CBOT markets have had a positive day today almost from the off, and that is in spite of reportedly better planting conditions in S America. US winter wheat condition lost 1 percentage point from last week (good to excellent) which is a record low and Australian wheat has an elevated quality risk as a result of unseasonal rainfall . We also continue to hear additional news of crop development pressure in parts of Russia and Ukraine as summer drought conditions continue into the autumn and early winter leaving wheat vulnerable should winter conditions prove to be extreme. The drop in US wheat condition comes on the back of the worst recorded summer drought since 1956 and also at a time when global supplies are under extreme pressure.

London wheat hit new highs again today with the May ’13 contract hitting £225.00 and closing just £0.25 off that level. New crop conditions fare little better as autumn sowing conditions continue to delay planting of cereal crops in both the UK and northern Europe, France in particular. Paris wheat also made new contract highs and technical levels are being tested which, if broken, could pave the way for new all-time high prices. We reiterate our view that US wheat is now looking cheap in relation to other origins.

We now look forward to Friday’s USDA report which is widely anticipated to present a bearish soybean output estimate but could well hold a “sting in the tail” for grains with reduced wheat output in both Australia and Argentina. In addition reduced US and world grain numbers would not be ruled out in the report.

This is a big week in a political sense with the US choosing a new (or maybe not so new) president tomorrow, which when coupled with the slug cash removed from  hedge funds as a result of hurricane Sandy has left US markets lacking clear direction.

Wheat in London and Paris  made contract highs not only in the tight old crop position but also in new crop as well as weather concerns escalate over delayed sowings in northern Europe and the emergence of newly sown wheat looking less than great.

US wheat continues to be reported as emerging poorly across the Plains in dry conditions, the latest Argentine reports are calling for reduced output and early harvest reports from Australia confirm our fears of a lower harvest output there.

Little wonder we are seeing wheat receiving support which is not currently apparent in corn and soybeans right now.

We have seen a week marked, in the main, by markets trending higher as fundamentals point towards higher levels. The disruption to markets as the US was hit by hurricane Sandy was widespread with the New York Stock Exchange, ICE futures markets and New York subway system closing for a time. Markets initially sold off but recovered quickly as some “bargain hunting” and realisation of value returned to the market. We wish everyone caught up in the storm and its aftermath a safe and speedy return to normality.

The return of Egypt to the market saw sales made once again by France (120,000 mt), Russia (120,000 mt) and Romania (60,000 mt). We do not believe that the Russian sale should be seen as a return by them to the export market, rather an “allocation” of tonnage not taken up by Iraq a week earlier.

More important for coming months is the additional sale by France, which continues to see the EU balance sheet tighten still further in a season that is predicted to end with around three weeks of ending stock. Worryingly, this would leave the region below “pipeline” requirements and we anticipate the need for significant feed grain imports in the remaining months of the season.

We are already seeing EU feed manufacturers chasing offers of S American and Ukrainian corn in an effort to fill the looming void. Volume offers are thin on the ground and rapidly escalating in price, and beyond December offers are virtually non-existent at the moment. To add to the problems, we heard that a sale of French corn, for shipment in November, to Japan was concluded inn the week. It is believed to be in the order of 25,000 to 50,000 mt and a “first” for France. The sale, if confirmed, will add credence to our view that global consumers are finding increasing difficulty in sourcing feed grain supplies from traditional sources.

The latest US crop rating produced a surprise inasmuch as the winter wheat condition was reported at only 40% good to excellent. This is the lowest such rating in over 20 years and is a result of the summer long drought which continues to affect the Plains. The dry conditions are forecast to continue into the early winter and the potential outcome is that tillering of wheat crops will be reduced and will result in lower yield. This comes at a time when global stocks are running at uncomfortably low levels and southern hemisphere crops look unlikely to “refill the barn”. Reliance upon bumper northern hemisphere harvests to take on that mantle in around eight months time is now at an all time high.

Argentine crop output was downgraded in the week by as much as 20% for corn and 10% for soybeans following prolonged storms and continued rainfall. Parts of Argentina, which is the No 2 corn and No 3 soybean exporter, are reported to have received as much as a full years rainfall since September. Crop analyst Michael Cordonnier forecast an 80 million mt soybean crop in Brazil, which is a reduction from the earlier 81 to 83 million mt estimates. He also referred to “fields as much as two feet deep in water as far as the eye can see,” and the likely reduction in Argentine corn output that this would cause.

The worsening prospects for S American crops comes at a time when global stocks are tight to say the least and improved, if not record, crops were being predicted as the saviour of the situation. We appear to be moving away from “salvation” at present and we consequently reiterate our view that higher prices on all three key crops, soybeans, corn and wheat are likely in coming months.

Yesterdays USDA weekly crop progress stats follow:

Weekly crop progress report (all numbers expressed in percent)
US CORN – 91% HARVESTED VS 87% WK AGO VS 60% 5-YR AVG
US SOYBEANS – 87% HARVESTED VS 805 WK AGO VS 785 5-YR AVG
US WINTER WHEAT CONDITION- 40% GOOD/EXCELLENT, 46% YR AGO
US WINTER WHEAT – 88% PLANTED VS 815 WK AGO VS 85% 5-YR AVG
US WINTER WHEAT – 63% EMERGED VS 49% WK AGO VS 67% 5–YR AVG

Out of all the data it was the winter wheat rating which caught our attention at just 40% good to excellent which is the lowest rating for some 20 years. As we mentioned earlier in the week it is the dry conditions across the Plains which are contributing to such a rating, and is could well cause issues with the crop entering dormancy in less than ideal condition. This is particularly relevant in a year when any early yield issues are potentially critical from a global standpoint.

Support was evident in early trade in Chicago but profit taking towards the end of the session trimmed gains to the lower end of the trading range.

S American weather, at last, shows some improved conditions across central and northern Brazil which will improve planting prospects. Dryer weather patterns are forecast across southern Brazil and Argentina which, if they materialise, will relieve the extended period of wet weather experienced by the regions.

Markets moved sharply higher in early trade as workers on the US east coast struggled to get to their desks in the aftermath of hurricane Sandy which had forced closure of some businesses and the subway in New York. Notable buyers were the funds this morning and consumers have struggled to procure physical grains from producers once again.

The move up is interesting today, particularly as month ends frequently see prices ease as positions are reduced in size to balance the books, generate cash and realign positions ahead of the new month. This has certainly not been the early tone in trade so far today.

Egypt returned to there market today and have secured 300,000 mt wheat for shipment late December and January with France and Russia each securing 120,000 mt and Romania picking up the additional 60,000 mt. Interestingly US soft red was the cheapest on an FOB basis losing out only on the freight advantage which France and Black Sea currently continue to maintain.

The Russian sale raised a few eyebrows given the tight domestic situation which they face and, despite their ongoing intervention sales, domestic prices continue to hit record levels impacting not only bread prices but also livestock feed. We believe the sales to be “allocation” of tonnages not taken up by Iraq a week ago rather than a sign that Russia is “back in the export market”.The French sale continues the trend which we have witnessed in recent times, and we maintain our view that with each sale made we will see the need for further grain imports particularly for livestock feed later in the season.

Further N African activity was seen with Tunisia purchasing 125,000 mt wheat from optional origins, these could possibly include Ukraine with their increase of 500,000 mt in the export quota to 5.5 million mt announced yesterday.

The EU granted a further 405,000 mt wheat export licences this week bringing the season total to 5.3 million mt, which is ahead of last year’s comparable figure of 5.0 million mt.

To “rub further salt into the wound”, Reuters announced the sale of French corn to Japan with 25,000 to 50,000 mt expected to load in the next week or so. This marks a “first” we believe and points to the high US price levels following the drought hit harvest this year, and the need for importers to source from alternative suppliers. Once again we reiterate the fact that we believe the EU can ill afford to export corn when it is already a net importer, and will likely see required import volumes grow this season after the  reduced harvest.

We see evidence of EU feed producers actively looking for FOB corn offers from S America and Ukraine; there appears to be an almost total absence of sellers particularly in deferred positions and those offers which do materialise are significantly dearer that they were a couple of weeks ago.

All in all, the picture appears to be pointing inexorably towards higher prices in coming weeks and months.

Once again we see the old “turnaround Tuesday” trick being pulled out of the hat as CBOT markets clawed back some of yesterday’s losses which were blamed on hurricane Sandy pressuring commodity sales to pay prospective equity margin calls.

The biggest news, hurricanes aside, comes from S America with headlines from Argentina proclaiming storms to have cut corn output by as much as 20% and soybeans by 10%. Parts of the Argentine corn belt are reported to have received as much as a full 12 months worth of rain since September. Argentina is the worlds No 2 corn and No 3 soybean supplier and much reliance is being placed upon decent crops this year to help restore some stocks to the increasingly tight global supply and demand picture.

The reports received some confirmation from noted crop analyst Michael Cordonnier forecasting an 80 million mt soybean crop in Brazil, which is lower than the 81 to 83 million forecast earlier and he added that the Argentine corn crop would be reduced following recent persistent rainfall which has left “fields two feet deep in water as far as the eye can see.”

The impact of the rainfall has left Argentine corn planting at 38% complete, which is behind the 58% planted at the same time last year. Regardless it would appear that S America may well switch significant corn acres to soybeans which can be planted later in the season than corn. Brazil’s soybean plantings are similarly behind in some regions with the south suffering from extreme wet weather and the north awaiting further rains to break the prolonged dry spell.

Closer to home the EU grain balance sheet is, as we have previously highlighted, extremely tight with both stocks and stocks/use ratios at historically low levels; projected stocks of some 22 days are less than “pipeline” requirement. Current export rates, particularly in wheat, exacerbate the problem placing a requirement for grain imports to meet livestock feed demand later in the season. These are likely to be in the form of corn from either Ukraine or Brazil, with projected volumes in the order of around 8 million mt required to only just maintain last years record low feed grain stocks. Given the tight global corn supply situation this is an additional demand which, when fully recognised, is likely to spark prices higher

US soybean sales to China were once again in the news with a further 8 to 10 cargoes reputedly sold. Again cash basis has firmed, particularly from an export perspective underlining the potential for stronger CBOT levels in coming weeks.

Today has been something of a “down” day with much of the selloff attributed to “Frankenstorm” Sandy the hurricane which is approaching the east coast of the USA. The storm is reputedly one of the largest in recent memory and, to give a perspective, if superimposed over the EU would cover the vast majority of it!

As a consequence, the NYSE LIFFE trading floor in New York and the ICE exchange in lower Manhattan have closed ahead of the storm making landfall. Markets have fallen as funds liquidate positions ahead of possible market closures Tuesday and to generate cash to meet potential margin requirements later in the week. Volumes have been thin and today’s fall has prompted further attention from Chinese soybean buyers looking for value on a scale down basis. On the other hand cash basis levels have firmed as growers hang on to their crops in store looking for higher prices in coming months.

We have heard today that there is a possibility that China may fall short of the USDA’s forecast soybean output by as much as 2.7 million mt which would add to their potential import requirements heaping further pressure on already stretched supplies.

On the wheat front continued wet conditions are hitting Argentine output and quality as fields flood and fungal disease spreads. Dry conditions are impacting newly sown Russian crops in southern regions, which is impacting emergence; this will leave the crop vulnerable to winter-kill much as is the case in parts of the US Plains region.

On balance, we see the dip as temporary and would expect a sharp recovery when “Sandy” retreats.

A week on from the much discussed Ukrainian wheat export ban it is now very much yesterday’s news although there has been little, if any, fresh news to supersede it. The ramifications of the ban are beginning to hit home and it would appear that there are a number of buyers, Egypt included, who will suffer from “force majeure” claims, as Ukraine exporters will be unable to fulfil contracts. The EU has condemned the action with the EU agriculture minister saying, “It will add unnecessary tension to international agricultural markets.” He further added that, “Those that will suffer most will be the world’s poorest.”

Past exports bans, such as that by Russia in 2010 after their devastating drought, have a history of pushing prices higher as buyers scramble to get cover in markets with restricted supplies. The current action by Ukraine could not come at a worse time when considered from the perspective of a tight global supply situation.

However, markets this week have not taken a dramatic turn to the upside as the ban was widely expected in one form or another, and as such, was already pretty much priced in.

In the US the weather continues to bring its forces to bear on crops as around half the Plains would seem about to enter the winter without being fully established as a result of dry conditions and consequently vulnerable to winterkill. Light rain and some snow is reaching some regions but the summer drought has still left lingering effects which may well be felt into next season. The long range weather outlook for the Plains issued by the National Weather Service predicts dry conditions to not only persist but to intensify and spread through to February next year.

At home in the UK, winter wheat seeding has been slowed by rain and wet conditions and the weather is threatening to cut acres. Unless conditions change rapidly there may well be a switch in acres to spring barley and a consequent reduction in wheat output for the 2013 harvest. Plantings in France are delayed but not to a significant level so far whilst German progress appears to be good.

Australian wheat growing conditions continue to deteriorate as cumulative rainfall through October in W Australia, New S Wales and Queensland sits at 0 to 40% of average. Talk of a 20 million mt crop persists, although exports are still envisaged in the region of 17 million mt thanks, in large part, to residual stock, which will be consumed to make up the shortfall.

In summary, the global wheat picture does not exude a healthy, rosy glow right now. The EU, Black Sea region, Australia and Argentina have all produced wheat under less than ideal conditions this season and this is clearly impacting upon available supplies amid strong demand fundamentals. The outlook for prices has to be bullish with recommendations staying the same; buy the dips when they appear and keep cover levels high.

The soybean market has gained ground over the week although we have seen some pressure on front month contracts due to fund re-balancing and rolling ahead of Nov ’12 contract expiry. Weekly soybean export sales were at the lower end of expectation but bring commitments for the season to a massive 25 million mt, which compares with 18.3 million mt at the same time last year.

Attention is now focussing on the November USDA report which is widely expected to show a further improvement in yield, although the export pace and voracious appetite of buyers, China in particular, will no doubt swallow any additional production without drawing breath. Typically, only small revisions are done with the November report. Instead, any significant changes to supply are dealt with on the January Crop Production Annual Report as the USDA has more data, including the Dec 1 Grain Stocks survey to reference.

The rise in values seen by mid-week, which amounts to some 85 cents above the previous week’s low, has triggered some profit taking ahead of the weekend. However, better levels have not managed to elicit any significant farm selling and cash basis remains firmer with both processor and Gulf bids higher than last week.

To wrap up, the fundamentals in the soybean market point to continued firm prices. In the UK we see the first break in prices coming in the May/Oct’13 position with any origin Hi-Pro soybean meal close to a £70/mt discount to the Nov ‘12/Apr ’13 position. On paper this looks like a good discount and obviously reflects the large anticipated S American crop which has some planting issues right now (wet in the south and dry in the north). Given our view on US supplies in a tight global market, the May/Oct price may well be tempting and an opportunity to “put a toe in the water” to start taking some cover further forward.

Today’s biggest news item comes from the International Grain Council who have cut global 2012/13 corn output by 3 million mt  to 830 million mt; the cut reflects reduced US and Ukraine output. At the same time they also cut 2012/13 global wheat output by 2 million mt to 655 million mt citing reduced output in the EU, Kazakhstan, Australia and Argentina as the main driver  of the reduction. Additionally the report reduced canola (rapeseed) prospects following reduced projections for the  Canadian crop; the report also talked of a decline of almost 25% in global end stocks.

At home, London wheat markets in both current crop and new crop reached contract highs (Nov ’12 and Nov ’13) today. We have seen the Nov ’13 contract start to trade in volume (in London terms) and open interest is approaching 2,000 lots and the new crop contract discount to old crop is closing as concerns are beginning to emerge over northern European winter wheat sowing and establishment in ongoing wet weather conditions.

We still see a few UK fields of wheat standing awaiting harvest in ongoing wet conditions, and many fields which have been harvested still have straw un-baled let alone attracting the attention of pre-sowing cultivations. Delays in sowing, as we all know, result in yield loss, and a delay in sowing until spring can often result in major crop re-evaluation. This season’s out-turn is not a great platform from which to see a poor start to the new crop outlook.

The EU has granted wheat export licenses for 242,000 mt this week bringing the season total to 4.9 million mt.

One has to smile when, within the space of two hours, we get diametrically opposed statements from “officials”; this time Ukraine where Reuters reported at 11:30 today  “There will be a full ban from Nov. 15. There will be a government order about this. We are not playing games here. We do not have any other option,” Farm Minister Mykola Prysyazhnyuk told Reuters. Within a very short period of time we hear that the Prime Minister says, “No!” The key to keep in mind is that the 5 million mt cap on exports is in place and the possibility of any export volume over and above that now seems extremely remote indeed.

A major topic of discussion arising from the export limit and whether or not it is “official” is the ability of traders to declare force majeure on contract tonnages over and above the “cap”. A formal ban and a set date will make it abundantly clear and buyers will have to find alternative supplies at market price with no recourse to sellers for any price differential. It is likely that the world’s largest buyer, Egypt, will be caught in this scenario as they have tonnages purchase beyond the 15 November deadline.

The key to prices going forward now is not so much related to the Black Sea region but more to what output will we see from Australia and Argentina and at what price will we see the US become a willing exporter.

Both corn and soybean basis levels remained firm throughout the day and we saw evidence of further soybean export sales by the US with another 100,000 mt plus sale announced today to an “unknown” destination. Even after recent price rises we see no evidence of the much needed price rationing kicking in and slowing the pace of demand, which can only exacerbate problems later in the season.