4 August 2017

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  • Lower volumes and mixed trade have been the hallmark of Chicago markets today as “technical healing” is the order of the day following sharp declines this week. Fund managers are cautious over new positions until the next ten days weather can be better determined. Many growers are reporting disappointing rainfall totals and drying soil moisture profiles. An estimated 60 million acres of US corn/soybean area is reported to be short or very short of moisture, which is the largest area since the 2012 drought. Some assistance is coming from the cooler temperatures.
  • What is important to note is that this week’s rain will be extremely unlikely to allow the US corn or soybean crop condition ratings to rise in any significant way, if at all. Indeed, we would anticipate Monday’s ratings to hold steady at best and possibly decline by 1%.
  • The current weather forecast is cool but has not enough rain to see soil moisture levels rise in any meaningful way. The drought looks likely to grow, particularly in Canada further stressing, and reducing, both spring wheat and canola (rapeseed) crops. We would offer extreme caution to those of a bearish persuasion on corn, soybeans or wheat prices.
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Weekend summary 4 August 2017

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Fund positions disaggregated data

3 August 2017

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  • IA rains and technical trading left soybeans 16-17 cents lower at the end of Thursday’s trading. The overnight trade was down, and the break back under key moving averages triggered additional technical selling. Following Thursday’s selling funds are now estimated to be flat the soybean market. Weekly export sales were within expectations for both old and new crop soybeans last week. The US continues to collect old crop business, though new crop sales remain well behind, and are at a 10 year low of just 6.4 million mt. While sales on the books are well behind last year, commercial traders note strong Chinese interest on breaks, and the light sales total is not due to lower demand expectations. Rather, the rally in US/world soybean prices in July caught Chinese crushers by surprise, who have been waiting on a US price break to lock down forward margins. November soybeans closed out a chart gap left following the June NASS reports, and a more neutral outlook is offered into the USDA’s August reports next week. IA rains were not enough!
  • Corn export sales continue to slow as recently harvest S American corn finds the global pipeline. Argentina’s harvest is now 69% complete, and S American supply pressure should be fading. We note that S American cash basis is higher yet again today, and Gulf corn is offered at parity with Brazilian origin, basis fob. Still, new demand has shifted to S America as evidenced by a string of crop-year low export sales. Crop finishing rains will impact the S Midwest, Delta and Southeast in the next 10 days, but precipitation will be lacking or completely absent from the Dakotas, IA and MN over the next 10 days. Informa this morning pegged US corn yield at 165.9 bushels/acre with production pegged at 13.85 billion, down 400 million from the USDA’s number in July. Trade estimates now seem to be centred at 162-166 bushels/acre, which if realised will keep Dec well supported above $3.65. A bullish outlook requires a sub 160 yield.
  • Excess wheat market length continues to be liquidated, particularly as corn and bean markets falter, thereby keeping wheat’s premium to corn intact despite weaker futures prices. However, we estimate that managed funds have sold an estimated 25,000 contracts since last Tuesday, and so their net position this evening is pegged at a net long of just 3,000, vs. 45,000 in mid-July. World futures have mostly followed the US, but amid strength in the €uro and a lack of farmer selling, global fob prices are very little changed this week. Russian wheat is offered at $196-198/mt for Sep/Oct delivery. Hi-pro German is offered at $208-210. Comparable Gulf HRW is offered at $193-198, and remains easily the world’s cheapest quality milling wheat. Indian cash prices are still in excess of $250/mt, and in the face of falling Aussie crop estimates this could disrupt the world trade matrix further. We are in no rush to sell this market amid large potential export demand, and as the rush for quality wheat supplies likely has not begun. Seasonal lows are normally formed by August 12th.

2 August 2017

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  • The month of July is in the record books, and it did not produce the rain or the coverage that was desired. The following map reflects percent of normal rainfall for July. Unfortunately, the drought in the N Plains spread south and east since June 1. An area of above normal rain stretched from N IL into OH and soils here are saturated. The drying across the W Midwest is becoming more pronounced with W Midwest soil moisture at its lowest level since the 2012 drought. Rains are without needed and demanded by growers.

  • Overall, the US pattern will be wetter, when compared to July, in the next two weeks, and excessive heat will be absent from all but parts of the C Plains and Dakotas. A pattern shift was due, and coming rainfall will be rather timely for reproducing soybean plants. We would mention that the GFS is still the wettest of the models, and the afternoon run of the EU model is much drier in IL and IA over the next 10 days. Short term drought Index (a running 4-week average) is below. Moisture has improved across the E Corn Belt following recent precipitation. Scattered showers will impact the N Plains and Great Lakes through Friday. Totals are pegged at .25-2.00”, though amounts in excess of 1” will be confined to ND, MN and WI. Note that a fairly robust high pressure ridge will stay intact aloft the C Plains, which will limit further expansion in soil moisture, near term. Heat returns after August 12th.

  • A more pronounced NW upper air pattern will be established by early next week. The jet stream will then flow directly aloft the N Plains and into the E Midwest, which will act to sustain cooler than normal temperatures across a majority of the Corn Belt and will also allow moisture to flow into much of the Midwest in the 6-10 day period. Better organised precipitation is offered to the S Plains, and perhaps too much rain will fall across TX, OK and parts of LA and AR next Tuesday - Friday. The EU model’s 10-day precipitation forecast is below. IL and IA look to be short changed, but no doubt the worst of this summer’s heat and dryness appears to have passed. Guidance on the 16-30 day period suggests modest warmth may return, but a more normal pattern of rainfall should continue.

  • Chicago trade today has been mostly in positive territory although latterly wheat has sagged on spread trade and fund liquidation but with US wheat being the world’s cheapest it is difficult to imagine much downside risk remains right now, particularly with US export demand picking up and stocks in decline. Technical damage to markets was done on Tuesday and this may take some time to heal.
  • Rains are falling across N Dakota this morning with the moisture to slide east and slightly farther south in the next 24-36 hours. The rains are nice, but won’t do much if anything to help N Dakota spring wheat or corn. The rain may aid soybeans, but this rain is an interlude, not a change of the pattern to a wetter profile. Dryness returns during the 5-12 day forecast period.
  • Brazilian President Temer faces a critical vote in the Congress today in terms of whether it should seek corruption charges or allow Temer to fill out his term until the next presidential election in 2018. The Brazilian Real is slightly stronger at 3.13 vs the US$. The marketplace is expecting that the Congress will move to block a special prosecutor to investigate Temer.
  • Additional rain throughout much of Germany and Poland look to further degrade crop quality and quantity. The world’s shortage of high protein wheat is worsening with the wet weather across N Europe. Most commercial sources are reducing the EU all wheat crop by another 2-3 million mt to 143-145 million vs. the WASDE estimate of 150 million mt. WASDE should reduce world wheat production by at least 8-10 million mt in next week’s report due to falling world wheat production. What will be missed is the growing shortage of high protein/durum wheat.
  • In summary, the market is healing from yesterday’s technical wound and a few days of back and forth trade is needed before traders can decipher if fund managers have cut back enough on their length heading into the August WASDE report. The US$ is now at a 15 month low and Russian farmers have shut the doors on cash wheat sales during the harvest. 

1 August 2017

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  • US crop conditions have been updated as follows:
  • Today has been described as “a bloodbath” in Chicago as soybean markets posted sizeable losses with the Nov ’17 contract falling below its 200 day moving average ($9.85) with corn and wheat markets following in harmony. The rise in weekly soybean crop condition (see above) together with the prospect of “normal” Midwest rainfall beyond 10 August, was sufficient to spark fund selling and position liquidation. $9.63/bu is the next downside target (Nov ’17 soybeans) at an open chart gap. Dec ’17 corn is toying with an uptrend line $3.76/bu whilst wheat support is noted at or just below $4.70, and this is currently breached.
  • Macroeconomic factors contributed to the morning Chicago selling including a sharp fall in crude oil and a comment from former US Fed Chairman Greenspan that the bubble is not in the equity markets, but in the bond markets. Greenspan mentioned that rising inflationary pressures are possible if the US$ continued to decline.
  • The Indian Monsoon is sputtering and concern is emerging about reduced oilseed/cotton and sugar production in 2017. The Indian monsoon has produced well below normal rainfall for the past 30 days and crop stress is said to be building. India is the world’s largest importer and if the monsoon does not return to strength by August 10th, yield damage will be unavoidable. Indian weather will need to be monitored more closely going forward.
  • The Canadian Prairies forecast remains arid for the next two weeks and wheat and canola crop estimates will continue to decline. If rain arrives during the last half August, some benefit will be seen, but the calendar is running out for Mother Nature to be of much assistance. We see the Canadian wheat crop at below 24 million mt, down 4 million from the WASDE forecast in July.
  • Yield data is raising Russian wheat crop estimates with some private forecasts placing the crop as large as 76-77 million mt. However, Russia has logistical constraints and they will struggle to be able to export more than 29-30 million mt amid this year’s slow start. Russia will therefore likely become a wheat storehouse in 2018.
  • To conclude, it is too late to become bearish of corn, soybeans or wheat with the rain in the forecast, but (crucially) not yet in the rain gauge. The USDA August report looms next week on Thursday. The downside price targets are; $9.55-9.65 in Nov soybeans, $3.70-3.75 in Dec corn with wheat already at value. There may be a little more selling to work through, but the downside is limited. 

31 July 2017

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  • Key to today’s price action has been the advent of non-threatening weather forecasts, which is a change from what we have been seeing in the last few weeks or so. US and EU weather models are in better agreement, raising confidence in their accuracy and traders are taking this to heart. Both models are showing 11-15 day rain chances as improved on previous forecasts as Gulf humidity flows move northwards. If proven correct, the dry areas of the Plains, NW Midwest and Delta regions will be shrinking.
  • The morning has been slightly lower in Chicago in modest volume trade. Weather and the upcoming August USDA reports will limit trader’s appetite for fresh new positions. The August USDA reports tend to place something of a cap on weather markets going forward, whether this will be the case in 2017 remains to be seen. We should not forget that August is the month that makes or breaks soybean crops, the soybean plant has a remarkable ability to add pods and yield as and when weather conditions are favourable.
  • Chicago markets have bounced, but we doubt that any bull run can be sustained with rain in the Central US forecast and the USDA crop report due next week. Rain seems to fall in areas around dry IA, but this is not enough dryness to alter the US yield outlook with cool temperatures. We continue to look for Chicago markets to range trade into the August USDA crop report.

28 July 2017

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  • Friday’s CoT report did not reflect the needed liquidation to suggest that the downside price risk has been curtailed in grains, soybeans or livestock. The data reflected that fund managers did not react to sliding prices and the early week prospect of improved Central US rainfall. Funds are holding their largest combined net long ago position since late 2016. We would argue that if there is liquidation prior to the August crop report, it will come in corn, soybeans and potentially hogs. Friday’s CoT data is slightly bearish to start the new week.
  • The major forecasting models are little changed from Thursday’s and this morning’s runs and still indicate that a high pressure ridge will dominate the N American pattern into the middle part of August. As of earlier this week, some 3-9” of rain was needed to ease drought in the Dakotas, NE, IA and S IL. Such rainfall certainly won’t develop in the next 8-10 days, and the lack of moisture will keep crop concern elevated. A broad NW upper air flow is forecast over the next 10 days. Cooler temperatures lie in the offing, but Gulf moisture will remain closed to remainder of the Central US, and so very little rain is expected in the near/medium term. This week’s spotty rainfall was welcomed, but a trend of rapidly declining soil moisture has returned. The GFS’s implied soil moisture change is offered.

  • This pattern looks to remain stagnant into Aug 11th as high pressure ridging again expands in the 11-15 day period. A moderate warming of temperature is indicated, but most important is that the mean position of the jet stream will stay north and east of major producing areas, keeping heavy rainfall isolated to the mid- Atlantic and New England. There’s time for soybean yield potential to recover, but as of now guidance on August precipitation suggests a continued lack of meaningful rainfall, particularly where drought is already established. We maintain that a major tropical storm is needed to change the overall US pattern, but such a storm is not projected in the next two weeks. Crop conditions, which tend to decline seasonally likely will be slightly lower in each of the next two weeks.
  • Soybeans extended late week gains to finish the week 5-6 cents higher. Weather forecasts remain warm/dry which offered early support, while court ruling against the EPA’s 2016 biofuel standards sent the soybeanoil market sharply higher. In 2016, the EPA lowered the amount of biofuels need to be blended into the US fuel supply based on consumer demand. The e court ruled that this should not be allowed. This week’s Midwest rains fell across the areas that were largely well watered, and avoided the areas that are parched. Based on the large parts of IA and the N Plains that saw limited rains, we expect another 1-2% decline in soybean good/excellent crop ratings on Monday. The GFS weather model at midday maintained limited rainfall across the Midwest in either the 5 or 10 day outlooks for the driest parts of W Midwest and Plains states. The Commitment of Traders update showed funds added 12,534 contracts to their long soybean position and are long 50,885. It is going to be a wide ranging market into the August crop report, with limited rains in the forecast to support any break.
  • September  corn ended exactly unchanged, and despite funds still holding a net long position, as of Tuesday  worth 106,815 contracts, the US forecast is simply too dry to sustain any lasting bearish trend. US corn crop conditions on Monday are expected to fall another 1-2%, and each decline in ratings suggests a further decline in yield. Recall good/excellent ratings a year ago stayed at a lofty 74-75% throughout all of August. The EPA’s court loss today implies little for future ethanol production and demand. Retroactive credits may be given to refiners for 2015 and 2016, but otherwise ethanol remains subject to market forces. We mention that amid falling US stocks of crude/gasoline, biofuel blending margins are rallying. Regardless of any appeal, the US ethanol market will remain strong, particularly as modest export demand continues. We maintain that harvest lows this autumn will stay at/above $3.50 spot futures and corn’s upside is current pegged at $4.10-4.20. The S American cash market is forming its seasonal bottom, and US yield loss will have a major impact on the major exporter balance sheet going forward.
  • Like corn, world wheat weather is just a bit too adverse to allow for a sustained bear trend to emerge. Another round of heavy showers will impact parts of Germany and Poland next week, and there is no end in sight to heat and dryness across the Canadian Prairies. Canada’s yield is still being affected. We would mention that, despite harvesting what looks to be a record winter crop, interior and fob cash markets in Russia remain firm. Domestic values this week are unchanged in both Ruble and US$ terms, and currently rest $10-12/mt above the same week in 2016. Black Sea/EU hi-protein fob offers end the week at/above $200/mt for Sep/Oct delivery, vs. comparable Gulf HRW at $198-200. Russian domestic values are expected to find a bottom in the next 2- 3 weeks, and so there is little evidence to suggest a collapse in world wheat prices lies in the offing. Funds are still net long (heavily so in Kansas), but the decline in major exporter stocks in 2017/18 suggests this position is validated.
  • Our weekly fund position charts can be downloaded by clicking on the link below:

Fund positions disaggregated data

28 July 2017

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  • The one fundamental that can change the longer outlook of the world grain market is a declining US$ (Index). The US$ has fallen nearly 9% from the end of 2016 and is now in a position to test the 2015 lows. A close below 92.00 would argue that a longer term bear market is in the making. The fall in the US$ pressures profit incentives for farmers outside the US. Longer term, this slows world acreage expansion and allows demand to catch up with production.

  • This week’s drought monitor included modest improvement in parts of SD, but the overall area in drought expanded for the 9th consecutive week. The graphic displays current conditions, as well as changes from last year. Cooler temperatures lie in the offing, but the lack of precipitation into early August will allow for further drought expansion in the near term. Note that where drought is most severe, bouts of heat will likely persist. The forecast today is little changed from prior runs and still features normal temperatures, but well below normal precipitation over the next 10 days. As previously mentioned, the strongest part of high pressure ridging moving forward will be confined to the Southwestern US, but weak high pressure will be more expansive over the next week. Heavy isolated, and welcomed, showers will impact the W KS, E OK and the TX and OK Panhandles on the weekend, but precipitation of any kind will be absent from the US Corn Belt into August 5th.

  • The EU model’s latest 10-day precipitation outlook is below, and still there is no major pattern shift indicated into the middle part of August. Dryness will also continue across a bulk of the Canadian Prairies through the period. 30-day rainfall totals across the southern half of Saskatchewan and Alberta rest at just 5-40% of normal. Confidence beyond 10 days remains low, but the EU ensemble, which has been the most accurate, indicates a few spits of rainfall across the far Southern Midwest, Delta and Southeast. The Plains and Western Midwest stay dry. Note that US rainfall in the first half of August last year totalled 1.5-3.0”, or some 100- 300% of normal in MN, IA, MO, IL, IN and OH. This does not look to be the case this year, and yield concern will rapidly shift to soybeans if the two-week forecast verifies. Western US drought concern will spread. 
  • Soybeans traded higher through Thursday, on fresh export sales announcements and a drier extended Midwest weather forecast. At the close, November soybeans were firmly back over $10.00. Weekly export sales were above expectations in old crop and at expectations in new. New crop sales remain behind last year at 5 million mt, while outstanding old crop sales are ahead of last year at 7 million mt.The combined total of 12 million is near unchanged. Old crop exports look to be gaining traction, and the USDA’s daily export reporting system showed old crop export sales of 198,000 mt and new crop sales of 66,000 mt to unknown destinations. Export demand for old crop soybeans looks strong. The market awaits the August crop report, as well as upcoming weather forecasts. The market will continue to add weather premium until there is a clear and defined rain event for the parched N Plains/W Midwest.
  • Old crop US weekly export sales were abysmal at just 3.6 million bu, a new marketing year low, as S American exporters ramp up sales and shipments. This will likely remain a theme in weekly sales reports into November. The fact that precipitation in the W Corn belt will be much below normal is well documented, but we would point out that rainfall during this critical growing stage will be just half of what it was a year ago. Along with steep yield loss in the C Plains, work suggests yields below trend in IA as well, and so we doubt the market has fully digested the potential loss of 650-800 million bu of US corn production. The corn market will closely follow the rain prospects for the N Plains and W Midwest. Dryness into mid-August could well cause corn to retest its highs.
  • Pictures of floods in Germany, and a pattern of ongoing rainfall there, continue to support high protein wheat cash markets. Fob premiums in the EU and Black Sea are again firmer, and Gulf HRW now holds a sizeable premium to comparable German origin through October, which is noteworthy. The recent break may have been warranted, but the point is at current prices the US is not losing additional export demand. This week’s spring wheat tour has pegged ND’s yield at 38.1 bushels/acre, unchanged from NASS’s July estimate and perhaps a bit below expectations. There is no doubt that yields in the Dakotas and MT will be sharply (20-25%) below trend, but, we mention that historically, the ND crop tour tends to overestimate yield. In only four years since 1995 has the tour’s yield been above NASS’s August forecast. US weekly export sales through July 20th totalled 18 million bu, in line with expectations but some 3-4 million above the pace needed to hit the USDA’s annual target. Falling major exporter production and quality argues for a range of $4.70-5.50, basis September ’17 September futures. Any weakness will very likely be short lived.

27 July 2017

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  • US export data has been released as follows:
  • Chicago markets started out with strong buying as discussion over a further fall in US crop condition resumed. Suddenly we are facing a further suggestion that 2017 corn and soybean crops are reducing once again.However, the bulls and the bears appear exhausted by the recent back and forth price action as well as the inconclusive nature of the weather forecasts. Trust in the GFS model is now lower following the failure of rain in IA. Our feeling is that we will see a further reduction in soybean and corn crop condition on Monday in the wake of heat and dryness across the N Plains and W Midwest.
  • The German and Polish grain crops are now being downgraded almost daily amid an abundance of rain. Another 1-3.00” of rain has fallen and producer sources report that mature grain crops are standing in saturated soils or ponded water. The concern for grain crop quality is reaching a fever pitch and the forecasts call for additional rain.
  • Some 32 million acres of US corn are located in the drought plagued areas of the N Plains and the NW Midwest. Dakota and Iowa crop yield potential is declining rapidly amid short to very short soil moisture. We would argue that Chicago prices need to be rising sharply to reflect the supply loss, but we understand GFS forecasting woes and why traders are reluctant  to trust it! Wheat could well now be making its seasonal low.

26 July 2017

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  • We hesitate to “buck” trends, BUT, the Dec ’17 corn market has relapsed to the lower levels of the 2017 $4.17-3.74 range, and we believe this represents an opportunity with a very favourable risk vs. reward ratio. Just a thought!
  • Nov ’17 soybeans have bounced off their 200 day moving average as fund selling pace slowed down. Corn futures initially followed with the December contract testing support levels with the wheat market mostly higher as Minneapolis made gains. Participants on the ongoing spring wheat tour are pessimistic on the actual acreage that will be harvested, and as the tour moves west it is reporting yields in single digit and low teens. This is causing the wheat market to turn higher and with the added pressure from extending drought across Canada we are becoming yet more friendly to higher wheat prices. The drought in Canada is gaining in importance from the perspective of canola (rapeseed),spring wheat and pulses. The canola balance sheet is beginning to “pep up” as Chinese demand starts to grow. Unlike the last year or so, US and world corn. soybean and wheat end stock estimates are in decline, and this will likely underpin prices and provide market support going forward, particularly when weakness is evident.
  •  Today’s back and forth trade was not unexpected as the markets attempt to repair the technical damage done by Tuesday’s wide ranging trade. The market now awaits location and amount of rain reports before deciding next direction and move.
  • The German wheat crop is going backwards fast in terms of quantity and quality due to excessive rains. Another 1-2” of rain is expected in the next few days and the world’s availability of high protein wheat is further reduced. It is becoming nearly impossible to secure German high protein wheat and those that have sold it already are pulling on old crop supplies. We are beginning to see the total EU wheat crop at 145 million mt vs. the USDA forecast at 150 million mt, and cut of another 1-2 million are in the making if the rains don’t cease soon. Cash sources have reduced their estimates of the Canadian wheat crop to 24.1-24.6  million mt due to the worsening drought. This is down nearly 4 million from the July WASDE estimate of 28.35 million mt. The Canadian canola yield is estimated to be reduced by 9% to 2.00 mt/acre for a crop of 18.9 million mt (down 2.1 million).
  • The next 12-18 hours holds the best chances for rain for the Midwest looking forward into August 6th. There could be a few afternoon pop up thunderstorms, but the GFS forecast appears to be overdoing the coverage. This is an arid weather pattern with warm (not hot) temperatures. Soil moisture will decline and the Plains and the W Midwest did not get the regional soaking that was desired. Crop stress will be returning.

25 July 2017

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  • It has been another brutal day of heat across the Central US with high temperatures ranging from the lower 90’s to the lower 100’s across the Plains and the W Midwest. Producers tell us that winds of 15-30 mph and the intense heat are taking a real toll on crops with corn and soybeans both rolling on non-irrigated acres. The promised rains cannot come soon enough and are extremely important for yield.
  • Soybean futures were sharply higher overnight and lower by the close, with November soybeans trading a wide 43.5 cent daily range, and closing 17 cents lower. The surprising 4% drop in Monday’s crop ratings offered the overnight support, while a wetter extended forecast for the W Midwest and Plains triggered selling throughout the day. The afternoon EU weather model update did not confirm the heavy/widespread rains that were projected by the midday GFS forecast, and is far drier in the 10 day outlook. Our lean is with the historically more accurate EU forecast, and we are not willing sellers under $10 November. The weather models are causing traders angst.
  • Fund liquidation continued in the corn market (official open interest on Monday was down a hefty 30,000 contracts) as the trade debates the US’s late July/early August weather pattern. The GFS model today was extreme, shifting from very dry to very wet weather in the 8-15 day period. The EU operational model is bone dry next week; the EU ensemble features limited precipitation into August 8th. Our bet is with the much more correct EU model. With July nearly finished, corn ear weight models suggests a national corn yield closer to 162-164 bushels/acre, and should the EU model forecast into early August verify, slight declines in crop ratings are most likely in the next two weeks. US ethanol production and blending margins are rising on recent corn weakness and even the decline in Brazilian ethanol prices has paused. The potential for the loss of some 550-650 million bu of US corn supply should allow technical support at $3.80 basis December ’17 futures, to hold. Weather-based volatility will continue into the August USDA report.
  • US futures ended lower, European futures ended followed, and cash market are little changed. We note that higher protein offers, in particular, are higher today as the market is better digesting ongoing rainfall in N Europe, and of course expanding/worsening drought across Canada. Standard HRW at the Gulf is now at parity with German fob and just $5/mt over comparable Russian. Egypt bought a massive 420,000 mt of Black Sea wheat at $204/mt, basis fob, unchanged from a week ago. This week’s spring wheat tour has uncovered a wide range of conditions. Conditions in eastern ND are of course better than the west and stories abound of producers simply grazing fields rather than harvesting them. The tour’s yield estimates will be available on Thursday. Funds have sold an estimated 30,000 contracts in the last two weeks, and with cash markets steady/higher and with Egypt’s buying spree ongoing, we would advise caution and argue that US wheat is becoming cheap.