• A $26 range on front month soybean meal (so far) today highlights the volatility being experienced for the reasons we highlighted this morning. For completeness, we should add that we are now at the bottom of the trading range, just into negative territory. Cash basis prices have held firm for much of the day as end users have double booked to endure deliveries as they allowed stock levels to drop in anticipation of abundant new crop supplies which have been slow to materialise both from a crush perspective as well as the logistical nightmares. It is expected that October crush data will reveal an increase in pace of almost 50% with around 157 million bu of soybeans being processes.

• Currently it has been revealed that US nutritionists are exploring ways of reducing soybean meal inclusion levels on account of the current expensive price levels. $430-$440/ton is hard to absorb and DDG’s, cottonseed and canola (rapeseed) are all being explored as is relatively cheap lysine. Such actions will, if exercised, reduce soybean meal demand and help prices to decline to more realistic levels. At such a time as we see prices drop, we would expect the move to be both dramatic and speedy.

• In Brazil it is reported that Mato Grosso has planted around 20% of its soybeans as of last week, this is below the five year average of 42% although this has not (yet) translated into yield concerns. However, there is concern over the safrinha corn crop, and there is even talk of a second soybean crop in Mato Grosso. The current market pricing structure can only further encourage this and we would venture to suggest this is a “wrong” signal to give in light of large and growing global stocks.

• Yesterday’s US crop condition report showed corn to be 74% good/excellent, unchanged week on week, and to be 46% harvested, which is a touch better than expected and compares with the ten year average of 62%. Soybeans were reported to be 70% harvested as expected, which is behind the ten year average of 79%.

• It is probably correct to say that chart technicals look bullish in a fundamentally bearish market right now. The bulls and the bears still have to establish a supremacy and market direction. As we have said on many previous occasions, when the technicals and fundamentals do not agree we tend to side with the fundamentals, and we see no reason to veer away from this stance right now.

Our focus today is soybean meal which has shown sharp gains that were initiated specifically in the nearbys with fund short covering and cash demand. Prices have rallied to their highest since the June USDA crop report. Despite eastern Midwest farmers progressing well with harvest and delivering beans to crushers it is a lack of rail cars and logistical difficulties that are producing what we describe as a cash bottleneck.

Southeastern pork and poultry producers needing meal are being forced into double booking cash meal, taking trucked in supplies whilst awaiting rail car deliveries that are currently delayed, possibly arriving later in the week. This is a pretty generalised description of the acute difficulties being faced in the short term. The double booking is creating a false demand picture for the long term but reflects short term cash demand.

The meal rally is leading the advance although grains and beans are not displaying anything like the strength of meal, which in our view, fully justifies the observations above. Producer hedging in the grains is helping to cap any upside at this time.

Soybean meal cash basis for Nov and Dec IS retreating lower, but focus (rightly) is on the spot month alone right now. Brazilian farmers who are enjoying the CBOT rally and a sharp drop in the Real are taking the opportunity to hedge considerable soybean volumes in Chicago which in turn caps upside.

In conclusion, we feel the meal market is giving entirely the wrong message to the market right now! The US does not need to see any further switching or cancellation of meal sales given its likely record supply position. Meal markets, specifically nearby, but also into year end have reached a level where S American supplies pencil into the US as imports. The price squeeze is as a result of a tight logistical situation. Western Midwest meal is offered $5.00 below Dec ’14 CBOT!!!!! Nearby issues and difficulties will be resolved in coming weeks and we doubt that this rally in meal can be sustained.

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

Weekly Update 24 October 2014

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

Fund positions

• As a pretty general comment it seems that at current levels US January ’15 soybean prices are as much as $2.00/bu overpriced. As Brazilian planting weather improves dramatically and US harvest progresses with the promise of volumes large enough to swamp the marketplace we would expect prices to drop, and potentially dramatically. Current prices reflect a stock/use ratio of around 8% or end stocks of 275 to 300 million bu. The current forecast of 450 million bu (and possibly growing) would suggest prices have to face a decline, the question to ask is, “When?”

• Whilst the above may well fly in the face of what is currently happening in markets, specifically soybeans, it feels very much as if the “burden of proof” lies with the bulls to justify why prices should not decline.

• US weekly export data has been released with soybean figures surprisingly at double estimates, adding support to prices. The numbers are as follows:

Wheat; 299,300 mt which is below estimates of 350,000-500,000 mt.
Corn; 1,031,200 mt which is above estimates of 800,000-1,000,000 mt.
Soybeans; 2,170,200 mt which is above estimates of 800,000-1,000,000 mt.
Soybean meal; 23,000 mt which is below estimates of 150,000-250,000 mt.
Soybean oil; 10,600 mt which is within estimates of 10,000-50,000 mt.

• On the subject of exports, Brussels granted another big week of wheat certificates with the week reaching 681,003 mt, which brings the season total to 9.601 million mt. This is 804,792 mt (9.15%) ahead of the same time last year.

• As an interesting add-on to exports, whilst Matif wheat continues to rally, and it seems this is not on the back of the recent Egyptian purchase, it appears to be on a more technical delivery position. Cash premiums have shown nothing in the way of weakness in the last three weeks despite a rally of close to €20 in futures prices. This was initially explained by “farmers don’t like the prices”, but it is beginning to feel as if “they don’t have the wheat to sell”, particularly given the pace of exports leaving reduced stocks available to sell.

• Having said all this, it still does not feel like there is a big wheat rally in the offing. US wheat remains uncompetitive and there are still fund shorts in place.

• CBOT markets closed firmer on large US soybean and corn export numbers and wheat followed through with additional fund buying. There have been questions asked over the size of the soybean export number given that daily sales data this week has been zero! There has been a suggestion that the data has been “forgotten”, “overlooked”, or (heaven forbid) cajoled by the Chinese to announce the sales on a different date! Frame contract price fixing, and how individual businesses treat them, could also be another explanation for the “surprise” data today. The bottom line appears to be that it is not all new sales, just a reshuffle of existing; 2.1 million mt of new sales without a single daily announcement is as close to impossible as it is possible to get.

• Despite all of the foregoing and the surprisingly resilient price rally, we struggle to see how, with the global grain and oilseed supply position, any lasting bullish trend can be sustained.

• For the first time in many a month we have started to turn somewhat friendly towards the wheat market! Whilst it may be frustrating to suggest this when prices (basis Nov ’14 futures) are some £12.00/mt above the lows, it should be borne in mind that tonight’s close is still more than £45.00/mt below the high levels seen earlier in the year.

• Why the change of heart? Why now? Why did we not see this two weeks ago? So many questions and all perfectly valid; taking the the last questions first, we try and look for lows (naturally) and these can only ever be seen after the market has bottomed and a pattern of reversal has been established. The change of heart was been triggered initially by yesterday’s Egyptian purchase at an average price some $10/mt higher than previously paid. Added to that we have a number of other statistics this side of the Atlantic that suggest a change of trend. Ukraine appear to have shipped/sold their 5 million mt exportable surplus. As we reported earlier in the week, Kazakstan’s exportable surplus seems destined to remain in the fields until next spring, they even appear to be importers in the short term (from Russia). Russian prices, despite earlier thoughts, appear competitive (for now) and the overall picture has a somewhat different feel to it today – even compared with yesterday morning!

• CBOT corn and soy complex markets closed lower with wheat bucking the trend and ending in positive territory, although off the session highs. Cash hedging by farmers has been evident as prices have risen and they ramp up corn and soybean sales, and this has weighed on prices as the day progressed. News that China returned to the US for Dec ’14-Feb ’15 soybeans on the back of slow S American soybean seeding provided some early market price support. Rumour has it that some US soybean meal sales have been switched to Argentina, and more are in the pipeline. Export space will be limited in Argentina but the commercial raison d’être is pretty obvious with both Argentine and Brazilian meal prices below US levels by around $26-$29/mt and the world is heading away from US origination right now.

• Late news tonight suggests that Russian wheat is about to enter winter dormancy in its worst condition in five years. Given the size of the country this is a bold suggestion and most regions have seen normal to slightly below normal precipitation since Sep 1st. However, there are some dry areas in SE Russia and E Ukraine where precipitation totals have only been 20-50% of normal. History tells us that the level of snow cover and spring weather truly determines Russian wheat yield but in the light of our earlier comments and potential change of heart this could become a particularly relevant issue going forward.

• S American weather patters are, at last, changing with N and C Brazil looking set to receive abundant rains in the next fortnight. Some 2-5” is forecast to fall across soybean growing areas which have been struggling with dry/hot conditions since early October, and this is likely to significantly help in restoring lost soil moisture. Soybean seeding ahead of the forecast rains is reported to be progressing as farmer confidence in the forecast grows. S Brazil and Argentina are forecast to see rains in the middle of next week which, if it arrives, will maintain soil moisture at “adequate” levels.

• We maintain the world has an abundance of grain and oilseeds, a bounce off the early October lows has occurred with soybean meal leading the way as pipeline filling has been slower that desired. Funds that have been heavily short in both wheat and soy have exited positions, and (basis estimated daily fund transactions) it seems funds could be close to square on soybeans right now. Consumers appear reluctant to chase the rally, suggesting when fund buying slows/stops a resumption of the supply driven bear market will return. Improving S American weather (dramatically?) and a strengthening US$ into the year end suggests that and sustained bullish trend is unlikely.

• Midday comments:

• After the closing bell last night Egypt’s GASC issued a further wheat tender for late November shipment, the results of which we should know before close of play today. The likely candidates for successful supply are expected to be Ukraine, Russia and France. See below.

• The US Crop condition report issued last night showed corn rated good/excellent unchanged week on week at 74% which compares with last year’s 60%. The crop is 31% harvested, which is 2% below expectation, an improvement over last week’s 24% but behind last year’s 38% and the ten year average of 51%. Soybeans rated good/excellent were also unchanged week on week at 73% which compares with last year’s 57%. The crop is 53% harvested, 2% behind expectation and up from 40% last week’s 40% but below last year’s 61% and the ten year average of 70%.

• Winter wheat in the US is reported to now be 76% planted up from 68% week on week but behind last year’s 77% and the ten year average of 79%. Emergence is being assisted by recent rains in the western Plains and the warmer trend for the remainder of the month will help early growth ahead of winter dormancy.

• Early markets saw support from a short-term uptrend in Dec ’14 CBOT wheat and stronger than expected demand in global wheat markets. In soybeans slower than anticipated S American plantings and slower harvest progress as well as further short covering supported prices despite prospects of yield improvement in the forthcoming November USDA report.

• It feels as if markets are at a pivotal point right now, they will either resume their downward slide and reach or breach their former lows, and this applies specifically to soybeans and corn, wheat will likely follow in the footsteps of corn rather than lead the way. Failing this, some are suggesting we have seen the season lows and the traditional harvest bottoming price action is complete as supplies have spiked and farmer hedging growth has been seen. We continue to favour the view that recent price upside has been fuelled by the slower US harvest and that farmer hedging pressure has been limited so far.

• One further macro(ish) factor is that index funds have been liquidating commodity positions as we approach the end of the year (yes, the year is truly flying by!). This is the third consecutive year in which index funds have performed poorly compared with other indices. The trend towards other investments with lower fees and commissions,whatever they may be, is reported to be growing. Consequently, any further move towards liquidation will likely pressure prices, limiting rallies and supporting the theory of lower prices.

• Evening update:

• The results are in! We saw a three way tie between France, Romania and Russia who managed to supply 60,000 mt each to Egypt in the latest tender which saw a total of 180,000 mt placed. The reported price was an average $10.00/mt higher than the last traded level.

• Markets have traded higher today with soybean meal leading the way as slower than desired harvest pace prevails. Suggestions of yield loss in Brazil as a consequence of slow planting progress has been denounced by Imea the Brazilian government crop reporter who suggested that it is far too early to draw such conclusions. Volume has been moderate rather than large suggesting a degree of hesitancy to follow prices higher – right now. The current “bounce” has now reached $0.70/bu for soybeans, $0.40 for corn and $$0.6 for wheat, and looking back this is not outside norms in the wake of a significant decline, such as we have seen this year. With US end stocks projected to be in excess of 2,000 million bu of corn and450 million bu of soybeans it still feels difficult to justify significantly higher prices or an about turn in price trend. If, in addition, S American weather is trending wetter and yield losses are being denounced, there is an even less supportive atmosphere to the market.

• Current market conditions encourage US farmers to increase soybean plantings at the expense of corn acres in the forthcoming spring planting campaign. The market has to attract corn acres, at the expense of soybeans, presumably falling soybean prices would achieve the desired outcome!

• CBOT markets opened the week on a lower note as improved US and Brazilian conditions pressured prices. Active US harvesting  in the central and western Midwest has been reported although eastern Midwest areas are still experiencing delays due to wet soils and lingering rainfall. Farmers in Brazil are either actively planting soybeans in Mato Grosso or are about to start in advance of forecast rains. Weekend rains were better than expected and producers are optimistic that the wet season has, at last, started across the north of the country.

• It has been reported that funds have returned to the selling table in the aftermath of last week’s short covering rally and whilst some consumers are fixing prices on weakness there is not any large scale buying evident at present.

• Matif wheat futures still have to cope with delivery silos that are reported to be choked with stock leaving Nov ’14 contract holders potentially unable to deliver if they so choose. Whether this is a help or a hinderance to the market right now is something of a mystery but, as always, time will tell. There is a suggestion that as a consequence of early snows in FSU regions we could well see some of the (Kazakstan) wheat crop standing in the fields until spring, which will potentially limit exports to some degree.

• Yields of corn in France are reported to range from good to stunning and it has been suggested the crop could reach 18 million mt.

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

Weekly Update 17 October 2014

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

Fund positions

• Midday comments:

• Yesterday’s rally in Dec ’14 wheat, to new highs, followed by a lower close could pave the way to downward pressure today. However, the contract showed some independent strength and made its high despite weakness elsewhere. The hedge fund exodus from short positions has supported the fundamentally weak grain commodities and the volume of trade has been high. It has been suggested that the funds are now “done”, or almost so, and the markets will now resume trading on their own fundamentals once more. As if a reminder was necessary, the grains fundamentals remain bearish, and an added pressure is coming from fears of global slowdown which has seen equity markets sharply lower, crude oil futures declining and currencies taking something of a battering. At some stage we see these issues pressuring the already fundamentally pressured commodity markets.

• Stratégie Grains has forecast EU 2014/15 soft wheat output higher at 147.403 million mt, compared with 146.6 million mt last and 135.4 million mt last year.

• In corn the market still has the threat of fund long liquidation hanging over it and hedge pressure from farmers selling and making more grain available to commercials will also remain a negative force, particularly if prices remain at, or above, current levels. Talk of improved US harvest weather conditions and the collapse in energy and equity markets as well as storage space issues from the grower’s point of view, all lean negatively on the corn market, particularly as time goes on. The weather outlook appears far better as we approach the weekend and into early November, and we would expect to see the harvest pace increase rapidly. Current price levels will be looking attractive to growers who may begin to look at moving their corn straight off the field, which would pressure cash as well as futures.

• In soybeans the large open interest in the front month Nov ’14 contract coupled with the fund net short position remains a supportive factor. Short covering is one side of the story, with the record US crop just around the corner farmer hedging will remain active and slow or restrict upside gains. Perhaps the largest longer-term issue remains the likelihood of increased S America soybean planted acres followed by increased US acres in spring 2015, which (if realised) would extend the oversupply position even further forward. Ultimately price has to become the balancing and driving factor to correct this potential trend. Currently the market remains very nervous and twitchy, hence volatility stays high, but the big picture remains unchanged.

• Evening update:

• It appears that Chicago markets have (at last) paused to take a breath after the volumes and gains of the last few days. As some equity markets and crude oil prices have recovered somewhat it seems that fund manager liquidation pressure is easing.

• Brussels has issued weekly wheat export licences totalling a massive 1,004,854 mt, which brings the season total to 8.92 million mt. This is 530,262 mt (6.3%) ahead of last year’s same time total. Clearly there has been some strong global demand for EU wheat as prices have reached their recent low levels, and consumer cover would seem to reach into early 2015 based upon these latest figures.

• With an hour of trading in Chicago corn, wheat and soybeans all remain in positive territory.

• Midday comments:

• CBOT wheat markets continued to piggy back strength in corn and soybeans although volumes dod not reflect any strong following. Perhaps the strange thing is that funds do not appear to be too concerned right now given the heavy selling being seen in crude oil which is causing liquidation of longs. Paris wheat made a good “recovery” bounce on the back of US grains. Any turndown or setback in corn or soybeans could well put the skids under wheat given its recent upsides. Last night’s planting report showed winter wheat at 68% complete vs. 56% last week and compared with the ten year average of 70%.

• Corn markets are likely to suffer from growers initially storing their corn whilst selling soybeans but in all likelihood storage will fill to bursting quite fast, and news of piles of corn on the ground will place the market under considerable pressure, particularly cash markets, which will in turn impact futures prices. Current market volatility in corn is high and the recent rain delays to harvest must be seen as a key driver of the latest upswing in prices. A resumption of better weather conditions and harvest will likely trigger a resumption of the longer established downtrend. Weekly crop conditions showed 74% of corn to be rated good/excellent, which is unchanged week on week and compares with the ten year average of 63%. Current crop condition is becoming less relevant right now, but keeps yield at the forefront of discussions, specifically in relation to the next USDA report in November.

• In soybeans we see a test of the $10 level in the Mar ’15 contract as a selling opportunity as the market faces a record US harvest and also a record S America crop which will be harvested in early 2015. Yesterday saw the second day of strong gains as funds withdrew taking profits which improved the short-term technical outlook. Volume, particularly in Nov ’14, was impressive with a life of contract set at over 200,000 contracts traded, mainly early in the session. Delayed harvesting, as with corn, and dry conditions in Brazil have been key drivers of the latest upswing in prices. Weekly condition reports showed soybeans at 73% good/excellent, unchanged week on week and compares with the ten year average of 57%. Harvest was quoted to be 40% done vs. 20% last week and the ten year average of 57%. The week on week change leans bearish for the market we believe.

• Evening update:

• Eventually CBOT corn futures gave way dropping almost 2.5% at the close with soybeans shedding half that amount.  Wheat futures closed in the red but not significantly lower. Financial markets have seen sharp losses in equities and US$ whilst Chicago grains have seen huge volume trade in the day. We could well have seen some fund repositioning although the evidence, if there is any, will be slow in coming forward. Friday is the reporting day for Commitment of Traders reports, and the next release will only show data up to yesterday (Tuesday). US debt futures have posted sharp gains on a weakening global economic outlook, one trigger has been suggested to be the ebola outbreak and it should not be forgotten that crude oil has dropped below $80, the lowest level in the last four years.

• The ebola issue has the potential to be a major global destabiliser. CNN have been reporting on one US health worker diagnosed with the virus who flew the day before displaying symptoms. The fear is that the 132 passengers on the same flight may also now carry the infection which could spread and create a “hotspot” unless they are contained for the incubation period, suggested to be 21 days. The interview process for these passengers illustrates just how fast paced the virus can travel and and how difficult it can be to contain. Ebola can not be considered bullish for commodities or financial markets, perhaps with the exception of gold, as economic activity potentially slows and large crowds, public transport and large cities become less desirable places to be in outbreak situations.

• S American weather forecasts show the wet season commencing in earnest next week across northern Brazil with progressively wetter patterns emerging into November. Normal precipitation and temperatures are projected across Argentina and far southern Brazilian crop areas.

• The € gained over 120 points and Matif wheat closed a touch lower today. Spreads widened in surprisingly high volume trade, possibly on November option expiry. Russian corn output, extrapolated from current harvest data, suggests that the potential 14.5 million mt suggested three weeks ago may well be optimistic. Current estimates now look closer to 11.5 million mt, and possibly falling, and compares with the USDA’s 12 million mt forecast.