Weekly Marketing Analysis with Miller Risk Management

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Grain markets were volatile this week with traders attempting to sort through various conflicting information on all three grains.  Spread trade continued to be a heavy feature as did corn/soybean spreads.  The early week cold snap offered some minor support to winter wheat contracts although the support was extremely temporary given massive world supplies and the fact there’s no way to confirm or discount winterkill in January.  Soybean markets remained very focused on the wide divergence between tight U.S. old crop soybean supplies and a global picture that is anything but short.  Corn markets finished basically flat but right up against the previous high posted just after the Jan 10 Crop Production report.  There were a lot of positives in that market this week that we’ll get into below, but the fact still remains that we don’t have the shortage that we’ve experienced the past few years and there’s still a ton of grain that has to be priced.
Outside markets were in no mood to offer support with analysts still concerned about currency problems in “emerging” markets.  We discussed that last week so I’ll spare a rehash and simply say that concerns are justified and definitely could have a long term effect on commodity demands.  Its short term effects are more limited to money flow issues.  The Federal Reserve this week acted in accordance with expectations removing another $10 billion from their QE3 program and stocks continued to sink.  Chinese PMI data confirmed contraction of the manufacturing sector with the worst reading in months and EU inflation data was also less than expected.  Needless to say there wasn’t much encouraging news this week.
Soybeans
Soybeans markets were prone to whiplash with old crop markets moving from the top of recent ranges to set a new low for the move before quickly rejecting the low and moving back towards the top of the range once again.  The instability had a fair amount to do with spread trade as while March contracts moved significantly, November new crop had a tough time breaking back above $11.00.  November was able to pull it off by week’s end, but the amount of effort it sucked from traders in order to get there isn’t going to be forgotten.  The weakening inverse (or at least highly unstable) from old crop to new crop is also a signal to markets that demand isn’t as hot as it was over the past few months.  All of this is very normal and quite typical of this time of year, it’s just an important signal and producers need to pay attention to.
As always for this time of year, South America remained the topic of conversation and production estimates out of that country remained consistently in the 90-91 mmt area.  There are estimates on either side of that range, but those handles will catch most of it. Safras y Mercado posted an estimate of 91.8 mmt, a 12% increase from last year and up just under 1 mmt from last month.  Agroconsult began their tour of the Mato Grosso province this week and confirmed a crop of at least 91 mmt, saying they would finalize a number on the end of the tour, which should be over the weekend.  USDA’s ag attache in Brazil raised their production estimate to 89.5 mmt, which is just above USDA’s Jan estimate of 89 mmt.  That’s a lot of numbers, but let’s put it this way. Using a rather conservative average of private estimates at 90.5 mmt, Brazil will out produce last year’s record crop by 275.5 million bushels.  Weather this week was nearly ideal for harvest in the north (warm and dry) while central Brazil and Argentina received some much needed rains in the amounts of 1”-2”.  That will allow for a nice finish to the crop.
Export data this week was healthy, but there’s not much else to be said since old crop soybeans have already exceeded USDA’s projections for the 2013 crop year.  Inspection numbers on Monday were huge at 73.8 mbu  with around half that number destined for China.  Sales numbers did drop off from previous levels, down to “only” 494k mt of old crop net of cancellations.  Again, we’ve already passed USDA’s total, so these additional bushels are cutting straight into carryout.  Some will argue that the heavy cancellations mean the export season is wrapping up; and they’re right.  Its just not fresh news and the reduction in carryout will likely help enforce support levels in the low $12.60’s a while longer.  Once we get passed February, however, shipments taper off dramatically.
EIA reports were released this week regarding biodiesel production and showed November’s output just a hair under the record set in October.  This is likely a somewhat false signal however as biodiesel tax credits were set to expire and the last time that happened in 2011 production ramped up sharply just prior to expiration only to decline just as quickly following the expiration.  Crush pace has been a huge supportive factor but there are some warning signs that may not continue.  At least one U.S. plant has already warned of a shutdown starting the spring citing margins pressure and they are not the only one feeling the heat.  Chinese crushers are running close to negative as well.
Corn
Corn market this week put in the best performance, consistently closing above their 50 day moving average and finishing Friday’s session just under resistance at $4.34, at least in the old crop contracts.  New crop contracts weren’t quite as fortunate, but were able to maintain closes above their 9 day moving average.  For Dec 2014, the 9 day MA hasn’t crossed the 50 day since back in July and with only a four cent or so difference, this is the closest they’ve come to crossing in months. A cross of those two lines would like bring in some fresh buying, but given the time factor involved, the benefit would likely be limited.  December is more likely to benefit from a run in March contracts if we can move through the resistance in the $4.35 area and trip some buy stops to push us higher.  New Crop corn has been pretty apathetic in terms of “buying” acres, and that really can’t be faulted given the carryout that the U.S. is posting for 2013.  It doesn’t eliminate the chance of a problem during the growing season next year (we will inevitably have one, somewhere, sometime), but it does dampen the impact of it.
South American weather has acted as a supportive feature this week.  Argentina has received rains that will help finish that crop (although early planting issues kept total acres down).  Brazil is currently in the act of harvesting their Northern Soybean crop and following that, some producers will be looking at putting in their second “safrina” corn crop.  Conditions there right now area somewhat dry, which is ideal in terms of soybean harvest progress.  There are concerns, however, given what happened in Argentina, that those conditions could persist and prevent the safrina crop from going in.  I would suggest that the fear of drought is likely overstated and “dry” conditions in Brazil are not the same as “dry” conditions in Argentina which has a typically drier climate anyway.  T-Storm weather forecasts do have the dry trend sticking around for another 10 days to two weeks before a rainy pattern resumes.  This would be nearly ideal in my mind as it would allow the crop to go in quickly and then have some nice moisture to offer establishment.  However, the market is rarely that long sighted and the FEAR of what may happen is enough to offer support.  This fear is a good part of the reason that corn did not break at midweek when soybeans and wheat did, although its likely not strong enough as of yet to push markets through resistance by itself.
Export news was surprising this week with inspection numbers fairly neutral but sales numbers offer a positive surprise.  Inspections on Monday totaled 28.7 mbu, which is typical.  It was the sales numbers on Thursday that caught traders eye as they came in at 1.943 mmt, mostly of old crop corn and nearly three times the highest trade estimate.  The total was the highest sales number we’ve had in three years so it’s tough to argue that the lower prices aren’t being effective in buying back demand.  The biggest purchases came from Japan, which had been a big customer of the U.S. until the past few years when prices were higher and they switched to Argentina and/or Ukraine.  There is absolutely nothing negative in this number and total corn sales are at 87% of USDA projections already, meaning we expect revisions in usage in February’s report (possibly by 150 mbu).  It’s worth noting though, that none of that corn was purchased by China and the U.S. remains at odd’s over them regarding the GMO issue.  Sources vary in the amounts but recent figures say 2.0 mmt of corn could be rejected by China when all is said and done.  Their committee on GMO’s does not meet until March so no action will be taken to allow the Viptera trait before then.  If it is not approved at that meeting it will not be done before June.  Quite frankly, this has turned in a such a political hot potato and such a convenient way for China to reject bushels they likely no longer want (domestic stocks are growing quickly), I wouldn’t be surprised if a decision waited until June.
Wheat
Wheat markets had a volatile week similar to soybeans, although from a technical perspective the outcome may have been worse.  Early week markets were actually fairly strong, at least in the winter wheats, as the recent cold snap created concerns regarding winterkill.  According to T-Storm weather and Commodity Group anywhere from 5-10% of major winter wheat production was again threatened by this cold due to the lack of snow, the bulk of which was again in southwestern South Dakota, Nebraska, and northwestern Kansas.  Areas of northwestern Missouri and Central Illinois were also suspect.  As temperatures warmed, however, those fears faded pretty quickly and the market took profits and refocused on the tremendous global supplies. The weakness in soybeans was likely an aggravating factor, along with the fact this week didn’t see near the amount of global tendering that we’d seen in previous weeks.
This week also saw a prime example of just how flooded the world market is.  Egypt’s GASC cancelled a previous tender and re-issued it with the added stipulation that they would only accept wheat that was 13% moisture or less.  That doesn’t sound like a huge deal and by itself, it really isn’t.  Moisture levels in wheat are a controlling factor in flour yield with lower moistures higher yielding.  GASC has for years been a big buyer of French wheat for several different reasons.  Unfortunately for the French, they had a wet year and their wheat is averaging 13.5% at the ports.  This move by GASC disqualifies them from futures tenders at least until the stipulation is removed and according to several sources, that could be awhile.  The underlying factor here is that Egypt is poor.  They have very little money and very little bargaining power given their political instability and a hungry population.  The fact that they can now afford to be picky in terms of what wheat they will take and not take (to the point they disqualify one of their former big suppliers) says a lot about where we are in terms of price.  The tender eventually went partially to the U.S. and mostly to Russia.
Export sales did pick up this week with USDA reporting sales of 797k mt total, mostly old crop.  This number is pretty healthy and marks a steady improvement from previous levels.  Wheat sales are not as far ahead of USDA projections in terms of pace as corn and soybeans but they are making decent progress.  I don’t believe we will see any reduction in export demand, and if the next month or two could continue this pace, we could even see a revision higher.  Canada’s tremendous crop leaves the U.S. spring wheat crop with huge competition, but for the time being they seem unable to move it.  That issue is likely to plague them the rest of the year resulting in a volatile basis for us and extended time of processing their overrun.
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