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Weekly Update 11 April 2014

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Fund positions

• Chicago has seen a “down” day today as yesterday’s report is finally digested and spat out again. Fund selling has dominated the pits today, apparently from the off, and has pressured prices lower.

• In addition pressure was also imposed by news that Chinese importers have actually defaulted on at least 500,000 mt of US and Brazilian soybeans, and it could be more! The defaults have materialised in the form of non-payment as buyers were unable to open letters of credit as banks are becoming more selective on who they lend money to as the economy shows further signs of cooling. The current default represents five or six panamax size vessels `(50,000 to 60,000 mt each) which have arrived but are now unable to discharge, as well as a further five or six afloat and en route to China. The Chinese crushers have indicated that is assistance was not forthcoming in renegotiating or reselling cargoes, a further 20 to 24 cargoes could well face the same fate before the end of June.

• Chinese crushers are now losing between $80 and $100/mt on each tonne they process, compared with former profit levels of $80 to $100/mt. These former profit levels prompted huge purchases which have effectively emptied the US of old crop soybeans. The anticipation is now of a huge slowdown in China’s soybean imports in Q3, with talk of sub-15 million mt volumes compared to 18.25 million mt last year. This could well prompt a revision in global end stocks in the June WASDE report, although it will be too late to materially impact old crop pricing.

• It is estimated that as many as 21 to 23 cargoes of Brazilian soybeans have already been cancelled or resold to other destinations. Some 12 or 13 have been sold to the US, one to Africa and the balance to the EU. A further 8 to 12 are currently awaiting resale, washout or default. This leaves sellers extremely nervous and fresh sales are slow to materialise to say the least.

• Brazil’s CONAB has increased its estimate of 2014 soybean output to 86.1 million mt, an increase of 640,000 mt from last month’s estimate. Given that 85% of the crop is now gathered and that yields in RGDS and Santa Caterina are better than expected it is widely expected that the range of total output will be 86.5 to 88 million mt.

• The surprise of the day came from CONAB’s corn estimate at 75.4 million mt, an increase of 300,000 mt from March, and a massive increase of 3.4 million mt over the latest USDA number. Interestingly, CONAB have a reputation and history for underestimating Brazilian winter corn production! If CONAB’s estimate is realised, the country could be in a position to export 22 to 23 million mt in 2014/15, marginally below last year’s record 24.9 million mt. These sort of figures will provide good competition for US and a potential source for the EU should issues erupt in the Black Sea.

• Finally, we have seen yet another big week of EU wheat export certificates at 631,708 mt. The season total now sits at 25.214 million mt, which is 7.635 million mt (43.4%) ahead of last year. The weekly tonnage now required to hit the USDA’s 29 million mt figure now stands at 315,477 per week for the remaining 12 weeks of the season.

• As expected we saw confirmation of increased US soybean and corn exports which has reduced carryout, as well as a reduction in US wheat feeding. Immediately upon publication we saw soybean and corn markets push to new season highs which wheat was unable to follow. Some swift farmer selling together with profit taking saw prices ease back with corn closing in negative territory and beans well off the highs. Wheat followed corn and closed almost 2% lower.

• If there was any real surprise it was the 125 million bu increase in corn exports, Chinese cancellations / rejections to date and the large unshipped balance make us think lower exports rather than higher. In addition, cheaper Argy corn makes additional new sales less likely. Consequently, we believe we will see US corn end stocks higher rather than lower as forecast today.

• Brazil’s corn crop was forecast 2 million mt higher whilst Argy output was left unchanged although S African output was increased 1 million mt. The increases have, on a global basis, offset reduced US stocks (per USDA) and with Chinese stocks at 10 year highs there seems little to trouble global supplies.

• US 2013/14 soybean stocks were reduced, as expected, maybe a touch more than expectation, to 135 million bu, which is considered by many to be bare pipeline levels. Growth in exports to 1.58 billion bu (all time record) and a record import volume at 65 million bu still leaves tight stocks. Perhaps surprisingly we did not see any reduction in Chinese import volumes which were left at 69 million mt, and many expect the eventual number to be 66 to 68 million mt. Current import pace is likely to decline amid poor crush margins and oilseed oversupply.

• As a footnote, it is rumoured that Chinese crushers are to meet Thursday to discuss defaulting on Brazilian cargoes as margin pressures continue to bite the processors.

• Wheat end stocks in the US were increased as a reflection of lower 3rd quarter feed usage and imports were reduced as a result of the Canadian logistical problems. Global end stocks for 2013/14 were forecast 2.9 million mt higher at 186.7 million mt, and 10 million mt above last year.

• It is difficult to see anything other than weather being the driver going forward. Cold, wet and late planting; hot dry summer conditions impacting pollination, grain (pod) filling; or beneficial El Niño impacts providing cooler, moist and generally favourable conditions?

• It is always hard to call a market, never more so right now, but we are favouring a suggestion that we have seen, or are close to seeing, seasonal price highs and lower levels are in the offing.

To download our USDA Recap in pdf format please click on the link below:

Apr ’14 USDA Recap

• Tuesday has seen mixed trade with prices trending higher towards the last hour in Chicago. The last day before the April WASDE report is seeing little enthusiasm for fresh spec positions as most are anticipating increased export numbers in both corn and soybeans which will equate to lower end stocks. However, this will be currently priced into markets, and it will therefore be the extent to which exports are increased that will impact price direction.

• Central US temperatures are rising which will bring soil temperatures to a more favourable level to permit field work, sowing and hopefully good germination conditions.

• US wheat conditions were not released by the USDA yesterday, as expected although some states did produce data. Of note, Kansas, the leading wheat state, good/excellent rating at 29% is fifth lowest on record (27 years) following prolonged dry conditions over the winter. Rainfall is much needed in the state if the crop is to improve although the weekly weather outlook is not particularly encouraging.

• In Eastern Russia and Ukraine the weather forecast is calling for rains which are needed as the region has been drier than usual over the last six weeks or so.

• We will update on the USDA figures tomorrow evening.

• The week has started in un-startling fashion in quiet volumes. Corn and soybeans are approaching the close in negative territory whilst wheat is only just positive. Many are suggesting that some heavy weather premium is now well established into new crop values; corn – $1.15 and soybeans – $2.35. From a historical perspective this level is right at the top end, and for this to be justified a significant yield decline or production loss, and this is even before the crops are fully planted.

• A cargo of Brazilian soybeans has arrived in the US Gulf, and is in the process of unloading. This is scheduled to be the first of an unknown number of shipments that are being diverted from their original destination, China. More cargoes are on offer by China, some are being diverted en route and the outlook going forward is not pretty.

• Added to the parlous state of Chinese soybean trade, it is becoming clear that the waiting time to load vessels with soybeans in Brazilian ports is reducing. This is in contrast to the same time last year when waiting times were growing to an alarming extent. As a consequence soybean basis prices in Brazil are at their weakest level in five years, exporters and traders there are reported to be very long basis cash soybeans. This is potentially an extremely bearish factor, and could well suit the tight US market who will welcome additional supplies, particularly if they are cheap!

• Finally, July to March grain exports from Russia have reached just under 20 million mt, 47% more than last year. Wheat makes up the bulk at 15.77 million mt, corn 3.1 million mt with barley and other grains making up the balance. The season total is expected to reach 22 million mt.

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

Weekly Update 4 April 2014[4]

Our weekly fund position charts can be downloaded by clicking on the link below:

Fund positions

• Following yesterday’s market price decline we have (unsurprisingly) seen something of a rebound as buyers sought both value, in relative terms, and profit taking opportunities. There was also perhaps some speculative “dipping of toes into the water” in an attempt to see if the upward price trend was still intact. The markets are at an interesting point right now and prices over the next few days could well determine longer term direction.

• Yesterday saw a response to a technically overbought market, coupled with what is reported to be massive producer selling not only in the US, but also S America and even Russia (if reports are to be believed). Such activity suggests that higher levels will be difficult to sustain and the bulls have to act both decisively and in volume if their current lofty perch is to remain secure and profitable.

• Cash basis for both soybeans and meal have continued to decline in Argentina, so much so that Argie meal can now trade into the US – profitably, as well as into Europe. Consequently, importer interest is starting to grow.

• We have today heard that one US soybean cargo has been the subject of a Chinese default, a rarity! This is unconfirmed, but if true is significant corroboration of the difficulties being experienced in China. Hot on the heels of soybean default news comes further rejection of corn by China, for MIR 162 contamination (again). Also a container of DDG’s was rejected for the same reason. China has reputedly cancelled over 221,000 mt of US corn and some 1.16 million mt (of committed sales) is, as yet, still to ship. Given the remote likelihood of MIR 162 approval this season, it looks increasingly unlikely that the unshipped tonnage will actually ship, which will ultimately add to US ending stocks.

• We have seen another 600,000 mt plus week of EU wheat export licences. The weekly total actually reached 616,172, which makes the season total 25.583 million mt. This is 7.38 million mt (42.9%) ahead of last year. The calculation to hit the USDA’s 29.5 million mt season requires 378,264 mt/week for the remaining 13 weeks of the season. Corn imports into the EU, on the other hand, were close to 400,000 mt again this week. This brings the season to 10.5 million mt, 250,000 mt short of last year’s full season total with three months still to go!

• We thought we would take a look at why everyone is scratching their head (amongst other body parts) in an attempt to work out exactly what is happening, particularly in CBOT markets – and the general lack of activity therein. Our thoughts are as follows:

• Managed money (aka funds) net positions, net of options and adjusted for index funds in  ‘000 contracts:

This is ignoring sugar, cocoa. Cotton etc. The total value of spec purchases in 2014 so far is close to $20 billion, and this ignores the leverage gained using futures contracts!

1. Funds began the year with massive shorts in corn and wheat.
2. Both stocks and bonds lost their financial appeal, and funds looked for better value and returns elsewhere – commodities!
3. The longer term bearish picture for corn just got pushed further and further back, and bullish news stayed up front, particularly as the USDA reduced corn supplies month on month – see above.
4. Both Chinese and EU consumers got caught heavily short on pricing spot soybean and meal contracts.
5. US export data on soybeans increasingly argued that the US would run out of soybeans.
6. Fears of a block on Black Sea wheat and corn shipments added to the funds’ desire to be long.

• The bottom line – a massive influx of money into markets that, as recently as end 2013, were essentially abandoned by the spec community.

• Looking forward:

If Monday’s USDA stock numbers were wrong, we won’t know until June, by which time it will be too late to trade old crop.
The market wants to believe “cold, wet and late plantings” right now.
The onus is on the bears to prove trend yields or better on acres as forecast. The bulls have the upper hand right now, and are reluctant to let go.

• We are hugely frustrated at the continuing market inverse, which goes against the logic of longer term global stock rebuild, however we must not lose sight of the fact that the market is always right. It is not clever to continue to predict the end of the world, one day it will happen!

• For what it is worth, the technical picture right now (on corn and soybeans) calls for a slight elevation in price levels – but does suggest these markets are tired, the term being an “exhaustion top”, and ripe for a long term trend reversal – where have we heard that before? The longer term fundamentals are in complete agreement – unless we see a significant, damaging, climate event, which looks unlikely at the moment.

• Post report day leaves us looking at higher soybean and corn prices whilst wheat prices decline. We have seen season highs in both soybeans and corn. Fund activity has been evident as we enter the new month and quarter and yesterday’s report offered little to discourage (or encourage for that matter) investment.

• Any soybean price rally is seen as an opportunity by Chinese importers and Argentine soybean meal exporters to sell back or add to sales. Argie values are weakening as supplies grow and pressure continues to mount on Chinese crushers who face ongoing negative margins.

• There is now a window of opportunity, weather-wise, for fieldwork and planting in the US Delta and south Midwest, which will persist for as much as two weeks, permitting early planting of corn although the forecasts are volatile, to say the least, as a consequence of the  split and fast moving jet stream.

• The big question remains, “Will funds continue to add to already large positions?” This is particularly pertinent given improving spring weather.

• Today’s USDA figures contained a few surprises but not shocks, as has been the case in prior years. It is probably fair to say that the general view is that the report is pretty much neutral. We will now be watching the weather and how it develops into the early summer.

• For the record, stocks of corn were reported at less than average trade estimates, 7.006 vs. 7.099 billion bu, however it must be borne in mind that this will be the 4th largest on record! March 2010’s stocks were reported at 7.694 billion bu, this year’s figure is (only) 688 million bu lower. Seedings for the 2014 season were estimated at 91.691 million acres, below average trade estimates of 92.748, well below last year’s figure. Such a level will be the lowest acreage since 2010’s 88.2 million acres.

• Soybean stocks, at 992 million bu are below last year (only just) but higher than average trade estimates. 2014 seedings are estimated at 81.493 million acres, which if achieved, will be a record, an increase on last year and above average trade estimates. An average yield of 45 bu/acre, based upon the estimated acreage, would provide a record large output of 3.612 billion bu leaving end stocks to nearly 400 million bu. This is a bearish number!

• Wheat stocks at 1.056 billion bu were above average trade estimates of 1.042 and all wheat seedings at 55.815 million acres were mid-range but below the average of trade estimates.

• The eagerly anticipated report is out, and will tomorrow be fish and chip wrappers, so where now? Whilst we may well have seen a supportive March corn stocks figure, fundamentally, given “normal” spring and summer growing conditions there is a substantial downside risk to corn prices, which will, in turn, impact wheat prices – adversely.

• The key now, and into the next few months will be weather in the central US and world. Potential does exist for delays in seeding, as we have previously discussed, but it appears there is a fast building El Niño weather pattern, which leaves little chance of a summer drought.

To download the report summary in pdf format please click on the link below:

USDA 31 3 14