not traded very “fundamental” since early autumn.

• Today has seem March ’17 Chicago corn push above the $3.61 resistance level whilst soybeans have traded either side of unchanged as the market vacillates between paying attention to coming rains in Argentina and  S Brazil or the tightening soybean meal market in China on account of crush plant closures allegedly due to environmental reasons. Many are suggesting that fresh money (which should always be watched closely) is being pushed into index funds and this is having its effect on prices. Fund managers are looking at record high US equity prices, the tightening US labour market and the slosh of cash that is circulating the world and chanting “inflation”. “Trumponics” and the expected fiscal stimulus has unleashed more confidence in US political leadership, which is helping the velocity of money. Whether it is crude oil, cotton or cattle, the markets are seeing better demand and this is helping higher prices.

• This week’s jump in crude oil and unleaded gasoline prices is causing huge margins for ethanol producers. Calculations put the ethanol futures crush margin at the highs of the year above $1.23/gallon with plant margins close to $.40/gallon over all costs. Both are some of the best production margins in years, which has plants/producers looking for cash corn and willing to secure futures to lock down future profits.

• The closure of 6-8 Chinese crush plants for a week has further tightened domestic soybean meal supplies within China and pushed their soy crush margins to a three year high. The exceptional margins has Chinese crushers looking to secure soybeans on any Chicago weakness. A further decline in the value of the Yuan vs. the US$ is likely to keep pulling Chinese soybean demand forward. China has already crushed 2 million mt more soybeans in the crop year to date than last year.

• More traders are talking inflation price trends that could keep Chicago prices heading sideways to higher into the year end. Brazilian and Argentine farmers are not willing sellers fearing further losses in their currency. Our mindset remains one of looking for some additional gains into year end as funds place inflationary bets at the Chicago Board of Trade. A 50% recovery of the summer decline crosses at $3.72 basis spot Chicago corn futures – watch this one carefully!

• Early rally efforts in Chicago markets failed with corn, wheat and soybeans all lower as we approach the close. Funds, whom were early buyers, appear to have reverted to selling as markets eased. Saudi Arabia’s purchase of 750,000 mt of hard wheat is reputedly to be sourced mainly from the US, although we are not convinced of this at present.

• The market today is correcting Friday’s rally as traders debate the Argentine and S Brazilian rainfall forecast for next week. Little or no rain occurs this week and the weekend has warming temperatures according to latest forecasts. Some high temperatures will reach the upper 90’s and lower 100’s on the weekend. We continue to want to sell a rally into the end of the year or opening days of 2017. China’s falling Yuan will likely keep a bid under soy!

• Following mixed but quieter trade through most of the morning, Chicago grain and oilseed markets briefly came to life with the release of the December WASDE report, but volume has been fairly light for a USDA report day. The report was not expected to offer any major changes to either the US or world balance sheets, and the USDA met those expectations with just some minor tweaking of estimates. Markets broke at the report release, but have generally traded quietly and are mixed around unchanged. The US corn balance sheet was left nearly untouched from November. The only change that was noted was an increase in the season average price forecast, which increased by 5 cents, to $3.05-3.65. In the wheat estimates, no changes were made to supply or demand forecasts. Again, the only significant change was to the season average price forecast which was raised by10 cents to $3.60-3.80.

• The USDA held demand and stocks estimates unchanged in the soybean balance sheet, but did raise the season average price forecast by 25 cents to $8.70-10.20. The largest changes in the December report were in the soybean product markets. As expected, soybean oil used for biodiesel was increased by 250 million lbs to 6,200 million  The increase was a disapointment for a number of biofuel bulls, who were looking for a significant increase. Historically, the December WASDE report has done a good job forecasting annual biodiesel demand, and we continue to advise following the USDA’s lead on this very complicated topic. The WASDE report lowered the estimate for soybean meal yield, and production was thus reduced slightly from November, while exports were lowered by 200,000 short tons to 11.8 million tons.

• The December WASDE report will be the last major update from the USDA for the year, and with the report now in the rear view mirror and just two full trading weeks left in the year, S American weather will garner the trade’s attention into the January Crop Production and WASDE reports. Brazilian crops are generally in great shape, and consequently the focus will be on whether rains in the extended forecast develop for the driest parts of Argentina. Our view is that it will take significant crop shortfalls in S America to support lasting rallies.

To download our USDA recap please click on the link below:

USDA-Recap-9-December-16

• Today’s theme has been one of consolidation, corn and wheat futures in Chicago have eased and early gains in soybeans have similarly been eroded. Dry Argentine weather forecasts are being discounted by traders who are holding profits ahead of the weekend (it’s only Wednesday!) and Friday’s USDA report. We should also not discount the fact that weather forecasts can, and do, change in the space of a weekend, and traders would not want to be caught wrong footed, in a long position, should this be the case. The opening market next week could well prove interesting/exciting depending on weather updates.

• US President Elect Trump is said to have picked Terry Branstad, a longtime friend of Chinese President Xi Jinping, as US Ambassador to China according to media sources. The appointment may go some way to cooling off building rhetoric that the new administration wants to label China as a currency manipulator. The appointment is being cheered by many US farm groups, that have been worried about nationalism and more protectionist trade policies.  There is no indication from the new Trump Administration that they are planning to extend the $1.00/gallon credit for biodiesel producers. The credit will expire on January 1st. Most Washington sources expect that any new support to the US biodiesel industry will come from a comprehensive tax legislation that could be enacted by the second quarter of 2017, until then, many biodiesel producers will be left wondering about their future profitability.

• Big picture – one can only be bearish with improved rain chances across Argentina and S Brazil.

• China has announced that it would try to double its biofuel production by 2020. At headline value, this sounds rather impressive, but when you reach into the data, you find that such a move would increase their 2017 corn ethanol demand by just 3.15 million mt. Such demand would be welcomed, not only by local growers but also by global exporters, but it does not materially alter the landscape for Chinese corn prices or supplies with their domestic stocks pegged at over 200 million mt by traders. China at some point will likely have to export corn.

• We have not seen a “turnaround Tuesday” as corn, wheat and soybeans in Chicago have continued higher on further fund buying. January ’17 soybeans have moved to their late November peak price levels whilst corn has hit levels not seen since early November. Wheat followed, but in a more half hearted manner as cash markets have been reluctant to follow. Weather premium is being added “just in case” the Argentine and S Brazil conditions continue dry for an extended period.

• StatsCan produced a 2016 all wheat crop of 31.73 million mt including 7.7 million of durum, 20.4 million of spring wheat, and 3.15 million of winter wheat. This wheat crop was 4.2 million mt larger than last year, and the second largest crop on record. The October snows did not seem to produce much impact on yield with the late October warmth allowing for a salvage of this year’s production. The finding of the additional durum wheat is important to world prices. StatsCan also increased their canola (rapeseed) crop to 18.4 million mt, which was also a record. The crop was slightly smaller than trade estimates that came in at 18.8 million mt. Nonetheless, the crop is sizeable and will offer the world considerable export capacity. As a sideline, soybean production was also record large at 6.5 million mt. The StatsCan crop estimates were considered slightly bearish amid the sheer amount of supply that was offered. In the past two days, the Aussie and StatsCan data has added 4.5 million mt to world wheat production, and we expect that the Argentine wheat crop will increase by another 1-1.5 million mt, which means that the world has just uncovered an extra 6 million mt of exportable wheat. This raises the supply competition for all world wheat exporters into June.

• Funds are covering net shorts in the grains while building the largest net long in soybeans since mid summer. US soybean sales continue to build and there is support for the forthcoming WASDE report to elevate the US soybean export total on Friday. There is some rain in the extended forecast for Argentina, but with the medium range models still offering dryness, our trust in that potential moisture is somewhat low. The market will add premium to price until better Argy rain chances are confirmed.