Weekly Market Analysis with Miller Risk Management


It was a short week for grain trade with markets closed on Monday due to the Martin Luther King Jr. holiday.  Regardless, prices found no lack of news to greet them this week between South American weather, Argentina’s decision to allow the purchase of U.S. dollars, the ongoing GMO issue with China on corn, and a sudden world interest in purchasing wheat.  In terms of timeline, Brazil’s north has already started harvesting soybeans with yields coming in generally between 47-52 bu/ac which is at to above levels.  It’s only a matter of time before the South begins their soy harvest and Argentina moves into corn.
As for outside markets, the stock market began falling around mid-week and never looked back.  As is usually the case it was a combination of factors that led to the fall, but in this case I believe it was a combination of overdone strength as well as a sudden lack of confidence in some struggling world economies.  A great example of this is Argentina, who we will discuss in the soybean section as their currency issues are and will continue to effect farmer selling levels.  On Thursday, Chinese PMI data (a measure of manufacturing health/expansion plans) fell below the 50 point mark that identifies the point at which plans switch from expansion to contraction.  That was the first time that had happened in six months.  Again, it’s a reminder to everyone that economic bottoms are rarely smooth and will instead have a series of up and downs on their way to improvements (this process in itself can take years).
Soybean trade saw the most volatility this week, moving from near the top of recent ranges to the bottom of the range and then posting a small recovery.  Last week’s March contract finished the week 36 cents higher while this week moved 31 cents lower.  Given the relative tightness of old crop soybeans, I doubt we will break below the $12.66 support area in the near term, and, at least for this week, that was the case.  Weekly export sales on Friday were a focus of the market, coming in well above trade expectations at a total of 1.673 mmt.  Of that amount, 969k mt were for 2014 crop with 703k mt for 2013 crop.  There’s no doubt those are good numbers, but it’s also important to note that there were 302k mt of cancellations by “unknown” destinations, usually read by the trade to mean China.  Other importers stepped in and picked up the slack of the heavy cancellations combined with the fact we are quickly approaching the end of January are a warning sign that our peak export season is likely coming to an end.
As the end of January approaches, the world soybean market is moving closer and closer to the time that South American soybeans become fully available.  The early soybean yield reports are above average at around 47-52 bu/ac.  From a private estimate standpoint, one private consultantcy did lower their Brazilian soy production estimate citing damage from the dry heat during December (they are the one and only firm to do this).  Even then, however, their production estimate was reduced to the low 89 mmt area, which is the low end of most estimates.  Safras y Mercado on the other hand released their private estimate on Friday at 91.8 mmt, up from the Dec estimate of 90.9 mmt.  The Rosario and Buenos Aires Grain Exchanges in Argentina both raised their estimate of Argentine soy production on Friday as well, with the Rosario exchange now at 55 mmt and the BA Exchange at 53.0 mmt, both well above last year’s crop of 49.3 mmt.
Corn prices this week stayed in a very tight trading range of about 10 cents from high to low. News for corn wasn’t as plentiful as it was for soybeans and wheat, but there were some good sized export sales reported near week’s end that probably took some of the downside potential off the market, at least for the day.  From a technical standpoint, the market has yet to really challenge the high posted just after the Jan 10th report, and even now, it appears any significant rally efforts are quickly beaten back by heavy producer sales.  This is something we have warned up since just prior to harvest and it typical of a market coming off of short supplies (short crops have long tails type mentality).  The fact that U.S. producers remain vastly underpriced compared to historical levels is a huge warning sign and something we would expect this market to continue dealing with not just through this winter but well into the summer as well.  The ongoing prices and wealth of available supplies is also going to limit basis appreciation into the summer, and producers looking for basis levels that we saw in the summer of 2012 and 2013 are likely going to be disappointed.
In terms of crop development in South America, rains fell across the driest areas of Argentina over last weekend with amounts totaling around a half to three quarters of an inch.  The moisture was well received and covered around 85% of major production areas.  The rains also preceeded a cool front that sat over the country for much of the week before additional rains moved in on Friday (amounts with that systems also anticipated about an inch or so, widespread coverage.  That system will exit the area on Sunday but the cooler temps and moisture should allow for good pollination on late planted corn and also allow decent fill on the rest of the Argentine corn acres.  Private Argentine corn estimates from the Rosario Grain Exchange were posted at 22 mmt, but were largely ignored as the number has differed significantly from private and USDA estimates all year (USDA’s last estimate was 25 mmt)
Wheat markets had an interesting week of back and forth as they continue to appear to be attempting a bottom.  Early week action was more subdued but threats of winterkill in U.S. winter wheat markets as well as widespread tendering by major world wheat buyers was able to push markets off their lows.  Those gains were, for obvious reasons more apparent in winter wheat markets but also benefitted Minneapolis at various times through the session before gains were pushed back.  Friday’s trade seemed to focus more on profit taking off those gains and by the close prices in hard wheats finished within a few cent of unchanged on the week.
The first major concern this week came with the second arrival of the polar vortex over the U.S.   In many ways, this weather occurrence seems to have become the new “El Nino” in terms of news attention and the market has fallen right on board.  Temperatures did reach threatening levels across hard and soft winter wheat areas on Wednesday and Thursday but snowpack over the soft wheat areas should nullify any impact.  Hard red winter wheat areas were more susceptible to damage, but even then our weather forecaster T-Storm weather believes the possibility of damage was limited to around 11% of winter wheat areas, primarily SW South Dakota, the Nebraska panhandle, and the NW corner of Kansas.  The key word here is “possibility”.  In our experience, winterkill damage in January is tough to accomplish, although admittedly not impossible.  That’s likely why the premium that was placed into the market faded so quickly.  It’s also tough to keep going this time of year because no matter what happened, it’s simply speculation with no proof for six to eight weeks or so at the earliest.  This is simply a matter of wheat using the second of its nine lives, with the more major scares to come this spring.  It is really the freeze/thaw cycle that will threaten production.
The more solid news this week that I believe is what will set a bottom in this market is the heavy tendering by major world wheat buyers.  This really started last week with Egypt issuing tenders but continued into this week with tenders of more than 500,000 metric tons by Algeria and Saudi Arabia as well as smaller tenders by Ethiopia, Taiwan, Iraq and rumored interest by China (although that remains unconfirmed).  Iraq’s tender early in the week went to Australia, which is fairly typical but served as a price point for world markets with Aussie prices at $335-346/metric ton.  U.S. and Canadian wheat were right in the money at $349 and $347/tonne respectively.  The sudden push in buying interest is a strong sign that we’ve got support in the global market place, even with the huge supplies that are around.  There was also an interesting note in the Taiwanese tender, which while not all that large, did represent a shift.  The Taiwan tender was originally a tender for U.S. corn that was rejected due to price levels.  Once the tender was rejected, Taiwan re-issued the tender in the form of U.S. wheat, indicating that the corn/wheat spreads have gotten too tight.
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