• Cash and Chicago soybean crush margins have reached their best levels in nearly two years. Soymeal end users around the world are caught with limited forward coverage as Argentina is within the throes of a developing drought. Rain is badly needed and the forecasts are not offering a change in the arid weather pattern into mid- February. As long as US and world soymeal values rise, firming crush margins are forecast. We note that the Brazilian soybean crop could rise to 112-113 million mt, but this will not be enough to offset the Argentine losses. Fund managers are taking note. 

• World corn acreage surged from 2009 to 2013, which was a function of price/profit. More acres were added in 2016, which was a function of non-US dollar currencies. However, as producer balance sheets change via Chicago prices and relative strength, even mild demand growth looks to cut world corn ending stocks. We fully expect corn seeding to expand another 1 million ha in Argentina in 2018, but decline in Russia, the US and China. The net is a slight reduction in total world corn area. Assuming trend yield and trend (and even somewhat weak) consumption growth, using acreage of 184.3 million ha results in a 19 million mt (9%) decline in global corn stocks. Note that world animal numbers are expanding following contraction in 2015 and 2016, world meat consumption growth is accelerating, and Chinese meat consumption is rising for the first time since 2014. 

• Global corn stocks/use at 15% will be the lowest since 2012, and while not overly bullish, it does suggest fair value in the next 12 months lies between $3.40-3.85 basis spot Chicago. Of course, a US yield of 176-180 bushels/acre would alter this outlook, but the most probable scenario features trend yield in the US and elsewhere. Importantly, following five years of depressed prices, the market has worked to elevate consumption, making weather issues a bit more interesting in 2018/19. Moreover, China has signalled it plans to embark on a comprehensive biofuel program and biofuels in general will be attractive until world crude producers respond with higher production. We maintain a broadly neutral corn outlook, but wishes to point out that the recent bear market has likely run its course. In recent years adverse weather was needed for rallies; in coming years very good weather is needed for a further break.

• Soy prices finished higher on Tuesday, with soyoil following palm oil prices higher, but also pacing the day’s advance in Chicago. The palm oil market found demand on Tuesday from deeply oversold conditions and slow production figures for the first half of January. Commodity funds traders were estimated buyers of 3,000 soybean contracts, and 4,000 contracts each in the soymeal and soyoil markets. After declining for three weeks, estimated Chinese soybean crush rates turned up last week to a 3 week high of 1.9 million mt. The current pace remains record large, however, soymeal stocks have also been moving higher since mid-November. There is a loose (and inverse) relationship between soymeal stocks and estimated crush margins. However, there is no statistical relationship between estimated margins and Chinese imports, and based on US and S American export to China in December, we expect that January imports will be at or near a record large figure of 6-7 million mt. The big event for Wednesday will be the trial of former Brazilian president Lula, and the impact that the results have on the Brazilian Real. Elsewhere in S America, Argentine crops have very little rain in the forecast.

• March corn fell slightly, and still appears bound to a range of $3.45-3.55 in the near term. We continue to caution against turning bearish at the lower end of this range amid ongoing, and accelerating, dryness in Argentina and as the US$ forged new lows for its recent move. US weekly export sales through the balance of winter should also be well above the pace needed to meet the USDA’s forecast. Without perfect weather, the most probable scenario includes further cuts to global stocks amid a lack of acreage expansion. The market in recent years has very slowly worked to build a rather sizeable demand pillar, and so work continues to suggest that multi-year lows were posted in 2016. Notice that ethanol’s discount to gasoline is testing the levels established during Hurricane Harvey. The EIA’s weekly ethanol report on Wednesday should be supportive. Funds have done little to change their massive net short position.
  

• Better than expected snow fell across N KS and NE in the last 24 hours, but, such totals will do little to curb drought expansion. Work suggests there is adequate snow cover given no extreme cold is expected across TX & OK in the next two weeks. Choppy trade will continue, and breaks look to be supported amid weakness in the US$, firm world cash markets and as funds maintain a net short position in Chicago worth 140,000 contracts. US wheat futures since early autumn have struggled at major moving averages, and the market awaits pronounced weather adversity or a demand driver to trade above $4.40, basis spot Chicago. This is logical as Black Sea stocks and export remain elevated. However, unlike recent years, major exporter currencies are strengthening, which is working to support world cash prices, Russian fob offers today sit at a season-high $194/mt, and still the market must reconcile widespread drought in the US, which according to climate work isn’t going away through the balance of winter.

• The map (below) to the left is topsoil and the chart on the right is subsoil moisture as of today. The only location where there is plenty of soil moisture is far NE Argentina, where few crops are grown. The Argentine dryness stretches all the way back to October, and although there have been promises of drought ending soakers, the rains have all been localised. Much of Argentina is dry and the forecasts are arid into early February.
  

• Improved rainfall returns to Central Brazil by late week, but the CFS weather model in recent releases has trended noticeably drier across Argentina. Very little rain is forecast in the next two weeks, and the latest guidance on 16-30 day rainfall is below average. 56% of Argentina’s early planted crop is in the silking phase, and the need for rain is immediate. Unfortunately a major pattern change is unlikely between now and early February. Dryness and above normal temperatures will linger across Brazil through the balance of the week. Thereafter, a high pressure ridge wanes which allows normal tropical shower activity to resume in Mato Grosso, Goias and Minas Gerais. It is still important that this shift materialises as pockets of Central Brazil are starting to experience crop stress. In Argentina, no meaningful rain of note is offered to the primary ag belt into Feb 1, and the graphic below suggests La Niña  based dryness likely continues to mid-February. Time is running out to salvage trend Argentine corn yield potential.

• The Argentine 2018 corn crop is going backwards, and rather quickly. One-off rain events since October have done little to curb the ongoing decline in soil moisture and without a major pattern change in the next 3-4 weeks, LLa Niña looks to negatively impact summer row crop production. Cumulative rains in Argentina since Dec 1 across the primary Corn Belt (Buenos Aires, Cordoba & Santa Fe) are just 60% of last year. Assuming the 7-day forecast is correct rainfall will exist at just 66% of normal and 58% of last year. Cumulative Dec-Jan rainfall of less than 8” is very often associated with La Niña establishment, and also indicates corn and soy yields well below trend. Such would appear to be the case in 2017/18.
  

• Dec-Jan cumulative rainfall correlates decently with final corn yield in Argentina. Typically it is December and February rainfall that most impact crop potential, but following this year’s delayed seeding, we suspect that the need for rain is immediate for both early and later planted crops. The Buenos Aires Grain Exchange last week reported that 45% of early planted corn is rated poor/very poor; 53% of later planted corn is poor/very poor. A majority of the crop will be in its silking phase by late month, and so the current dryness is indeed impacting yield. Using Dec-Jan precipitation to date, work indicates a final Argentine corn yield 15- 18% below trend. Though the model isn’t perfect, it is clear that rainfall of 10” plus  is needed for corn yield to reach trend or above. Precipitation of 5” in Feb would be helpful, but the forecast models want to maintain the arid trend.
  

• What is important about the lack of rainfall in January is that the production loss is beginning to cross the threshold where it does impact the global corn trade matrix. Assuming an Argentine corn yield 15% below trend (6.75 mt/ha), production comes in at 33.8 million mt. Even with record large carryin stocks such production will allow for an exportable surplus of just 24-25 million mt, vs. actual exports of 25 million mt last year and the USDA’s forecast for the coming year of 29 million mt, thus 185 million bu will be switched to other origins. Given the recent surge in Black Sea corn basis, and the uncertainty over safrinha production in Brazil, the US will be the primary beneficiary. There is no shortage of corn in the world, but as the market begins to question US acreage in 2018, We seriously doubt that spot futures can fall much farther. Argentine losses may well spark fund covering.

• It was a higher start to the week as the trade resumed concern for the Argentine crop. Old crop soymeal led the day’s rally and and finished up $7/ton. Funds were estimated buyers through the day of 7,000 soybean and 6,000 soymeal contracts while selling 1,000 soyoil. Soy markets appear largely focused on Argentine weather and the potential impact on crop size/meal exports. Soyoil was thought to be the story of the year on expanding biofuel demand, but is marking new lows this week and down 9% for the year, while soymeal has marked new highs and is up 15%. The largest notable change has been in the spot soybean crush spread which has now gained 25% from the start of the year and 52% over the September low. Chicago is offering processors an average margins of $1.11/bu to the end of the year versus $.83 last year and the 5 year average of $.68. Limited rains look to fall across Argentina over the next two weeks. Our next target for March beans is at $10.10. Remember that funds are short close to 90,000 contract of soybeans.

• March corn moved very little, and aside from ongoing dryness in Argentina, fresh news was absent. However, We view the coming weather pattern in Argentina and far S Brazil as highly important, as now production losses look to shift export demand in 2018 to other origins. This along with uncertainty over US corn seeding this spring, and as US domestic corn use has ballooned to a record 12.5 billion bu, will keep spot futures well supported above $3.45. Funds sold a net 5,000 contracts today, and thus maintain a short position worth 215-217,000 contracts. Argentine dryness is priority number one, but in the meantime the market continues to work to boost overall consumption. Brazilian ethanol’s premium to US origin has widened further to $.92/gallon (40%), and ongoing ethanol exports are attracting market attention. Gulf corn is offered below all other origins through May. A close above $3.55, March, is needed to attract fund short covering.

• Wheat futures continue to recover post-USDA report losses, albeit very slowly. However, the lack of any demand driver is working to limit any meaningful fund short covering. World cash fob offers are moving higher, but not at the speed of those in the US, and so Gulf HRW is again positioned rather poorly in the world market. Export sales in the next 1-2 weeks will stay uneventful. However, the downside risk is lacking. The market’s goal in the coming weeks and months is to reconcile weak export demand with low winter wheat area as well as an expanding Plains drought. Still no meaningful precipitation is included in the Plains’ 2- week forecast, and climate guidance maintains ongoing below normal precipitation into April. This is mostly a function of the duration of La Niña. More pronounced short covering requires adverse weather in one more major exporting country; Russia, the EU or the Ukraine.

• A higher morning Chicago trade uncovered some modest cash related selling in US corn which pressured the grains into the midday hour. Soybean futures have held strong on concerning Argentine weather. The Argentine forecast can change, but limited rainfall totals over the next few weeks is likely to cause stress to developing summer row crops. Argentine temperature are seasonal for this week, but look to warm next week and into early February. Corn is being the crop that is being impacted and yield estimates are in decline. Research argues that for a 2018 Argentine corn harvest of 36.5 million mt (and in decline) vs. the January USDA forecast of 42.0 million mt. Soymeal is the commodity being most impacted by drought like weather, but we would remind that corn is the crop that could see the steepest yield/production losses. Argentine nearby fob corn is offered at $165/mt today, the highest fob price offer in nearly a year. New crop Argentine corn offers have risen to $163/mt. This is no place to sell corn or indulge in bearish fantasies!

• Chicago brokers report that funds have sold 4,400 contracts of corn and 2,300 contracts of wheat, while buying 4,100 contracts of soybeans. In soybean products, funds have sold 3,200 contracts of soymeal and sold 1,800 soyoil.

• The US Senate is likely to approve a two week stopgap measure to re-open the US Government and the flow of ag information. The US$ has started to rally back with the Brazilian Real and the Russian Ruble gaining. The Argentine Peso has been weaker at 19.1:1, but farm sales have not been large as inflation is starting to become more engrained in the mind of the Argentine farmer. In Peso terms, their corn prices are at an all-time record high today.

• Seasonal price trends are up and funds are too short of corn, wheat and soybeans amid concerning S American weather. Our hope is that NAFTA negotiations can make progress this week. The Argentine corn crop is in fast retreat and crop condition reports are not good. The S American weather pattern looks to be static with concern growing for Argentine crops in February. Funds are too short of Chicago corn/soybeans and the risk vs the reward is tilted to the bulls.
  

• The monthly chart of the CCI/CRB Index is turning upwards, and would confirm a bull market with a close above $443.00. A broad swathe of commodity markets are bottoming due to a falling US$, strong world demand, and stagnating supplies. By most measures, a longer term bottom in the broad commodity market is forming. However, this does not mean that a new lasting ag bull market is ready to emerge. Notice that the CRB Index peaked in 2011 and the ag markets peaked in 2012 amid a major Midwest drought. Our point is that its become late to be bearish of ag commodities.
  

• Reversing the trends of recent days, the grains (corn/wheat) have caught a bid with soybeans and soymeal weaker in moderate volume. Corn is once again bouncing off of $3.45 support as the market continues to build a base against ever rising open interest (likely new fund shorts). We estimate that funds are now short a record 235-240,000 contracts of corn. The soybean market has rallied sharply for several days, but an attempt to fill an open chart gap at $9.62 has occurred. Wheat futures appear to be caught in between the pull of corn and the push of soybeans this morning.
  

• Chicago brokers report that funds have bought 5,500 contracts of corn and 2,800 contracts of wheat, while selling 4,300 contracts of soybeans. In soy products, funds have sold 2,700 contracts of meal and 2,100 soyoil.
  

• US farmers indicate that they will look to plant more cotton, sorghum and barley based on current prices and the outlook for their future profitability. US cotton acres could rise by 800,000-1.0 million acres to 13.5 million acres, sorghum acres back to 6.3-6.6 million acres (up 600-700,000 acres), and barley to 3.1-3.3 million acres (up 500-700,000 acres). The point is that minor crop acres including cotton could expand by 1.9-2.4 million acres which will come out of corn/soybean seeding with total US cropped acres unlikely to expand. This may cause a 500,000 acre decline in 2018 US soybean acres and 1-1.5 million acre drop in corn. This compares to the November Baseline report forecasting 2018 US corn and soybean acres both expanding to 91.0 million acres.
  

• US corn futures are rising as traders ponder reduced 2018 US corn seedings and a tightening balance sheet assuming a trend yield of 173 bushels/acre. Soybean futures are weaker on spreading against the grains and the retesting of support in March soyoil futures below $.325. Our view is that soyoil values are near long term support with limited downside risk as demand for US biodiesel increases. Amid funds that are holding a record large net short grain position, we continue to advise against any substantial downside expectations.

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

Weekend summary 12 January 2018

• US crude stocks have fallen now for eight consecutive weeks, and since the middle of November have declined 42 million barrels, or some 4%. Until the market confirms enlarged production, and there is a sign that stocks are building, we look for crude to trade in a range of $55-65/barrel. This is of course an input cost, but should also on the margin strengthen major exporter currencies and work to curtail acreage expansion outside the US.
  

• It has been another mixed session, with corn, wheat and beans all pretty much unchanged as the market digests CONAB’s latest report, another round of weak US export sales, and preparations for tomorrow’s stocks and seedings numbers. The soy complex has extracted premium from price amid ideas that the USDA will raise Brazilian production, lower US exports and find new land available for soybean seedings via reduced winter wheat acreage. The break from recent highs is understandable, but work suggests the market is fairly valued at $9.45-9.75, basis March, until more is known about S American production, particularly as Central and Northern Brazil will be drier in the second half of January.

• Through the week ending January 4, US exporters sold a net 17 million bu of corn, 3 million bu of wheat and 22 million bu of soybeans, all of which are considered disappointing. For their respective crop years to date the US has sold 1,067 million bu of corn, down 25% from last year; 1,523 million bu of soybeans, down 14%; and 715 million bu of wheat, down 8% from a year ago. Much better demand is needed to hit the USDA’s forecasts, and though late season corn/soy sales are a function of S American production, US exporters must now sell 700 million bu of beans from now until Aug 31, vs. 400 million a year ago.

• We would mention that there are suggestions that China still needs to cover its spring soybean needs, but does not seem to be in a rush to do so. Two cargoes were sold to unknown destinations this morning. Funds net short in soybeans has become rather large, and as of this morning we estimate managed funds’ short at a net 100,000 contracts. This is the shortest such position on record ahead of a S American growing season, and is just 18,000 shy of the all-time record posted last June. The US soybean balance sheet is no doubt comfortable, but the short side of the market is getting crowded.

• Soybeans in the last two weeks have digested incremental boosts in Brazilian soybean production estimates, as well as a string of disappointing US weekly export sales. Downside risk is viewed as limited ahead of pod fill in S America, which will take place over the next 2-5 weeks.
  

• Gulf US soybean basis levels appear to be closely following last year’s pattern with gains since early December. The rally in Gulf soybean basis was occurring long before the onset of arctic cold, and we are told that there has been a modest increase in Midwest soybean origination, but that supplies are less than crushers and exporters desire. This means that US cash soybean basis could stay strong in coming weeks. US nor S American farmers are making cash soy sales in a declining marketplace. The marketplace will have to encourage additional sales post the USDA January report.
  

• Virtually no precipitation has fallen across the US Southern Plains, including KS and pockets of NE since the middle of autumn, and another two weeks of complete dryness is likely. This, along with bitterly cold temperatures, has put a bid under HRW wheat prices in recent weeks. We would note that winterkill will likely never be fully quantified, but dryness is always more of a concern. NOAA’s drought forecast released in December, which leaned heavily on La Niña’s arrival, has so far proven correct. While current weather is not impacting wheat yield directly, there does appear to be a correlation between winter and spring precipitation. Assuming latest model runs verify, KS precipitation in Dec-Jan this year will be 60% below normal. The odds that drought continues into spring have been elevated. Dryness also appears to a bit more structural in nature amid the development and deepening of La Niña. Latest ENSO model forecasts suggests that a weak to moderate La Niña will persist into the later part of spring, thereby including a majority of winter wheat’s critical growing stage. Wheat yield in KS has been below trend in 7 of the last 10 La Niña springs, and yield exceeded trend significantly in only two of those years. It is far too early to bet on drought, but measuring probabilities 45-60 days ahead of the end of dormancy is important.
  

• Low volume and slow has been Chicago this morning with the grain markets slightly higher with soybeans/soy products slightly lower. Traders continue to await Thursday’s Brazilian crop estimates from CONAB and the USDA January Crop Report. Soybean futures have retested prior lows with March taking aim at $9.5475 with funds still exiting long soymeal positions. We estimate that funds are now short around 97-99,000 contracts of soybeans as they add to their net short position. Funds have been modest buyers of wheat. Chicago brokers estimate that funds have sold 4,300 contracts of soybeans, 2,900 contracts of soymeal, and 1,200 contracts of soyoil. In the grains, funds have bought 2,000 contracts of corn and 1,600 contracts of wheat. The funds continue to add to net short soybean position, while covering a modest portion of their grain short.

• The expectation of a bearish USDA January report is pulling the soy complex back to its prior lows as traders discuss a sizeable drop in US soybean exports. Corn and wheat are trying to hold near unchanged amid the soybean downdraft. China is seeking world soybeans on the break, but fund selling is keeping Chicago values under pressure.