2 November 2017

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  • Seasonal price trends for wheat are generally down into the first half of December. It is possible, but seasonally rare that US wheat futures would bottom in late October. Funds are heavy short wheat futures, which makes the market subject to short term rallies. However, we would argue that it will be mid-December before a more lasting rally effort can unfold. Note that any rally in US wheat futures has to be tied to reduced Russian exports, which also concurrently occurs in December.
  • Following firm overnight trading, soybeans were able to extend gains through Thursday in technical trade. Fundamental there was nothing new in the market, rather January soybeans willingness to hold at the 200 day moving average over the last two weeks, along with limited hedge selling on the decline has triggered fund short covering. Chinese soymeal stocks continue to decline, after reaching historic levels late last summer. At the peak, meal stocks were thought to be over 1.2 million mt, but have since been cut in half. Stocks last week were estimated at just 664,000 mt. Note that over the last several years, estimated crush margins and meal stocks have had a near inverse relationship, with margins turning positive, as meal stocks began to decline back in August. Heading into the end of the week, the soybean charts look more supportive with January stopping just under $10.00. However, we expect that much improved hedge selling will develop on a recovery back to the October high near $10.10.
  • December corn rallied 2 cents on decent export sales, but mostly due to fund money flow. Managed funds earlier this week could very well have held a record net short position, and we mention that the spec short has exceeded the commercial short, and so a rally was due. Fundamentals, however, have changed little in recent weeks. US corn prices are stuck between rising world feed prices and ongoing cheap S American offers, and a general lack of early season weather threats in Brazil and Argentina. Export sales through the week ending October 26 totalled 32 million bu, down roughly 20 million from the prior week but still right at the pace needed to hit the USDA’s forecast. We would note that feed wheat and barley prices continue to rally, and maintain sizeable premiums to world corn offers. This is positive for US corn, but to sustain such a pace of export demand into mid-2018 requires adverse S American weather, which is not evident as of now. Much of Argentina’s crop is rated as good or excellent. Funds short position is viewed as excessive, but trading above $3.75 basis March, will be tough without major declines in S American surpluses.
  • Chicago wheat futures are now flat on the week following a flood of short covering today, and as Iraq looks to have secured 400,000plus mt of US HRW this week, vs. a reported 100,000 mt on Tuesday. EU cash prices rallied quickly by $4-5/mt, Russian wheat is firm at $193-196/mt through early 2018, and the market still lacks a bullish or bearish story in the near to medium term. Weekly US export sales through last Thursday totaled 13 million bu, down fractionally from the period week and a bit below the pace needed to hit the USDA’s forecast. There is nothing yet to suggest a lasting boost in US demand is imminent, though S Hemisphere harvest data is awaited. Argentina’s harvest is just beginning, and this week reached 3.5% complete. Yield so far is pegged at 1.3 mt/ha, vs. 1.6 mt/ha on this week a year ago, but the Buenos Aires Grain Exchange maintains a production estimate of 17 million mt, vs. the USDA’s 17.5 million. Such a harvest will allow for exports of 10.5-11.0 million mt, down from last year but still large. Funds’ short position is sizeable and futures were again nearing oversold levels, but rallies will struggle amid a still rather loose major exporter balance sheet.

1 November 2017

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  • The monthly CRB chart offers technical hope that the bear market in commodities (that started back in 2011) is changing. For just the 2nd time in recent years, the CRB closed higher for 2 consecutive months. A third month of higher close in November would spur additional demand into early 2018. Crude oil and metals have been the bullish stalwarts, but livestock and a few of the tropical soft markets have started to follow. The expanding world GDP looks to underpin the CRB. 

  • Following firm trade overnight, soybean futures came to life Wednesday morning and closed up 6-7 cents on technical buying. Soy product markets finished higher, with December meal finding support at the 50 day moving average, and gaining slightly on soyoil. Brazilian farmers were active with their soybean planting last week, with planting progress across the key producing states now estimated at 49% complete versus 34% last week and the 5 year average of 52%. Producers across the Midwest ran planters around the clock ahead of a wetter forecast for the early days of November. Farmers in the largest producing state of Mato Grosso now have 68% of their seed in the ground. By next week, we expect that progress should reach 63-65% and near 90% by the end of the month. We see January soybeans caught in a wide range, with support expected on breaks back to $9.70, while rallies back above $10.20 are sure to find farm selling as cash values near $10.00.
  • Corn futures 5-day decline was halted amid further expansion in funds’ net short (open interest on Tuesday increased 25,000 contracts) and as US ethanol production continues at a record pace. There is still no major story for US or world grain markets, but downside risk below $3.40 basis December, is limited. US ethanol production last week totaled a near record 310 million gallons, up 10 million on the same week a year ago, and particularly high for late October. Ethanol stocks remain large, but current economics bode favourably for the biofuel. Gasoline stocks continue to erode, and the recent boost in US/world energy prices makes fundamental sense. The incentive to blend ethanol remains elevated, and record corn use is expected. FC Stone in its October report raised US corn yield to 173.7 bushels/acre, just 1 bu shy of last year’s record and which if realised will add 75-100 million bu to 2017/18 US corn end stocks. Consequently any meaningful tightening of the US balance sheet demands adverse S American weather, which is possible but won’t be a market factor until January. Both the bulls and the bears will continue to struggle in the meantime.
  • Chicago wheat traded in just a 3 cent range, but ended the day steady to fractionally lower. Funds have built a sizeable short position, but at 100,000 contracts is still 60,000 shy of the 2016’s record. French milling wheat futures are nearing contract lows, and this along with weakness in the €uro have pulled European cash prices to levels at or below Russian origin. German offers for nearby delivery have fallen some $15/mt from highs posted in mid-summer. Competition for world demand remains stiff. Ongoing warmth in the Black Sea will sustain an elevated shipment pace in Russia, and any boost in the US’s share of world trade awaits the winter months. A shift to wetter weather in eastern Australia into late November is occurring at the wrong time, harvest is dead ahead, but otherwise rallies demand adverse S American weather this winter, or drought in the Black Sea next spring. Wheat lacks a story.

31 October 2017

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  • Tuesday was another quiet day of trading across the soy complex, that left January soybeans just over unchanged. Support at the 200 day moving average continues to hold, though the markets are still struggling to find direction. It is still early in the year, however early season soybean crush rates are have so far held above a year ago on a week to week basis. Last week’s crush was estimated at 1.75 million mt, and note that there has only been one week this year that has been under 1.7 million mt, which was during the October holiday. Seasonally, weekly processing rates tend to trend higher into the New Year Holiday, which this year is 2 weeks later than 2017 and lands in mid-February. Soybean basis remains historically weak, but holding above the late September lows and should further improves as harvest across most states starts winding down. Seasonally, it’s the wrong time of year to be overly bearish soybeans.
  • Corn futures ended lower with December again flirting with major chart-based support. The contract has struggled at resistance levels, and is expected to stay bound to a rather narrow trading range. Weekly US ethanol production (due Wednesday morning) should be strong, but the USDA’s November WASDE is likely to feature another boost in 2017 US yield and end stocks. US harvest progress as of late October vs. changes in corn yield from October to final since 1990 shows a correlation that is not overly strong, but more times than not, a slower than normal harvest results in yield hikes beyond October. This model suggests another 0.5-1.0 bushels/acre boost in yield in the November or January reports, which is also validated by combine harvest data. Rallies will struggle.However, managed funds are short an estimated 200,000 corn contracts, a level that’s only been exceeded in five weeks since 2006. ENSO forecasts are a bit stronger with La Niña in December/ January, and so a close eye will be kept on coming Argentina dryness. This is no place to be bearish of corn. 
  • Winter wheat futures fell to new contract lows as the market continues to reel from recent tender results, which included aggressive offers, and as currencies in Russia, Australia and Canada all weakened. The Canadian and Australian dollars rest at multi-week lows, and overall steep competition for exports is ongoing. The trade views current US winter wheat crop ratings as adequate for maintaining trend yield potential at this early date. Russian exporters look to scramble to clear stocks ahead of the winter months, but in the next few weeks there is no sign of freezing temperatures in areas surrounding the Black Sea. World cash wheat markets have been unwilling to break, but equally unwilling to rally. Gulf HRW this evening holds a modest premium to comparable origins, and so sales and shipments in the next several weeks will stay just so-so. Funds are heavily short in Chicago and Kansas (an estimated 102,000 and 17,000, respectively), and a modest bounce could occur at any time. However, rallies beyond 15- 20 cents will struggle without adverse S American weather. We see wheat as range bound between $4.10-4.50 basis spot Chicago futures.

30 October 2017

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  • US crop condition data has been released as follows:

  • La Niña is budding across the equatorial Pacific with the coolness pushing southward along the eastern coastline of S America. The rapid build of La Niña argues for heat/dryness across S Brazil and N Argentina during the mid to late crop growing cycle. The odds of a S American weather scare are elevated in La Niña years. The record warmth of world oceans argues against the La Niña episode continuing into mid 2018. If there is a crop impact, it’s likely to be S America.

  • Soybeans turned down at the morning open and November finished the day 2.5 cents lower on liquidation ahead of first notice day and a more favourable Brazilian weather forecast. After the close, NASS reported that through Sunday the US soybean harvest had reached 83% complete and was just under the 5 year average of 84%. LA is the first state to be 100% complete, but most of the Corbelt states are 80- 90% complete and winding down. Late season yield reports have quickly dropped and suggesting that the US yield could be another 1-2 bushels/acre lower by the January Crop Report. January soybeans have held an approximate range of $9.70-10 since September, and we look for that range to continue.
  • Chicago corn futures ended steady to just fractionally higher, and still the market lacks direction. Work suggests that final US corn yield may be slightly understated yet, and export shipments continue to lag the pace needed to meet the USDA’s forecast. Black Sea feed wheat prices moved higher today, the pace of US harvest remains well below normal, and of course the speculative community already holds a rather sizeable net short position. We await input that would drive spot futures out of the long-established trading range. Harvest through Sunday reached 54% complete, vs. 72% on average, and progress is noticeably slow across the Dakotas, CO, IA, MN and NE, and we suspect that as more objective yield data is available, NASS will lift yield in November. Otherwise, we doubt a new bearish pattern can emerge without elevated farmer sales, which are not expected at current price levels, and we maintain a neutral outlook until S American crop enter critical growing phases.
  • US wheat futures ended lower but in the middle of the day’s range, and highlighted today are a series of very aggressive tender results. Saudi Arabia bought 484,000 mt of optional origin wheat at $222/mt, which suggests exporters were willing to discount what appear to be replacements costs today, and which underscores that steep competition for new demand will be ongoing until Black Sea logistics cap exports there during the winter months. World cash milling prices are firm, but have been unwilling to move higher in recent weeks. The season’s first crop winter wheat crop rating (see above) was pegged at 52% good/excellent, vs. 58% last year and 55% on average. Ratings in the N Plains very bad (17% good/excellent in SD), but otherwise are pretty close to average. National ratings suggest trend yield and normal abandonment are intact. Like corn, we look for minimal changes in price in the near term, but a close eye will be need to be kept on recoveries in currencies in major exporting countries amid recent strength in crude prices. A bearish outlook is not advised here. 

26 October 2017

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  • US export data has been released as follows:
  • Chicago markets have been both mixed and dull today with only better than anticipated corn and soybean exports adding support, and weak sales together with an absence of fresh news input pressuring wheat prices. A plethora of global wheat tenders announced today are likely to limit further price erosion, certainly in the short term. Those tendering include Ethiopia, Jordan, Saudi Arabia and Taiwan.
  • US export demand for corn included enlarged requirements from traditional destinations including Japan, Mexico and S Korea as well as a substantial volume for “unknown” destinations. US corn exports so far in October has exceeded expectations!
  • China’s import quotas for 2018 are unchanged from 2017, and include 7.2 million mt of corn, 9.6 million mt of wheat and 5.3 million mt of rice. Feedgrain imports in September rallied slightly amid improving margins there. China also aims to embark on a more robust ethanol blending program, with a 10% blend targeted by 2020. This would of course require elevated corn consumption (potentially elevating imports), but would also cap feed imports amid higher DDG production.
  • Also weighing on rallies is ongoing weakness in major exporting currencies. Brazil’s Real is down again to new three month lows. Australia’s dollar is inching lower, and following Canada’s decision to leave interest rates alone, the Canadian dollar has fallen 2% this week.
  • It is clear that funds are, and will be, reluctant to take new positions until winter weather patterns are better known.

23 October 2017

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  • US cash ethanol prices have fallen to multi-month lows, which has weighed on production margins but also looks to find better consumption interest. Brazilian cash ethanol prices, meanwhile, continue to rally, and even amid Brazil’s 20% tariff on imports from the US, Gulf ethanol pencils into Brazil. Higher ethanol disappearance is expected into late year.
  • Most soybean futures were up 1-2 cents after trading in a relatively narrow 6-8 cent range today. The December soymeal contract, however, slipped by just over $1 while soyoil continued its rally and added 0.4 cent to close at 34.56 cents (up nearly 8% since the beginning of the month). 97% of the soybean crop was dropping leaves as of Oct 22 while 70% of the crop had been harvested. Harvest progress was above the high end of the range of expectations, up 21 points for the week, but still lagging behind the 5 year average of 73%. China will release final details for September imports tomorrow but the total should be unchanged from the 8.11 million mt “preliminary” estimate released earlier this month. Based on exporter shipments to China in September, we expect China’s October imports to fall to 6.11 million mt. However, ship lineups so far this month suggest that November imports will jump to 9.3 million mt. We look for a broad ranging trade to unfold.
  • Corn futures rallied 6-7 cents, which relative to recent months is quite a bit, and which we attribute mostly to fund short covering. Somewhat quietly managed funds have a established a sizeable net short, which as of Sunday evening is estimated to have reached 185,000 contracts, a record for the middle part of October. Producers are harvesting, and not generally interested in adding to new sales at current prices, and so the path of least resistance today was higher. Other news is lacking. S American basis levels are stagnant and still some 5-20 cents below Gulf quotes. US harvest progress through Sunday reached 38% complete, vs. 59% on average. Interior basis levels are mostly stable, and in the C Midwest have rallied noticeably from early October’s lows. There’s still no compelling evidence to support a major lasting move in either direction. The bulk of harvest still lies ahead, but ethanol production should be maintained at lofty levels, and US Gulf ethanol is now priced at a 35% discount to Brazilian origin, and the recent break in ethanol prices should find some incremental demand moving forward.
  • Wheat futures led the way in ag markets amid short covering, and an otherwise lack of selling. Managed funds’ net short in Chicago has been growing slowly but steadily, but we also mention funds net long in Kansas has now been liquidated entirely. As of last Tuesday funds were net short 5,000 contracts in Kansas (which was slightly larger as of this morning), and so were net short Kansas for the first time since April. Russian interior wheat prices are stable in both Roubles and US$, and with replacment in Southern Russia calculated at $160-162/mt, we maintain that downside risk in world cash markets is limited. Russian fob offers are unchanged at $193/mt. German wheat rests at $196. Comparable Gulf HRW is offered at $197/mt, and so a host of origins are competiting for new business over the next 2-3 months. Winter wheat as of Sunday was 75% planted and 52% emerged, and the season’s first crop rating is due next Monday.

18 October 2017

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  • When one looks at the US interior cash corn price, it has been generally sideways since mid 2014. There have been two rallies that occurred during the N American growing season, but otherwise, corn values have held in a 40 cent range. Unfortunately, with a 2017 US corn yield near trend of 169 bushels/acre or more, the outlook for US interior corn prices is for a continuation of the sideways trading range, it is going to be tough to push December corn below $3.30 or above $3.70 into yearend. It looks to be just more of the same!
  • Overnight selling continued on Tuesday with limited fresh demand news prompting the unwinding of long soybean/short grain spreads. November soybeans closed 6.25 cents lower. Soymeal prices are holding above all major moving average, though cash basis across the Midwest continues to trade at multi year lows.  The latest vessel lineup for Brazilian soybean exports shows that October exports could be close to 3 million mt versus 1.6 million a year ago. However, Brazil is thought to be nearly sold out of old crop soybeans, with spot offers for export this week quoted 30-35 over the US through to the end of the year. Early new crop Brazilian exports are at least 3 months out, with significant volume not likely available until March. Harvest offers are quoted similar to current US offers 45-50 cents over the CBOT. Stronger US sales are needed in the to justify USDA’s record export forecast. Spot soybean prices are still 60-70 cents over the August lows, and our view is neutral. We expect farm selling to slow rallies in the coming weeks.
  • Chicago corn futures closed slightly lower in back and forth price action with the weakness in the soy complex allowing the bearish tug on Chicago grain prices. The nearby soybean/ corn ratio closed at 2.81:1. The ratio argues that US farmers should be more aggressive in selling their new soybean harvest vs. corn. Argentina fob corn is cheaper than US values into mid winter and the US corn export profile will continue to suffer as a result. Brazil will export 5.7 million mt of corn October vs. just 1.1 million last year. It is the combination of large Brazilian and Argentine corn exports that will continue to steal US corn export demand, and cap Chicago futures rallies at $3.70-3.80 basis March. A rally in Chicago corn futures will not be sustained without a rally in S American corn basis offers. The Midwest corn harvest is slowly advancing with yield reports maintaining a trend of being better than expected. The US corn harvest is only an estimated 35% completed, and it is the results from the last half of harvest that will be key. However, the yield data leans in favour of a further bump in US corn yields in the November NASS report. Chicago corn prices are seen as cheap and with funds short an estimated 170,000 contracts of futures, one has to be careful about being overly bearish.
  • US wheat futures closed mixed with Minneapolis finding some end user support, while Kansas and Chicago wheat futures closed slightly lower in thinning volume. The world wheat market could be forging an early season top with the EU and US needing to see better export demand. Rallies in US wheat futures will be based on fund short covering. 2017/18 global wheat stock/use ratios will be at their highest level in 20 years and near the all time record set back in the mid 1980’s. 128 million mt of wheat resides in China, but the point being is that there is no shortage of world supplies. We expect that world wheat production will rise to an even higher record in 2018 amid the rise in seeding in the Black Sea. The supply bear market appears to be unending without adverse weather. We believe that a “sell the rally” mentality is appropriate with world wheat prices nearing a seasonal top.