• Chicago markets are trending lower as we head to the close and some contracts are heading towards contract lows once again. There is doubtless some pre-report positioning ahead of tomorrow’s report, exits from long soybean oil/short soybean meal have been reported although volume has been subdued. The S American harvest is picking up pace and it feels as if this will currently limit rallies from both a duration and size perspective.

• Global macros, including equity markets have been in something of a meltdown with the Dow shedding 300 points and crude oil has again dipped below the $30/barrel mark. European and US bank shares have seen some of the biggest hits leaving some questioning future credit risk – something worth watching.

• As much as 90% of the Argentine soybean crop has been reported to be rated good/excellent in a report sanctioned by the Argentine government. Old crop Argy beans are trading at at significant $30 premium to new crop, which appears to be encouraging farmer selling of their hoarded supplies, particularly now as much needed rains have fallen across a broad swath of the pampas. With the Peso in decline it would seem eminently sensible for the farmer to take advantage of the nearby premium.

• The Russian government has not made an announcement on export duties as was expected. The prospect for an increase in wheat export duty is looking unlikely due to the falling value of the Ruble, although some believe a modest duty may be imposed on corn and/or barley exports. Recall that Russia needs hard currency for their economy.

• Chicago markets look to be stuck with the fallout from global financial markets and a test of contract lows is looking entirely possible. Soybean meal looks as if it will struggle to sustain any significant gains in the face of weakening US cash demand. Global fob offers for wheat, corn and soybeans continue to weaken as they try and find some demand.

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Weekend summary 5 February 2016

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Fund positions

• Yesterday Informa Economics released their latest 2015/16 production forecasts for S America with Argentine corn output increased to 26 million mt from 22 million previously. Argentine soybean production is also higher at 60 million mt, an increase from 58.5 million mt. Brazil’s corn output is forecast higher at 81.6 million mt from 81.3 million previously. Soybean output in Brazil was reduced to 100.5 million mt from 101.4 million.

• Conab, for comparison purposes, put Brazil’s corn crop at 83.3 million mt, 1 million higher than a month ago, and the soybean crop at 100.9 million mt, 1.2 million lower month on month but this would still represent a record output if reached.

• To conclude the raft of data today, StatsCan reported 2015 year end wheat stocks at 20.7 million mt, below trade estimates of 21.8 million and last year’s 25.6 million mt. Canola (rapeseed) stocks were reported at 12.1 million mt, above trade estimates of 11.5 million but below last year’s 12.6 million mt.

• The USDA has today released its weekly export figures as detailed below:

Wheat: 154,000 mt, which is below estimates of 200,000-400,000 mt.
Corn: 1,143,500 mt, which is above estimates of 800,000-1,000,000 mt.
Soybeans: 22,100 mt, which is below estimates of 400,000-600,000 mt.
Soybean Meal: 12,800 mt, which is within estimates of 5,000-25,000 mt.
Soybean Oil: 12,800 mt, which is within estimates of 5,000-25,000 mt.

• Brussels has issued weekly wheat export certificates totalling 826,594 mt, which brings the season total to 17,019,839 mt. This is 707,143 mt (5.99%) behind last year. The last couple of weeks’ volume are about on pace to hit the USDA’s latest 32.5 million mt season total, but need to be matched each and every week for the remainder of the season if the total is to be hit.

• Chicago’s early rally faded as wheat led the way lower in the wake of what was described as “disappointing” price results from Algeria’s tender and ongoing weakness in global fob levels. Despite the fall in the US$ prices in Chicago closed lower pretty much across the spectrum. The US$ has lost around 3% this week as bullish trades are unwound amid concern that US payrolls will reflect post holiday weakness, which will likely place interest rate hikes on hold. The fear that a continuation of stuttering global economic outlook will drag US GDP lower is the cause of bullish US$ trade being unwound. Algeria’s tender was concluded at a reported $178 basis CIF and is thought to be mainly French origin although there has been a suggestion that UK origin may feature. The price works back to a fob level equivalent to $171-172, which is a multi year low and below current replacement levels, perhaps indicating eagerness to book volume sales ahead of the 2016 harvest.

• The news of the Algerian price has many wondering if EU wheat will cost into Mexico and SE USA as a feed ingredient. The feeling is that at a $1.50/mt premium for wheat over US corn, and its improved feeding value, will attract interest from US livestock feeders. Little wonder US Gulf corn is losing export demand!

• Price trends in US markets has been broadly sideways for some three weeks but global wheat prices are continuing lower as too much supply chases too little demand. Next week’s WASDE report should see US export volumes trimmed on corn and wheat and reduce 2015/16 soybean crush leaving elevated end stocks, and the outcome should be lower prices. We are watching price rallies failing well below technical resistance levels suggesting that physical sellers rather than technical chartists are running the market at present.

• World wheat cash offers best illustrate the demand issues facing global grain markets. Just yesterday French offers for March posted new seasonal lows, as Egypt rejected a cargo over the weekend due to phytosanitary issues that we reported yesterday, and as we calculate record (or close to record) surpluses across the Black Sea and Europe. US wheat, meanwhile, has been flat. Wheat markets elsewhere are probing for a level that boosts major importer consumption, but they do not seem to have found it yet, and financing on behalf of major importers has become a real issue.

• In its January seedings report, NASS cut 2016 Hard Red Wheat planted area by 2.4 million acres from the previous year, and cut Soft Red plantings by 370,000 acres. The tables below assume average abandonment and trend yields, and notice that if realised, production is only modestly changed from 2015/16, and total supplies will be steady to higher amid enlarged carryover stocks Total US wheat consumption is projected slightly larger in 2016/17 amid a boost in world trade, weather across wheat areas of N Africa, the Middle East and Brazil has been less than perfect – but Hard Red stocks will remain burdensomely large. Soft Red stocks are projected to contract 20 million bu, but will be very close to the five year average. Soft Red premiums to Hard Red will expand over time. The point of is that even a sharp decline in US acres does not change in the structure of the US wheat market (a demand-driven bear market). Adverse weather is needed to prevent another build in all-wheat stocks.

• Funds continue to slowly pare back their large net short position, but world the cash market remains decidedly weak. As reported, Egypt found no offers at its latest tender, with major exporters citing Egyptian credit difficulties and stringent phytosanitary specifications. Egypt faces a real problem, both political and economic, if it cannot source wheat in a timely matter. However, major exporters also have a problem with massive remaining surpluses and Egyptian demand is needed. French cash prices fell $1/mt to just over $169 (a new seasonal low, and a level comparable to $3.95, basis spot Chicago), and the graphic below displays the US’s premium to competing markets. The current $30-40/mt premium has been rare over the last 12 months, and this disconnect between the US and world markets is unlikely to last. The global market has the potential to bottom out closer to $160/mt this spring, and it’s important to keep this in mind. Note, too, that ENSO forecasts continue to trend towards El Niño lingering throughout 2016, which will be a boon for S Plains soil moisture.

• Macro markets have kicked off February with a whimper, mostly due to ongoing negative indicators from China. The graphic below charts monthly PMI, and notice that this indicator has been at levels that show economic contraction (50) since summer. A string of six consecutive months of contraction in the manufacturing sector is not helpful to the macroeconomic climate, and we expect global investors to remain wary of risk until emerging markets show signs of strength.

• Weekly soybean export inspections were within expectations, but also the lowest since early October, at 42.4 million bu. The cumulative annual total slipped further behind last year, down 172 million bu or 13% vs. the USDA’s annual forecast that calls for just an 8% decline in US soybean exports. NASS reported a total December soybean crush of 167 million bu, in line with expectations and 9 million bu over December’s NOPA total. Both meal and oil yields were below the NOPA total. S American weather forecasts lean bearish for Chicago  trade, while discounted prices on soybeans and meal look to slow US export programs.

• Egypt’s GASC today announced a new wheat tender for early March shipment only to later announce its cancellation due to lack of offers. Whether the lack of offers is in any way connected to three cargo rejections for ergot contamination (according to Reuters) is clearly a matter for speculation, but the timing of both events looks highly correlated! Rejection for trace contamination, within the 0.05% tender specification, seems highly suspicious and if we were the exporter/shipper we would be speaking with legal counsel about initiating arbitration proceedings. Seemingly there is a difference of opinion between Egypt’s supply ministry, which includes GASC, who maintain they will allow shipments within specification whereas the quarantine authorities have refused to accept even trace contamination. Left hand – right hand???? The additional risk is too much for exporters to take on board, particularly when prices are extremely competitive right now and the required risk premium too high.

• We now face an interesting conundrum with Egypt not in a position to lose global connections and ties whilst exporters still have issues reducing their record surplus stocks.

• Outside markets continue weak with crude oil weak at midday, down $1.30/barrel and gasoline also down, the DOW was lower, down 285 points at midday and European wheat markets also displaying weakness. Fund short covering has been ongoing in the last couple of weeks or so, yet remain net short in the three major ag commodities (estimated soybeans short 80,000, corn 125,000 and wheat 100,000). The slow and steady short covering exodus has not produced a volatile spike, which would have likely ensued if the exit had been been less orderly.

• Wheat futures have extended their overnight decline amid similar weakness in European futures, but overall the markets have been relatively inactive. Spot Paris milling wheat has posted a new contract low, which along with an unchanged €uro will push French wheat offers even lower.

• China’s monthly PMI updates did no favours to macro markets today,earlier crude was down $2.00/barrel at $31.50, and both gasoline and ethanol were following, and the DOW is down 100 points. Investors remain uneasy amid ongoing negative macro indicators – Japan’s negative interest rates, poor data from China, and the US Fed’s recognition that economic growth in the US has been a bit shaky.

• Brazilian trade data in January featured corn exports 4.5 million mt, which is another record for the month, and this suggests that the USDA is still some 2-3 million mt too low with their Brazilian corn shipment estimate, and surprisingly, a few cargoes of corn keep getting added to the vessel lineup. Brazilian soybean exports in January totalled 390,000 mt vs. near zero last year. We calculate new crop Brazilian soybean commitments as of last week at a record large 6.0 million mt, vs. 3.4 million a year ago. Weakness in the Real (compared to a year ago) will likely further boost early sales of Brazilian soybeans.

• A flood of data will be released through the rest of this week; grain and soybean crush is due after the close, Stats Canada’s tri-annual stocks of grain and oilseeds will be published on Thursday  and monthly winter wheat conditions will be released later this evening. However, market-driving news is left to the USDA’s Outlook conference in mid-February and two-sided trading will likely continue in the weeks ahead.

• Non-commercial traders have embarked on slow but steady short covering since early January, and only now have they pared back their positions to more reasonable levels. Rallies in the short term will hinge more upon actually bullish data, which is not widely available, while declines await S American harvest results and early crop conditions in the far Southern US in early March. We expect the next leg down to be a function of fob corn and soybean offers from S America in late February/early March. Amid current Brazilian soybean production estimates, there’s still downside risk in global oilseed prices.

• Over the weekend it was confirmed that Egypt has, in fact, rejected the ergot contaminated wheat cargo that has been the subject of retesting in recent days. The longer term implications of this are yet to be felt, but there will doubtless be some reaction from traders (at least in France) in the next tender.

• What markets take one day they give back another! Chicago wheat has led prices lower today as concerns over a Russian export duty fade. One Russian ag deputy countered talk from another (last week) in that Russia should cut wheat export duty in favour of new duties on barley and maize. Left hand, right hand and all that springs to mind! Basically it should not be forgotten that Russia has too much wheat/grain and needs to remain an exporter to the world’s market.

• China appears to remain uninterested in US soybeans and is in preparation for their Lunar New Year holiday which is notorious for commodity inactivity and market lull. With recent purchases from S America (4-7 cargoes of Brazilian soybeans and cover through to May) there appears little reason for them to chase the market higher. In addition it looks likely that the Brazilian farmer will dig deeper into soybean harvest in the next couple of weeks, and will likely increase sales if prices move higher leading to price caps.

• There is a continued absence of fresh input and with this as a backdrop we continue to focus upon lack of evidence of enlarged world or US grain export demand and the main fundamental factor, too much supply chasing after too little demand, as we head into spring. The US planting season, the weather and likely acres are the next items upon which we will have to focus. Globally, it seems that farmers are holding onto large stocks, either by design or by default, and this remains a potential price cap as we look forward.

• In another interesting turn we hear that Egypt has not yet made a final decision on the rejection of a cargo of French wheat that has tested positive for traces of ergot fungus. They recently decreed that “no wheat containing ergot fungus will be allowed into the country”, and the shipment, which arrived in December, is being retested.

• Chicago markets have been mixed although it remains wheat that is displaying positive prices as we approach the close. The market today was described as dull with only short covering in wheat, which came close to testing the $5.00/bu level in the July ’16 contract. Slowing Chinese demand for US soybeans has left prices lacking support and this has being seen today as has the slowdown in US crush operations. Neither factor can be construed as bullish for soybeans or products and with crush margins at or near negative levels and US stocks of soybeans at decade highs we continue to struggle when we hear others peddling bullish stories.

• Argentina continues to be an aggressive fob seller of corn through to April at levels reportedly some 15-20 cents below US Gulf, which will move buyers in their direction and remain away from the US. At the same time Ukraine is matching Argentina’s prices as they become more aggressive as farmers boost their sales. The result is that US corn exporters are struggling to find demand for their volume and to make matters worse global feed wheat is offered below the price of corn resulting in end users like S Korea to extend forward cover in wheat as far forward as June. There is too much feed grain in the world right now and price is the only means by which it can be moved – but it will have to be at lower levels that we are seeing right now!

• If Russia was to place an additional export duty on wheat exports they would have to place an official public notice for 30 days in their federal register (assuming they follow the rules!) and if decided on Friday this would leave the door open to extremely aggressive export activity in the period up to implementation (early March). This would likely see French prices undercut, maybe substantially, in a drive to secure what little volume demand is around at present, leaving EU stocks unsold.

• European wheat prices rose on Monday as dealers covered short positions after reports Russia is considering increasing its grain export restrictions. Front month March wheat in Paris unofficially closed up €3.00  or 1.8% at €167.25/mt, the day’s high. Russia’s Agriculture Ministry is considering toughening grain export limits and imposing tougher restrictions until new crops arrive for sale this summer, the Interfax news agency reported on Monday. The aim is to cool Russian internal market prices. Reuters could not confirm the report. Russia already has an export tax on wheat but despite the duty, the country’s grain exports hit a record in December due to the weaker rouble.  The picture in Russia remained blurred, leading to a risk-off mood among market participants. However the report about possible additional restrictions on Russian exports prompted some dealers to cover short positions, traders said. “Export restrictions by Russia, which dominates the export market, would change the story but it has yet to be confirmed,” a trader said. Russia is a major rival to France in wheat export markets. The downward trend in Paris wheat prices since early November meant some export competitiveness had been regained but international demand is still weak, another trader said. German cash premiums in Hamburg were cut to compensate for the strength in Paris, with buyers declining to accept price rises. Standard wheat with 12% protein content for February delivery was offered for sale at €2.50 under the Paris March contract against €3.50 under on Friday. Bids were generally €3.00 under Paris futures.

• Chicago markets were described as slow and two sided with rallies being capped by selling pressure. Favourable S America weather and ongoing lacklustre US demand, as well as the likelihood of growing US end stocks, look as if significant price gains remain unlikely. Wheat was higher on the latest Russian rumour. No confirmation on the rumour has been offered and differing opinions have been expressed by Russian ag deputies on the subject. A Russian economics ministry meeting will be held later this week. We have heard that wheat export duties could be on the agenda due to rising domestic food inflation rates. However, no outright ban on Russian wheat exports is being contemplated amid the abundance of Russian wheat/grain. We struggle to believe that any sizeable export duty will be placed and the wheat export duty rumours are tied to the falling Ruble and its impact on a host of consumer goods within Russia.

• There has been considerable talk about rising domestic Brazilian corn prices and their record large corn export program. We have no hard evidence that Brazil is planning to shift or default on corn export commitments due to their short term rising prices. In fact, talk is ongoing that Brazil could release another package of government stored corn (they did 500,000 mt last week) to help their livestock producer. Moreover, their first corn harvest will start in just two or three weeks and this new supply will afford a fresh supply of corn as exporters shift their focus to soybeans. We don’t expect that Brazil will move to alter their corn export program with their cash corn market to likely to peak in the next 10 days.

• US farmers are citing that grain and soybean prices are cheap. Yet, Russian, Brazilian and Canadian farmers would suggest that their domestic prices are high? It is the value of the US$ that continues to play a heightened role in stimulating world agriculture production. The 2016 grain markets are different insofar as the Black Sea is the world’s leading wheat exporter and S America is the world’s leading soybean exporter. This places huge pressure squarely back on the US and Chicago. As US export and crush demand estimates wilt, so will prices with time!

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Weekend musings 24 1 16