HEADLINES: Chicago corn/soybeans strongly recover on China purchase talk; Russia stays the aggressor in the Black Sea; Brazilian cash corn firms.
Russian troops are moving closer to Kiev by moving into Belorussia which threatens the region’s stability. Russian President Putin is showing no willingness to back down on his NATO demands with UK foreign offices being told that they could be placed in crisis mode in short notice. Any Russian/Ukraine skirmish would be exceptionally bullish grain with Russian ag exports embargoed in economic sanctions. Russia is the world’s largest grain exporter.
Chicago grain futures are sharply higher at midday with corn, soy oil and wheat leaping above important chart-based resistance. Russian/Ukraine geopolitical concern and falling S American crop yield potential has the attention of investment managers that desire more exposure to the commodity space. Large investors worried about inflation see commodities as a partial hedge. The large spec position in Chicago corn has held at a relatively high level throughout the past 9 months as these fund managers just hold long corn futures positions. The more important question is whether they will expand their length into other grains including wheat. Trading funds are holding a sizeable net short Chicago wheat position. We look for a sharply higher close with selling limited above the market. US/S American farmers are not using the rally to part with a large share of their crop supplies. This is adding to the upside velocity of Chicago.
Chicago brokers estimate that funds have bought 9,000 contracts of corn, 5,800 contracts of wheat, and 6,200 contracts of soybeans. In soy products, funds have bought 3,200 contracts of soyoil and 4,500 contracts of soymeal.
The Phase One of the US/China Phase One agreement expired on Saturday (Jan 15). We hear that the USTR/China are holding frequent discussions on a new pact, but the trade details have yet to be fully worked out. The US and China see grain/trade as a bridge to narrow widening political differences. And the Biden Administration would like to lower US inflation. One way would be to drop tariffs on $265 billion of Chinese goods that enter the US annually. The new trade negotiations would benefit US ag and US consumers, while providing China with a chance to deescalate US political tensions that are historically high.
Cash rumours abound that China has purchased 1.5 million mt of new crop soybeans and corn (each) as a show of good faith in fulfilling the prior trade pact and to keep current discussions ongoing. The Biden Administration does not want to enter a new US/China Phase One agreement (Phase Two) without China adhering to the prior pact calling for $36.5 billion of US ag purchases. Traders will be watching to see if the USDA makes any daily sales announcements of US corn/soybeans in the coming days. So far, we cannot confirm the cash purchase rumours.
European grain traders are fearful that Russia could make a push across the border into Ukraine to gauge the world’s response. Russia is the aggressor and the former Ukraine President’s return to Kiev to stand trial has many wondering of it is a ploy to get him back into power under Russian President Putin. World grain markets would rally sharply on the news of any Russian push into Ukraine based on it involving the world’s first and third largest wheat exporters, and the adverse impact on trade through western economic sanctions.
Note that US export sales, ethanol and other US export data will be delayed by one day. The US weekly export sales report will be released on Friday.
The midday GFS weather forecast is similar/consistent with the overnight run with any meaningful rain holding across Central/Southern Argentina with 1-3.00” totals over the next 10 days. Rains will be limited across the Southern 2/3’s of Brazil with 10-day totals of 0.25-1.00”. Soil moisture will decline into February and deepen the existing drought. Brazilian farmers are likely to slow their early seeding of the winter corn crop awaiting better rains and cooler temperatures in February. S American crop potential is in decline with the winter Brazilian corn crop highly important.
A drop of 20 million mt of S American soybean and 20 million mt of S American corn production equates to 1,500 million bu of grain, the equivalent of the US 2021/22 corn carryover. This large amount of lost supply occurs at time when world exporter stock/use ratios are at or near record lows. Add on top the Black Sea geopolitical concern via Russia’s aggression on Ukraine, and you have grain that must rally into March to raise Northern Hemisphere planted acres. WE remain bullish on any corrections.
HEADLINES: Markets recover from morning lows; NOPA crush in December record large.
Chicago ag futures are mixed at midday, but wheat has extended its overnight rally in the US and Europe while corn and soy futures have recovered from morning lows. Breaking wheat-specific news is lacking, but European cash prices last week fell to sizable ($10-14/mt) discounts to comparable Russian origin. Current EU cash wheat prices will uncover spring importer demand. Additionally, we estimate that managed funds in Chicago on Friday evening were short a net 50,000 contracts, which is large relative to the last two years. Short covering, along with long corn/soy-short wheat spreads are being unwound. It is just difficult to bearish of wheat at $7.50, basis spot Chicago, given Black Sea cash prices will be steady/higher into early summer.
Yield data in S America leans bullish. Producers in Parana have reported soy yields there of just 5-15 bushels/acre and we note that there will be very limited moisture relief in Paraguay and much of Southern Brazil in the next 10 days. In fact, max temperatures in Paraguay and RGDS in S Brazil will stay in the low 100s into the weekend, and salvaging soybean and summer corn yields there will be impossible amid early planting dates.
Most important is that international cash markets are beginning to readjust to declining S American corn and soy surpluses via rising basis levels. Fob soybean basis in Brazil continues to surge, with premiums for Apr-May delivery in Paranagua quoted at $0.65-0.70/bu over, which compares to new crop offers of $0.35-0.40 in early January. Brazil’s interior cash corn index has rallied to $7.45/bu, vs. $6.80 three weeks ago. And domestic Brazilian processors are outbidding the export market for supply, which poses challenges for filling existing/coming vessels. World cash price relationships are evolving to support abnormally large US row crop exports during spring.
US exporters this morning sold 239,000 mt of soybeans to Mexico for 2021/22 and 126,000 mt of sorghum to unknown destinations, very likely China.
Additionally, widespread river logistics issues in the US are not negatively impacting interior basis levels. The cash pipeline must be kept full and monthly US corn exports rise to 250+ million per month beginning in March, vs. exports in Nov-Dec of 180-190 million. Originating supply only becomes more difficult in spring and early summer.
NOPA member crush in December was all-time record 186.4 million bu, vs. prior expectations of 184-185 million and vs. 183.2 million in Dec 2020. NOPA soyoil stocks on Dec 31 totalled 2.03 million lbs, vs. 1.7 million lbs the previous year. We note that US soyoil disappearance, while unexciting, has been unchanged at high prices. Crush rates must be maximized throughout the balance of the 2021/22 crop year. Crush of 186-188 million bu is expected in January.
The Tonga Volcanic eruption is not expected to materially impact global climate patterns.
The midday GFS weather forecast is wetter in Argentina in the 6-10 day period, with cumulative 10-day precipitation totals now pegged at 2-5”+ across Argentina’s primary crop belt. This will recharge soil moisture. The pattern in Argentina reverts to La Niña-based dryness beginning Jan 30, which is not an issue in the near-term but regular rains will be required in Central Argentina throughout Feb and early Mar to stabilise Argentine corn and soy production at 50 and 46 million mt respectively. The Buenos Aires exchange will update crop ratings on Thursday afternoon.
Abnormally heavy Argentine rainfall raises uncertainty with respect to final crop sizes, particularly corn, which in some regions has pollinated and in others remains unplanted. We hold to a bullish bias into seeding amid positive seasonal trends and as meaningful and irreversible damage has been done to S American yield potential.
Chicago ag futures are mixed at midday with wheat and soy well off morning lows and corn turning higher. Wheat prices worldwide are viewed as undervalued as Black Sea cash markets stay unchanged and as EU fob prices are now quoted at substantial discounts to Russian origin. Russian wheat will not be getting cheaper until very late spring. And the details of Argentine forecasts are beginning to lean bullish as principal crop areas will stay arid for another 7-8 days. A temporary shift in S America’s upper air pattern does occur beginning early next week, but soaking rain in the next 10 days will be confined to 35-40% of Argentine ag areas.
Additionally, Feb climate guidance is also trending warmer and drier in Argentina and Paraguay. Note that weather stays critical in Argentina this season into the first part of March given record late corn planting there. Ultimately, we maintains that additional sizable cuts to S American corn and soy production lies ahead, and longer term there is concern over soil moisture in Parana ahead of safrinha corn seeding in mid/late February. Parana in 2022 will account for 17% of Brazil’s total safrinha area.
US exporters sold 100,400 mt of corn to Mexico for old crop delivery. Additional US corn demand lies ahead as importers through mid-summer can no longer turn to feed wheat and cheaper S American origin supply.
Spot WTI crude is up $1.00 to $83, with RBOB gasoline posting a new two-month high at $2.41/gallon. Energy market outlooks stay bullish amid supply snarls and as global demand does not look to be materially impacted by Covid. This is important as spot Chicago corn as a percent of crude’s value today sits at 38%, right at the longer-term average. Soyoil as a percent of crude is 211%, the lowest since summer 2020. The biofuel production/demand growth story is intact and corn and soyoil are not expensive relative to US and global energy markets, particularly when accounting for renewable diesel tax incentives. Global vegetable oil price determination has been weighted more heavily to crude in recent years and this weighting will only increase in calendar year 2022.
90-day climate forecasts in the Central US are beginning to expand warmth and dryness into KS/NE and portions of the far Western Midwest. Immediate concerns are cantered on HRW yield potential, but in the long run the issue is whether these parameters are altered prior to summer. Cool Pacific temperatures and warm Atlantic temperatures offer high odds of warmth/dryness across the Plains and W Midwest, while too much rain is possible across the Southern Midwest. It is far too early to be concerned, but the burden being placed on US production in 2022 cannot be understated amid S American crop loss.
Algeria was reported to have secured 600,000 mt of wheat this week. French origin was snubbed, with Paris milling wheat down another €2.00/mt today. However, global wheat demand has not begun its seasonal fade, and so we urge caution against chasing the recent correction in US and global values.
The midday GFS weather forecast is similar to the morning run, but the outlook in Argentina is much drier than in recent days. Maximum temperatures stay in the 90s/low 100s into Monday. Moderate showers do expand into the principal ag belt Jan 21-24 but only after vegetation health worsens further. Previously, widespread rain was anticipated in Argentina beginning Jan 17-18. Without above-normal Argentine precipitation in Feb additional sizable production loss is assured.
Long weekends do carry increased weather risks, in that that three full days of model output cannot be digested. Yet, an outright and lasting change in S America’s pattern is unlikely into very late winter. Note that La Niña is now forecast to linger into Jun/Jul. Breaks remain buying opportunities. Upside potential remains massive.
To download our weekly update as a PDF file please click on the link below:
Chicago ag futures are sharply lower at midday amid weak weekly export sales but mostly as weather premium is being extracted. Coming Argentine rainfall is not new to the marketplace, but the consistency of model releases is raising confidence that a bulk of Argentina, Paraguay and Southern Brazil will see accumulation of 2-4” over the next 10-12 days. It is too late to alter yield potential in Paraguay and Southern Brazil, but with the majority of crop-critical weather in Argentine due in February and early March, the trade is hopeful that yields there can be salvaged. The exact placement and amounts of precipitation in Argentina next week will be scrutinised heavily, but for now worst-case drought scenarios are being pushed back.
US export sales through the week ending Jan 6 included 18 million bu corn, vs. 10 million the prior week, 27 million bu of soybeans, vs. 14 million the prior week, and 10 million bu of wheat, vs. 2 million the previous week. All are viewed as disappointing relative to USDA’s annual forecasts. We view the lack of expanding US demand as short-lived but there is a lack of bullish news to offset S American weather-based liquidation.
For their respective crop years to date, the US has sold 1,632 million bu of corn, down 9% from last year, 1,559 million bu of soybeans, down 23% from last year, and 593 million bu of wheat, also down 23%. US wheat export pace analysis suggests the USDA’s new 825 million bu is about right, while final corn and soy exports more than ever will be a function of spring/summer sales and shipments. Note that Brazilian fob soybean basis for March onward has rallied sharply over the last 30 days, which is evidence that actual cash markets have become concerned over exportable surpluses there.
Iran this morning secured 240,000 mt of optional origin wheat. Full Iraqi purchase details are lacking but newswires confirm Iraq has so purchased 150,000 mt of Aussie origin. Algeria closes its tender for March supplies today and Turkey returns next week for upward of 350,000 mt of likely Russian origin. Paris milling wheat futures are down €5.50-6.00/mt as Algeria looks to continue to shun French wheat, but overall the break in world wheat values has uncovered renewed importer interest.
Additionally, Ukraine through early Jan has shipped 10.8 million mt of high-protein milling wheat, or some 80% of the government’s projected total. Ukraine joins Europe and Russia (due to Russia’s Feb-Jun quota) in having limited ability to fill future importer milling wheat demand. US exports have not benefited from supply tightness elsewhere, but world cash prices relationships must be monitored. Gulf HRW today is offered at parity with Russian origin on a fob basis.
The US$ has fallen below major chart-based support, with the longer-term outlook turning more bearish as more $ printed in the last 18 months are put into the economy. The US$, along with currencies in S America and the Black Sea, will be more important to ag price determination in 2022.
The midday GFS weather forecast is unchanged completely from the morning run, with moderate to heavy showers and cooler temperatures due in Argentina beginning early next week. Precipitation totals upwards of 4” will impact northern Argentine crop areas. Welcomed dryness blankets Central Brazil, where soy harvest progress accelerates. The 10-day forecast by itself is favourable, but Feb weather in Argentina remains critical as moisture deficits from mid-Nov to mid-Jan sit at 3-6”.
Chicago corn, wheat and soy markets have fallen to support levels, which are expected to hold. This is no place to add to sales as S American production estimates are still much too high. Additional weakness should be rewarded with expanded end user supply coverage.
HEADLINES: January USDA report as expected, no big surprises; S American weather and private crop estimates to rule Chicago close.
Chicago grain futures are slightly lower following the January USDA Crop report with US corn/soybean stocks slightly larger while WASDE raised world wheat end stocks due to an increase in Argentine production and a modest cut in world wheat trade. The USDA January report will not alter prevailing price trends with cash markets to underpin values on breaks. Chicago looks to be range bound until there is clarification on 2022 S American weather/crop sizes.
The USDA raised their estimate of US 2021/22 corn end stocks to 1,540 million bu, up 47 million from December. NASS raised its 2021 US corn planted area by 100,000 acres and harvested acres by 300,000. The 2021 US corn yield was held steady at 177.0 bushels/acre, the first time that the January yield held steady with November in over 2 decades.
WASDE held its farmgate cash corn price average at $5.45/bu. WASDE raised its ethanol grind estimate by 75 million bu to 5,325 million. We would forecast another 75 million bu hike.
We would disagree with WASDE on cutting US corn exports by 75 million bu due to growing S American corn crop losses and strong world feed wheat prices. We believe in a forecast of US 2021/22 corn exports rising to 2,600 million bu or 175 million above WASDE. We forecast 2021/22 US corn end stocks at 1,315 million bu or just above the levels of last year.
The USDA cut its 2022 Argentine corn crop estimate by 500,000 mt to 54.0 million mt and Brazil by 3 million mt to 115 million mt. We believe Both crops will be substantially adjusted lower in coming monthly reports.
NASS estimated the 2021 US soybean crop at 4,435 million bu with a yield of 51.4 bushels/acre. Harvested acres were trimmed by 100,000 to 86.3 million acres. The 10 million bu production increase in 2021 production. 2021/22 demand was left virtually unchanged leaving end stocks to grow by the same level as production to 350 million bu. We expects that the USDA will raise both crush and exports in future monthly reports so that 2021/22 US soybean end stocks fall below 300 million bu.
The average US farmgate cash soybean price was raised $0.50 to $12.60/bu. No statistical changes were offered to US soybean product stocks. A hike in the US soyoil yield was absorbed by greater exports.
The 2022 Brazilian soybean crop fell a record 5.0 million mt to 139 million with Argentina dropping 3.0 million to 46.5 million mt. The decline was more than expected, and supportive.
USDA wheat data is viewed as slightly bearish. Dec 1 US wheat stocks totalled 1,390 million bu, down 313 million from 2020 and below prior trade expectations, but USDA opted to trim annual US wheat feed/residual use another 25 million bu. The USDA also lowered 2021/22 US wheat exports 15 million to 825 million bu, with end stocks lifted 30 million bu to 628 million.
NASS pegged 2022/23 US winter wheat seedings at 34.4 million acres, up 749,000 acres year-on-year despite lower RMA acreage enrolment as of late Dec/early Jan. HRW seedings totalled 23.8 million acres, up 300,000 from last year. SRW acres were put at 7.1 million, up 420,000 (6%). Winter wheat seedings totalled 3.56 million, up 70,000. Assuming normal abandonment and trend yield, US winter wheat production is estimated at 1,333 million bu, vs. 1,277 million in 2021/22. US wheat balance sheets have loosened, but it remains that HRW stocks fall to a 9-year low 240-250 million bu in 2022/23 even assuming normal Plains spring weather.
Major exporter wheat stocks were raised 2.1 million mt as EU production was raised slightly and global trade was lowered 1.1 million mt. Major exporter stocks/use is now pegged at 13.2%, vs. 12.6% in Dec and is slightly above 2013’s record low 13.1%. Yet, bearish exporter wheat data has been digested, and we maintain spot Chicago is undervalued below $7.50.
Overall, USDA stocks data and S&D changes were dull when compared to recent years. All eyes now return to S American weather. Our work suggests US/global stocks will be revised lower in subsequent reports, with S American production numbers still way too high. Chicago stays longer term bullish and breaks offer new purchase opportunities. The risk vs reward stays with the bulls.
To download our USDA data recap as a PDF file please click on the link below:
HEADLINES: Crude surges; GFS weather forecast trends wetter in Argentina; Wheat importer demand returns.
Chicago ag markets are higher at midday in thin volume as the trade debates CONAB’s first round of cuts to Brazilian corn and soy production against the midday GFS’s wetter 6-15 day forecast in Argentina. The models are having trouble fine-tuning the coming pattern shift, with the GFS forecast now offering upwards of 5-7” to portions of Buenos Aires Jan 21-26. This is overdone, but not until later this week will the market have a clear idea of exact precipitation totals and coverage in Argentina, Paraguay and S Brazil in late January. What is known is that crop stress in Argentina this week will be incredible. A lasting period of soaking rain is desired in February. Additionally, this week just 29% of soybeans in Parana, the second largest producing state in Brazil, are rated as good/excellent. This compares to 82% a year ago.
Demand has also surfaced. US exporters sold 100,000 mt of soybeans to Mexico for 2021/22 delivery. Turkey tenders for 355,000 mt of optional origin wheat, while Algeria is seeking a nominal 50,000 mt of milling wheat. South Korea bought 129,000 mt of corn (optional origin) this morning, and so there is no sign that importers are balking at current prices.
The recent slowdown in physical world wheat trade will be short-lived as trades made in late Dec will be executed in the weeks ahead.
Russian interior wheat and flour prices have moved very little over the last 30 days, with spot cash flour still perched at or near all-time record highs. Replacement wheat costs in Southern Russia are calculated at $202-205/mt, which along with normal fobbing costs and an export tariff of $100/mt suggests downside risk in Black Sea wheat prices, and thus the world market, is low. We maintain that wheat is an intermediate bottom. Australian domestic prices have also followed world futures higher. This suggests record Southern Hemisphere production has been digested.
Spot WTI crude at midday is up $2.90 to $81.10 as energy markets are unafraid of Omicron’s impact on global economic growth and as there remains a need to boost production worldwide. Spot gasoline is up $0.07/gallon. Rising energy prices will keep intact global plans to boost biofuel production/consumption and EIA’s report on Wednesday is expected to feature another week that ethanol production exceeds the level need to meet the USDA’s forecast by 10-15 million gallons. Ethanol production margins have fallen sharply from November’s peak. The decline is logical given the spike in profitability in margins in mid-autumn boosted the industry to roughly 95% of capacity. Yet even margins just above break-even will sustain large weekly grind amid the need to prevent additional stocks contraction. Recall US ethanol stocks on Dec 31 were down 8% from the prior year.
Based on trade estimates, the market looks for a modest hike in 2021/22 US wheat end stocks due to lower exports but does not expect any changes in US corn and soy balance sheets, setting the stage for potential surprises. It is Dec 1 corn stocks and winter wheat seeding that will have the market impact on Wednesday. The USDA, as usual, will be slow to adjust S American crop sizes.
The midday GFS weather forecast is wetter in Cordoba in the 8–10-day period and is much wetter in Argentina Jan 21-26. Cumulative rainfall of 4-6” is forecast in Buenos Aires in a 48-hour window Jan 24-26, while near zero rain was forecast there this morning. The GFS forecast appears incorrect, but close attention will be paid to each/every model release over the next 2-3 weeks. Elsewhere, a favourably drier pattern develops in Central Brazil. Moderate showers and cooler temperatures are probable in N Argentina next Mon-Thurs.
The importance of S American crops cannot be understated this season. Be prepared for excess volatility as fair value will be changing rapidly. However, bullish seasonal price trends are expected to hold into Northern Hemisphere seeding.
HEADLINES: Markets extract weather premium ahead of south morning pattern shift; Duration of Argentine rain critical.
Chicago ag markets are mixed at midday, with weather premium being extracted from corn and soy while long row crop/short wheat spreads are unwound. The midday GFS weather forecast keeps intact needed rainfall across Northern Argentina and allows this wet pattern to reach southward into Argentina’s primary corn and soy production regions Jan 21-25. Whether a lasting pattern change occurs in S America will be key to Chicago price determination over the next 10 days.
Yet, crops in Argentina and parts of Paraguay/S Brazil will labour under extreme heat this week. Near-term forecasts have trended warmer over the weekend, with max temperatures in key areas of Central Argentina on Wed to reach 108-110 degrees. Massive soil moisture loss lies ahead, and so a lasting period of active rainfall, beyond just the next two weeks, will be needed in Argentina/S Brazil to replace moisture lost over the next 4-5 days.
Our overarching message is that volatility throughout the next 6-7 months will likely be the highest in years as every ton of production lost or gained has a material impact on global supply and demand.
The market’s perception today is one of yield stabilisation in later planted fields in S America. The return of heat/dryness in Argentina/S Brazil in Feb triggers the intense/rapid addition of premium. Our longer-term outlook remains bullish given S American crop losses to date but buying and rallies and selling breaks will be fraught with increased risk.
US export inspections through the week ending Jan 6 featured 40.3 million bu, with inspections the prior week revised upward 6 million bu (30%) to 30 million bu. Soybean inspections were 33 million bu, though the prior week shipments were raised 16 million bu (35%) to 59 million bu. Wheat inspections were a weak 9 million bu, unchanged on the previous week. Recall Census corn exports have exceeded FGIS numbers by 20-44 million bu since Sep. There is no evidence to suggest USDA lowers annual US corn and soy export forecasts in their Jan release on Wednesday.
We hear of China buying US soybean basis contracts for Sep following the rally in S American premiums. China’s primary concern is that Brazilian exports are shut down completely in late summer/early autumn as the new crop harvest is exhausted. The loss of S American corn and soy yield/production will indeed be felt in both old and new crop US balance sheets. Brazilian exporters in recent years have flooded the global soy market with supply beginning in March. However, the duration of Brazilian soy export dominance hinges entirely upon crop size. CONAB in its Jan report on Tuesday is expected to reduce Brazilian soy production by 2-3 million mt. Recall CONAB’s soy estimate in Dec was 142.8 million mt, vs. USDA’s 144.
Even a modest trimming of soybean production from CONAB places crop size there dangerously close to last year, which in the context of record global soy/oilseed consumption underpins the Chicago market into spring.
The midday GFS weather forecast is similar to the morning run in keeping soaking rainfall in Argentina confined to a narrow band covering the far northern section of corn/soy production. This rain will no doubt be welcomed, but key areas of Cordoba and Buenos Aires will see little/no rain over the next 10 days. The GFS forecast remains consistent in expanding rainfall in Southern and Central Argentina in 11-15 day period, but this must be pulled into the nearby period before confidence in its arrival is increased. A lasting period of dry weather occurs across Central and Northern Brazil beginning Sat/Sun, which allows soybean harvesting to accelerate there.
Market focus centres solely on whether a lasting period of rainfall occurs in Argentina/S Brazil beginning next week. The S American weather market is in full focus, and the transition to N Hemisphere production starts quickly thereafter with Delta corn seeding to commence in late Feb. Big markets lie ahead.
HEADLINES: Index funds start rebalancing 1 day early. Soymeal spreading/purchases large; Midday S American forecast further south with rain in Argentina.
Chicago midday trade is mixed amid the sizeable statistical uncertainty that exists heading into the weekend and next week. On Tuesday, CONAB will release their January 1 Brazilian crop estimate. On Wednesday, the USDA is out with their first real measure of S American corn/soybean crops along with their final measure of the 2021 US corn/soybean crop, a new crop US winter wheat seeding forecast, and December 1 stocks estimates. The January reports are the most important of the winter season and carry an elevated market risk due to the quarterly stocks estimate surveys.
Along with the Government statistical crop and stocks data, the weather forecasts are less than certain beyond the next 10 days of hot/dry weather for Argentina and Southern Brazil where crops have suffered this week due to drought. The extended range 11-15 day S American weather forecast is hinting at a shift in the pattern to better rain across S Brazil/Argentina and drier conditions for Northern Brazil. Extended range forecasts carry reduced reliability (slightly better than a coin flip) but should the rains bust, the market will have the chore of adding considerable weather premium to price in a short period of time. The amounts/locations of the Jan 17-22 rain will be highly important with crops struggling with drought/extreme heat.
The point is that key USDA/CONAB reports and less than certain weather will produce elevated market volatility. And at the same time, the index fund rebalance has started with large daily purchases of soymeal anticipated.
The USDA announced the sale of 176,784 mt of US corn to Mexico and 120,000 mt of US soybeans to an unknown destination (said to be China). WE hear that China is stepping up their new crop US soybean purchases with S American crops in retreat. Already fob offers for September have jumped to $1.85 over with October at $1.20-1.40 over as world soy demand will be exclusively focused on the US as Brazil/Argentina run dry on soy stocks.
We would raise our 2022/23 US soybean export estimate to 2,225-2,250 million bu (just below the 2020/21 record of 2,265 million) to account for the shift in world soybean trade. The additional export demand will drop 2022/23 US soybean end stocks to below 200 million bu assuming 89 million acres of seedings. The point is that soybeans are again a multiyear bull market, and the risk is to the upside.
The Index Fund rebalance has started with massive purchases of soymeal noted. Fund buying has pushed soybean futures to new rally highs at $14.13 basis March. Chicago brokers estimate that funds have bought 3,200 contracts of wheat, 4,500 contracts of corn, 14,000 contracts of soybeans and 7,500 contracts of soymeal. The selling has been in soyoil is put at 3,000 contracts.
The midday GFS weather forecast is little changed from the overnight run other than the 10–15-day rain that starts on January 17. This rain is further south across Cordoba/Buenos Aires. Otherwise, the midday GFS operational model argues in favour of a pattern shift. A sizeable high pressure ridge rests across Argentina/S Brazil which produces little rain/extreme heat with highs ranging from the mid 90’s to 100’s. Some regional areas may see highs of 99-112 degrees. The coming Argentine heat/dryness raises the stakes on late January rain.
Index funds could not wait and started the rebalance today with massive meal purchases. Grains and soybeans followed. We cannot overemphasis the importance of the Jan 17-22 rain for S Brazilian/Argentine crop yields. Soaking rain is required, or much higher prices are required. Rest up this weekend, next week promises to be volatile.
To download our weekly update as a PDF file please click on the link below:
HEADLINES: Funds sell wheat to have something short against corn/soy; Midday S American forecast threatening.
Hawkish US economic statements from the US Central Bank have pressured Chicago futures at midday as fund flows are to the sell side of the book. Threatening S American weather has been cast aside with traders worried that rising US interest rates could end the reflation trade. We doubt that the reflation trade has ended as evidenced by the sharp daily gain in crude oil futures. However, following the Chicago rally in recent weeks, the Fed statement causes a pause with a USDA Monthly Crop Report on Wednesday.
Wheat has been the downside price leader on chart-based considerations with March Chicago following below the December low at $7.51. The chart breakdown has sparked fund selling and narrowed the wheat/corn premium to $1.45/bu Chicago wheat. US wheat is competitive in the world market based on this decline, with world importers expected to take a second look at US wheat for shipment from March-June. Fundamentally, nothing has changed in the US or world wheat market, and we argue that wheat futures are too cheap below $7.50 March Chicago or $7.80 KC March. There are still 5 months left in the old crop year.
Chicago Wheat/Corn Spread; Support at $1.30 wheat Premium:
HEADLINES: Wheat price drops on chart selling and corn/wheat spread unwinding; KC wheat nears $7.75 support; Soyoil to new rally highs.
Chicago futures are mixed at midday with parched Argentine/S Brazilian weather, the index fund rebalance and USDA January Crop Report all in focus. Chicago has rallied sharply in recent weeks and traders are trying to decide how much weather premium is enough in the summer row crop futures. Crop size estimates are in decline which is limiting any active selling of corn/soy. Argentine crop conditions and yield prospects are said to be in sharp decline which on top of Brazilian losses is adding to the longer-term Chicago bullishness. Chicago values may chop for a while as traders try to understand if $14.00 is producing any meaningful soybean demand rationing. The July/November soybean spread above $1.00/bu confirms that weather premium has been built into valuations. Wheat prices are sliding on chart considerations and a slowing of spot export demand.
Brokers estimate that funds have sold 6,600 contracts of corn, 5,900 contracts of wheat and 1,600 contracts of soybeans. In soy products, the managed money has bought 3,400 contracts of soyoil and sold 2,900 contracts of meal. Buying the oil share has been a popular trade of recent days.
The latest updates for Monday’s index fund rebalance pegs corn buying at 5,100 contracts, Chicago wheat buying 2,500 contracts and 21,000 contracts of soybeans. In the products, the rebalance has funds buying 24,000 contracts of soymeal and selling 6,300 contracts of soyoil. The rebalance occurs over 5 business days starting next Monday. The rebalance will be adding to the volatility with the USDA January Crop Report out on Wednesday.
Plain’s producers are trying to decide if it pays to top-dress winter wheat with nitrogen based on its record high price and the generally poor condition of the crop with the weather forecasts arguing for additional dryness. Although the final decision can still be made in several weeks, producers report that they will likely pass on winter fertilisation programs amid the extreme cost. The reduced or lack of top-dressing wheat could lead to well below trendline yields should spring wheat weather become adverse.
Tunisia booked 125,000 mt of soft wheat, 75,000 mt of durum and 75,000 mt of feed in a tender that closed today. The durum wheat was sold at price of nearly $700/mt. The soft wheat is expected to come from the EU, while durum could be sourced from Canada. The shipping period is from Feb 1–March 25.
Chicago market volatility is going to stay extreme for most of 2022 due to tightening world exporter stock/use ratios of corn, soybeans and wheat and the importance of weather/yield in directional trades. The old saying that bull markets always let you in should work well following the USDA January Report.
The midday GFS weather update offers dry weather conditions for Argentina/RGDS in Southern Brazil for next 10 days with extreme heat in the 5-10 day period with mid 90s/lower 100s. NE Brazil stays wet with rainfall of 5-12.00”. No extreme heat will impact N Brazilian with highs in the 80’s/90’s.
The forecast hints at drier weather conditions for N Brazil in the 11–15-day period, but it is a low confidence forecast with an existing trend in place. We see no real change in the S American weather pattern except the widely scattered showers reach into MGDS and the northern portion of Parana.
Two steps forward and one step back has been the theme of early 2022 Chicago trading. Tightening world vegoil supplies and the onset of new renewable diesel production will rapidly draw down US cash soyoil stocks. Soyoil will be the bull leader due to US renewable diesel production doubling by over 1 billion gallons in 2022. S American crop sizes are in retreat, and a bullish Chicago outlook is maintained. We argue that corn would be up 2-5 cents if not for the chart liquidation in wheat. We continue to doubt that wheat has scored its seasonal high with the break providing another buying opportunity. This is no place for new sales with bull trends intact.
