We are basically down to the last work week of the year.
Yes, I realize many will pretend to work that week ahead of Christmas, but let’s not kid ourselves, there are basically 5-7 trading days left in the year where we can expect full participation.
Taking this into consideration and adding to it the fact that we have a fresh update from the USDA, I figured what better time than now to look at the fundamental stories catching the attention of traders currently, and how those headlines reconcile with what’s happening in the global cash market.
Wheat
Wheat has gone from struggling to attract buyers, to rallying nearly a dollar in 10 days, before cooling slightly as we worked our way into the weekend. Surprisingly strong Chinese buying interest of soft red wheat that had basically come out of nowhere was the catalyst needed to spook speculators out of their short positions.
Over the last handful of weeks, China has amassed nearly 2 million metric tons (73.5 mbu) of US soft red wheat purchases. This is the third largest amount of soft red wheat purchased by China from the United States in over 20 years.
While an increase in Chinese wheat imports should not come as a surprise after an unprecedented stretch of wet weather just ahead of their harvest damaged an estimated 25-30 mmt of supplies (919 mbu – 1.1 bbu), the timing of the purchases from the US is somewhat puzzling. It was only 3 weeks ago that prices were under pressure and trading to new lows on reports of China looking to roll over 1 mmt of French purchases out into deferred months. While logistical constraints could have been behind the roll, many traders were worried the desire to kick bushels out for later shipment was being driven by reduced demand. This big string of purchases out of the US would indicate that is not the case.
In addition to strong Chinese buying, Egypt’s GASC was in for a couple of tenders this week, something we had not seen in months. Russia got much of this business, with uniform values offered. It is interesting to note, these tenders were a bit different with Egypt requiring 180 days of credit in the first round of purchases, with 270 days needed on the second round.
From a cash market standpoint, wheat remains a mess. Russia has the largest number of exportable supplies on hand and continues to offer them at a discount. However, their pace of shipments isn’t meeting the amount needed to hit current export projections. With Russian soft red wheat values undercutting US vales by nearly a dollar a bushel, and hard red wheat values nearing a $1.50 discount, it would seem China would be looking to get a phytosanitary agreement between the two countries on wheat in place sooner rather than later—if they are truly in need of supplies.
When looking at the USDA’s most recent supply and demand update there are some questions on the global outlook, with some conflicting thoughts on what is happening in the European market. From a US balance sheet perspective, the reduction in export selling to other countries, with a reduction in overall domestic demand will likely keep wheat rallies somewhat capped, without new crop production worries.
While global buyers remain relatively unfazed by the recent strength in Chinese buying and there is room in the balance sheet for the uptick in interest, further aggressive purchases could quickly change that outlook.
Corn
We are watching the situation in the Brazilian cash market unfold as expected. Uncertainty over the corn production outlook, with expectations of a big year over year reduction, and poor economics has the Brazilian farmer holding on tightly to their supplies. Interior basis levels in the country have surged by over 70 cents in the last month, as the stoppage of sales is evident in the pipeline.
This rise in interior values caught many exporters in the country by surprise, with some of them now looking at a loss of a dollar or more a bushel if pushed to cover their position today. The drop in available supplies and falling margins has exporters looking to switch the origin of their sales, with talk of at least 10 cargoes being cancelled out of Brazil, set to be loaded out of the US instead.
Weather issues in Brazil have prompted many of our traditional customers who had reduced their purchases from the US a year ago to come back for supplies. Japan has over 2 mmt more corn bought from the US than they had a year ago at this time, with big increases by Colombia, Unknown and Mexico as well. With Chinese purchases running over 2 mmt behind last year’s pace, they remain the 500 pound gorilla in the room. As it stands currently, much of what they need for this marketing year looks to have been sourced from Brazil and supplemented by Ukraine, though there was a chunk switched from unknown to China in this week’s export sales report.
Marketwise, it appears as though we will meet lofty USDA export projections, calling for a year over year increase of 439 million bushels. With Argentina returning to the market in March, and many still working to increase exports out of Ukrainian and Romanian ports, how aggressive buyers are over the next handful of weeks will be interesting to watch.
The uncertainty over Brazilian production as well as questions over whether China will start to aggressively purchase corn will likely provide enough bullish potential to keep funds from looking to short this market any further for now. However, the amount of farmer length lurking in the wings continues to live rent free in my head, as we traditionally see a big uptick in grain movement after the first of the year.
Soybeans
The battle between the Euro and GFS models continues, with the Euro calling for better rainfall amounts and coverage across Brazil this week. Both agree rainfall amounts remain below normal for the next two weeks, with 90% of Mato Grosso expecting 2.8” of rain during a period they would traditionally see nearly 6”.
Private and public groups alike seem to be converging in the 160 mmt production range, with some outliers in the low 150’s but few above 160. While the crop is far from in the bin, it does appear as though the outlook has stabilized enough to where we can feel comfortable with a low and high side for now.
On the demand side, the Chinese government continues to source supplies for reserves from the US, though the buying pace seems to have slowed. Some believe upwards of 5 mmt of beans have been bought by the Chinese government from the US since the Xi and Biden meeting. With hog margins and subsequent feed margins incredibly poor, many believe Chinese buyers will continue to remain hand to mouth, waiting for cheaper, more plentiful Brazilian supplies March forward.
The USDA left their domestic outlook unchanged in last week’s report, keeping carryout at 245 million bushels. When looking at Brazil’s outlook, they did cut new crop production 2 mmt to get more in-line with Brazil’s CONAB, while increasing old crop production and solving the balance sheet for now.
The increase in Argentina’s production, returning to normal levels after last year’s drought cut the crop in half is going to be interesting to watch as well, especially with their new president looking to make some major economic changes.
Overall, the US will still be working to sell beans into the world market, though buying interest seems lukewarm at best. Crush remains the bright spot, keeping support under the market thanks to a sharp increase in demand.
Long Story Short
While time is the only thing that can really answer all the questions we have when it comes to available supply versus demand in a given year, for now the global supply and demand situation feels relatively comfortable.
While enough questions remain to keep funds from selling aggressively much further beyond the levels achieved recently, enough comfort in supply availability and farmer ownership will likely act to limit upside.
As always, let me know if you have any questions! Have a great week.
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
