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Weekly Update 14 March 2014

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• Brazil’s CONAB released its latest 2013/14 crop updates in which soybean output was cut to 85.44 million mt from February’s 90.01 million mt. Export potential was also reduced to 45.3 million mt from previously anticipated 47.4 million mt. Corn output was forecast at 75.18 million mt, which was also a reduction, albeit of lesser magnitude than in soybeans, from 75.47 million mt. The Brazilian wheat crop was reduced by 300,000 mt at 5.5 million mt. Hot and dry weather conditions were cited as responsible for the downgrades.

• Interestingly, the impact upon Chicago prices was not taken as bullish, presumably as reduced Brazilian output had already been well publicised and was factored into prices. Soybean markets fell almost 2.5% (basis May ’14 contract) although closing off the lows of the session.

• In contrast, Chicago wheat markets rose sharply on further fund purchasing. The outlook for US 2014 wheat production is a reduction on 2013 output although this is hardly fresh news; the January winter planting report put soft red wheat acreage 16% down, which, at trend yield and average abandonment, gives an output of 440 million bu. This has been in the public domain for a long time and should not be a price driver today. The remaining wheat news remains the uncertainty that exists over the Russia/Ukraine situation, which may become clearer after the Crimean referendum on Sunday.

• Closer to home, Stratégie Grains and the HGCA reported positively on UK winter cereal crop conditions despite the wet winter conditions. Spring sowing concerns are also evaporating as recent drier conditions are allowing field work on lighter land and the prospect of getting onto heavier ground in coming days looks increasingly likely. The ten day weather forecast has encouraged the favourable view. In terms of output, Stratégie Grains latest numbers suggest a wheat crop of 15.215 million mt, which is an increase from last year’s 11.921 million mt. Total barley output was forecast at 5.8 million mt, down from 7.092 million mt almost entirely as a result of reduced spring cropping, which was forced last season due to impossible winter planting conditions.

• Finally, the Egyptian supplies minister is to form a committee to remove obstacles in wheat tender specifications. Maybe this will placate the French!

• Yesterday’s soy complex led selloff has seen something of a recovery today (not surprisingly – profit taking) with CBOT wheat leading the way. Seemingly, dry weather in the US is the main culprit, supported by ongoing Ukraine tension. This has spilled into EU markets which have closed firmer tonight.

• There is probably a “bargain hunting” mentality also at work in today’s price rises given the sharp selloff yesterday.

• There is little in the way of fresh news to stimulate the strength in wheat, fund activity has appeared to show them adding to positions, and this has led to stronger prices.

• Argentina’s Rosario Grain Exchange has forecast the 2013/14 corn crop at 22.7 million mt, which is a 700,000 mt increase from their last estimate.The soybean crop was forecast 300,000 mt lower at 54.7 million mt.

• Rumour abounds on the number of Brazilian soybean cargoes that have been cancelled by China, 20 (over the Friday to Monday period) being the latest number put forward. It is also suggested that there are more in the pipeline. Additionally, in the light of collapsed crush margins (in China) it is suggested that the likelihood of Chinese default on US soybean shipments is now higher, as the financial downside (to China) is less with default than it is with importation and crushing.

• The USDA March crop report was deemed slightly bearish as US corn and soybean stocks failed to match the expectations of the market. Corn and soybean futures are lower while the wheat market is mixed with some degree of further fund purchasing.

• CBOT markets will now focus on the 31 March stocks and seeding report, US export demand, the Ukraine/Russian issue and spring weather and planting. We believe that rallies will be more difficult to sustain into this report as the trade fears bearish soybean seeding and corn stocks totals.

• WASDE raised 2013/14 export inspections by 25 million bu to account for the stronger sales pace since February. 2013/14 US corn exports are forecast at 1,625 million bu, which reduced end stocks to 1,456 million bu. One issue remains, that being whether China will ship 1.5 million mt of corn due to their strict testing for MIR 162, and whether or not other traditional importers of US corn will add to their current large forward positions.

• No other changes were made to US corn demand, and the stocks/use ratio edged  to 11%. 2013/14 global corn stocks were increased slightly to 158.5 million mt, an increase of 1.2 million from February due to larger carry-in and imports.

• 2013/14 global corn production was increased to a record 967.52 million mt with crops in Argentina, Brazil and South Africa holding steady. China’s corn crop was increased by 700,000 mt to a record 217.7 million mt.

• US soybean exports were raised by 20 million bu to a record large 1,530 million bu. To balance the increasingly tight end stock position WASDE reduced the crush rate by 10 million bu to 1,690 million bu and increased imports by 5 million bu to 35 million bu. The result is a decline of 5 million bu in US soybean end stocks to 145 million bu and this gives a stocks/use ratio of 4.36%. Historically it has proven difficult for the ratio to drop below 4.3%, 1 March supplies appear to be bigger than last season, does this indicate a bigger crop?

• 2013/14 world soybean production was reduced by 2.26 million mt to 285.43 million mt, the decline being due to smaller forecast output in Paraguay and Brazil. The Brazilian harvest was estimated lower at 88.5 million mt, and with over 50% already gathered we would hope that this is an accurate representation. The Argentine crop was left unchanged at 54 million mt. Chinese  imports for 2013/14 were left unchanged at the record 69 million mt level.

• Global soybean end stocks were reduced to 70.64 million mt on account of the reduced Latin American crop. It is of course possible that Brazil’s crop could lose another 1 million mt, but this could equally be offset by slower Chinese imports and/or a bigger Argentine crop. It appears almost a certainty that global end stocks will be 71 to 72 million mt, and South America will have a long export tail into late 2014.

• US wheat stocks were left unchanged at 558 million bu with no change in the balance sheet, it feels that the US wheat exports number is high, and as such we would ultimately anticipate a higher end stock figure. Global wheat and stocks were broadly unchanged at 183.81 million mt, the main feature of the figures was an increase in Australian output by 500,000 mt to 27 million mt. The last Indian crop was increased by just over 1 million mt to a record 93.5 million mt, although expected exports remain at 6.5 million mt.

• To summarise, the March report held little in the way of surprise to either supply or demand. We already knew that US soybean stocks were historically tight, additional price gains will have to be led by the cash market. Currently this market is under pressure from active farm selling as well as the thawing of principal waterways further north.

• It appears we may be seeing funds reducing some of their recent length, they need to decide on their stance going into the March stocks and seeding report.

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Weekly Update 7 March 2014

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Fund positions

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

Wheat: 600,500 mt which is above estimates of 250,000-450,000 mt.
Corn: 1,682,500 mt which is above estimates of 600,000-850,000 mt.
Soybeans: 1,029,400 mt which is above estimates of 450,000-750,000 mt.
Soybean Meal: 268,700 mt which is above estimates of 75,000-150,000 mt.
Soybean Oil: 16,800 mt which is within estimates of 0-30,000 mt.

• The greater than anticipated volumes in wheat, corn, soybeans and meal have all lent additional support to markets, which are already generally well supported by the funds. Whilst it will only be Friday evening when we receive the official data, it appears that overall open interest is declining seemingly as a result of spec short covering. In a “proper” bull market we would expect to see an increase in open interest rather than the current trend. This begs the question, “Is this a bullish market, or not?”

• Selling is noted in new crop corn and soybeans in Argentina and Brazilian farmers are scale up sellers in soybeans. The current rally is particularly appealing to the S American farmer right now. It would seem that soybean prices basis FOB Paranagua when compared with FOB US Gulf are $1.10/bu cheaper, this coupled with better than previously anticipated load times is encouraging the switch to Brazil.

• Brussels has granted weekly wheat export licences totalling 586,316 mt, which brings the season total to 21.873 million mt. This is 6.868 million mt (45.8%) ahead of the same time last season.

• In Ukraine the situation remains complicated, although (thankfully) relatively calm. There has been a vote by the Crimean legislature to hold a referendum on returning the peninsula to Russian control, and this is currently scheduled for 16 March. The international implications regarding economic sanctions agains Russia become harder to contemplate in the light of this latest news.

• At long last we have seen Chinese cancellation of soybean cargoes amounting to some 245.000 mt for 2013/14. Soybean markets shed value on the news, although with half an hour to go, old crop prices are still in positive territory. Farm selling and fund buying is still evident, not only in soybeans, but also in the grains. It appears that in the wake of the Ukraine crisis managed money is moving away from equity markets into (defensive?) commodities, and fund positions are likely to reflect this in the next published figures on Friday evening (UK time).

• The Ukraine situation offers little in the way of fresh news, and markets appear to have digested the news, and are looking now for fresh input. Russian troops appear to be settled in Crimea, and resolved to remain there until Ukraine leadership voting is completed in May. Political posturing, bluff and bluster aside, it seems that little is about to change in the short term.

• In other news, we hear that China is about to approve the corn GM event, MIR 162, as they have received appropriate documentation, or is that because they have rejected/cancelled sufficient to offset their improved domestic production – or is our underlying cynicism rising to the surface yet again?

• Reuters reported that Egypt is to “review” its 13% moisture limit, which recently (effectively) excluded French supplies from being included from the sat two tenders. Little effect is anticipated in old crop trade where we may see one more tender before imports are completed.

• Markets started the day a touch weaker as rumours spread that China had cancelled a number of US soybean cargoes – music to the ears of the bears perhaps! Fund demand soon put an end to the brief spell of weakness as prices moved back into positive territory. It appears that technical, chart based, buying is dominating at the present time rather than prices taking direction from the usually dominant fundamentals.

• Cash markets in the US have seen a sharp decline in basis as farmer selling on the recent rally has been particularly active. Current price levels are thought to be a significant driver that will maintain US planted acres and potentially see an increased soybean area.

• Informa Economics have today released their latest estimates which include the following:

Brazilian 2013/14 soybean output at 88.8 million mt, down from  89.7 million mt.
Argentine 2013/14 soybean output at 54 million mt, down from 57 million mt.
Brazilian 2013/14 corn at 65.45 million mt down from 66.55 million mt.
Argentine 2013/14 corn at 22.6 million mt, which is unchanged.
On a more upbeat note, Indian wheat output for 2014/15 was estimated at 108 million mt, an increase from their last forecasted 99 million mt, and a huge 15.5 million mt above last year’s output. The pressing need for India’s export volume to grow has just been raised a notch or two.

• The Ukraine crisis has not gone away, the last piece of news we picked up is that Russia has tested an Intercontinental Ballistic Missile from the southerly Astrakhan region near the Caspian Sea and the dummy warhead hit its target at a proving ground in Kazakhstan. If this is not provocative, we don’t know what is! Clearly the “test” is another flex of the biceps in what is proving to be a difficult situation. However, out loading of grains continues albeit we are towards the end of the season, and it will be a few months before new crop movements become front page news.

• Markets remain nervous, and we now have a built in risk premium. Some of the new “longs” are questioning what they are going to do with their newly acquired position. It seems that we are at a potentially critical point of balance in markets right now.

• Today has been all about the Ukraine “crisis” and the involvement of neighbouring Russia who have moved from the border between the two into Ukrainian territory, specifically the Crimean peninsula. International outcry is loud and vociferous in its almost universal condemnation of Russia’s action but they are adamant about their role as “protector” of the oppressed Ukrainian people. Nonetheless, markets have built in a substantial risk premium today, although we have seen that erode in soybeans and soybean meal whilst wheat in Chicago saw gains of over 6% ($0.41/bu) at one stage although at the time of writing wheat’s gains are running at $0.20/bu (3.5%). London wheat surged over £6.00/mt and MATIF gained more than €9.00/mt before closing just off the highs.

• The big question many are asking is, “Have we now seen the lows?” Our view is tempered with a degree of caution and a caveat over what happens in Ukraine over coming weeks. However, we see little logic in either Ukraine or Russia stifling agricultural production, which is a main source of revenue, or restricting imports, which appear to be continuing today. That said there are suggestions that the faint suggestion over questionable export execution is sufficient to justify the rally. On the other hand, the fact that the initial surge in prices was not maintained throughout the session could well point to the fact that initial fears were overdone.

• In the UK (England and Wales) the latest HGCA planting survey confirms a return to more normal winter cropping pattern for the 2014 harvest. 2.976 million ha were planted to winter sown crops (wheat, barley, oats and rapeseed) by 1st December, which was a 14% increase over the previous year. Weather conditions, which were vastly improved over the previous season, were cited as the main reason for the increased acreage. Wheat accounts for 1.815 million ha of the total, 295,000 ha more than was actually harvested in 2013, and this ignores late planted or spring plantings. Interestingly, the winter barley planted area at 369,000 ha is also above the 2013 harvested area by some 41%, and is reported to be the largest area since 2003. The 2014 rapeseed harvested area is estimated at 703,000 ha, a 3% year on year increase.

• In Brazil, Safras (agribusiness consultants) have estimated reductions in the 2013/14 corn and soybean crops on account of dry conditions. Corn was estimated at 71.2 million mt, down from their last estimated 75.6 million mt whilst soybeans were estimated at 86.1 million mt, which is just over 6% down on the last estimated figure.

• Without wishing to labour the point, confusion still exists over the soybean situation as far as China is concerned. There is still no concrete evidence of the long awaited contract cancellations/switched, and that is despite further news of port storage congestion in China to the point that vessel discharge is being disrupted and/or delayed. Further news of collapsing crush margins and declining soybean meal demand from livestock producers who, it is suggested, are already long in a weakening marketplace. All this with significant volumes of soybeans from both north and south  America on the water heading for China as we speak! Something, it would seem, has to give before too long. Maybe the expiry of the March contract will provide the necessary trigger.

• Finally tonight, extreme cold in the US is not currently anticipated to be a significant threat to wheat crops thanks to the insulating blanket of snow which preceded the recent reduction in temperatures. However, spring planting could well be delayed by low temperatures as the soil needs to both dry out and warm up to allow field work and seed germination (which requires soil temperatures over 5℃/40℉).

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Weekly Update 28 February 2014