Key points on wheat:

Transcription

1 The USDA August WASDE was out last Friday and confirmed what many have been saying for some time that the world is heavy with grain. On paper the report was bearish for the three major grains however market price action since the report has largely been friendly. The key take away from the report was the forecast for record yields and production for both corn and soybean crops this season in the US leading to a solid increase for global stocks. Wheat yields were also higher in the US but some adjustments in the global balance sheet saw wheat end up overall with a small reduction to global stocks. Despite some variable weather this season the end results overall have been favourable for crop development and we are heading for another bumper season of production. Whilst this has been bearish in general for grain prices it now appears that grains have been trying to form a base in values after testing multi year lows. Given the comfort with current high levels of stock it can take some time for the market to work through this however it does feel as though the market has priced a decent chunk of the bearish news for now. Weather So the warm to hot weather in the US was supposed to noble the crops and cut yield potential and certainly the market convinced themselves of this for a period of time. Yes it was hot but they also saw plenty of moisture and at this point the benefits of abundant moisture have comfortably offset the negatives of additional heat leading to record forecasts for both corn and soybean yields. Corn is getting closer to being set whilst beans still have a way to go and today the market is broadly comfortable with overall production outlook. There is plenty of discussion around the validity of the USDA numbers but at this point you have to go with them as their methodology is pretty sound and the market will trade these numbers until there is a valid reason to do otherwise. The global impacts of wheat weather have been a bit more volatile even if it has netted off about even. The EU crop has taken a hammering with ongoing rains damaging crops and pushing French production down sharply versus last season whilst there have also been losses in Germany and some of the Baltic states. On the other hand the Black Sea region has had a bumper season with close to ideal conditions leaving Russia set to harvest a record crop and likely take the mantle as the leading exporter of wheat globally. Australia is also enjoying some very good conditions and likely we could suggest that a decent spring rain should set us up for a very good season here as well. Switching back to the northern hemisphere the next thing in focus will be the planting weather and conditions for next seasons winter crops. At this stage everything looks ok but it is early days. Wheat The major changes to the wheat grid over the past month have revolved around the lost production in Europe and the increasing production in the Black Sea. French production is forecast at 28mmt down from 40mmt last year with quality also suffering following an excessively wet season. We will also likely see some lost production in Germany as well as some of the Baltic states but not nearly the same level of impact as suffered by the French crop. The Black Sea region is booming. Russia is forecast to produce a record 72mmt crop of wheat whilst both Ukraine and Kazakhstan have also seen some improvement from earlier forecasts. The USDA took EU production down 9mmt, Black Sea was up 11mmt and Australia, Canada and the US were also adjusted higher giving us a global increase of 5mmt of production. To offset this we also saw lower opening stocks, higher wheat feeding and higher exports netting off with a skinny 1mmt reduction to ending stocks. This was lower than I thought we might see and less friendly for the market than I had imagined. In reality we have plenty of stocks globally even if 45% of wheat stocks are sitting in China. The big8 exporters are holding 70.73mmt of stocks which is down 2.5mmt from last report and slowly tightening. Obviously with some big changes the challenge will be on for regions such as the Black Sea to make

2 the bigger export numbers. It will always work on paper but the supply chains can get tested. Similar can be said for the US as whilst wheat export numbers are very normal there will certainly be some competition from corn and soybeans for export space. Wheat has been consolidating over the past month at key long term lows in the zone after getting dragged lower on the back of heavy stocks, flat demand and improving corn weather and crop conditions. After a pretty brutal move lower through June and July wheat is slowly starting to build a base and show some signs of life from a technical perspective. Demand is building slowly especially given that there is plenty of lower grade feed wheat available which has been pricing competitively against corn so far. On the other side of the equation global supplies remain very abundant and it will likely take a supply shock of some degree to push wheat values beyond the current range. The bulls will be hoping that these lower values will eventually stimulate some additional consumer demand and there is some evidence that this is happening but the process remains slow and will take time. The northern hemisphere winter planting season is approaching and it will be interesting to see how farmers globally will respond to lower wheat values overall. These values will test the cost of production in some regions and no doubt this can test the resilience of the market. Funds have continued to hold/add shorts in the wheat pits and it feels as though wheat has also been their default short for spreads against corn and soybeans. Wheat had a low at back on August 2 nd and recent price action might suggest that we have put in a low for now. Whilst the broader outlook for wheat remains heavy it might just be that much of the bearish news is fully priced. Certainly the risk/reward of being short wheat around 400 levels does not look very appealing to me. Key points on wheat: The global SND remains heavy with USDA estimating carry out stocks: mmt ( July) and mmt ( July) US stocks forecast 981myn bu (stocks:use 50.6% = very high), 1100myn bu (47.5% stocks:use) US wheat yields are higher with 16/ bu/acre vs 51.3 last report and 43.6 last season USDA wheat by class projections are similar with HRW stocks big at 578mbu 16/17 up from 446mbu in 15/16 HRW has been increasingly competitive in global markets and export sales have been robust but there are plenty of stocks EU production at 147.5mmt (156.5) and some estimates closer to 141/142mmt with plenty of quality issues. Black Sea production at 114mmt (103) with sound quality albeit a generally lower protein profile. Wheat futures markets remain under pressure but still potentially range bound however I have redefined my ranges on the back of recent market action - calling a nearby range at and an outside range at on the front contract for now Northern hemisphere wheat harvests are well advanced Aussie wheat regions looking very good with a very good moisture profile after some terrific widespread rains we will need spring rains but the potential is set for a very big crop with many estimates currently around 28-30mmt. Aussie wheat still looks expensive at USD fob range APW however global values are firming with the benchmark Black Sea values around USD range whilst EU values are roughly $20 higher at $ basis 12.5pro and HRW is $189. Likely Aussie wheat is competitive into core markets however if we grow a big crop then the challenge will be competing for optional origin business.

3 Global fob values have firmed around $10 recently as Black Sea prices are not seeing competition from EU wheat given the production and quality issues they are having this season. Globally feed wheat is pricing around USD162 fob against corn pricing at USD fob range so wheat is continuing to displace corn into feeding rations USDA increased wheat feeding again by another 2mmt Fund structure remains friendly with an ongoing large short position in the wheat pits (SRW at around -132k, HRW at around -37k) The market is also close to triggering another VSR. After 23 of 29 sessions U-Z spread is running at 84.81% of full carry and needs to average 61.56% or 16 6 cents over the next 6 sessions to trigger another VSR. Market currently at 17 0 so we are line ball. Wider carries in the wheat market will certainly create some interest. Bottom line: Bigger picture it is difficult to not hold a bearish outlook on wheat however in the short term we continue to form a base here around these longer term lows at the levels and I favour that these levels will hold. Wheat can likely be a grinding affair here for some time and the target should be to trade the narrow ranges until the market suggests we are breaking away from this scenario. Despite some recent positive price action from corn and soybeans it is likely these markets will also remain heavy short term and as such it is difficult to see any sustainable rallies building in grains near term. Trade a range on nearby wheat. CBOT Wheat daily continuation chart

4 CBOT Wheat weekly continuation chart The longer term down trend remains intact.

5 Wheat-corn Z6 daily chart

6 Wheat Z6-H7 daily calendar spread

7 Corn So La Nina was supposed to come and bake the corn crop and slash yields and everything else but the market forgot that rain will solve many issues for grain crops and so it came that we had heat but we also had significant rains and we are now looking at a record crop of corn in the US. The rally into June is all but a distant memory with corn joining wheat in challenging multi-year lows on the price charts. What has maybe been a bit surprising in the corn market is the relative strength of corn since the USDA released their forecasts for a record yield. In reality the market focus has maybe switched from heavy stocks to the estimated demand strength with the US being the key focus for corn exports now that the SOAM supply has all but shut off. In addition to the increase to export numbers the USDA have also increased feeding numbers significantly from last season however it remains to be seen if both wheat and corn can achieve strong increases in feeding demand this season. Weather is pretty much done for corn now with maybe some late planted corn still needing to complete grain fill and if anything the risks might come to quality if the heavy rain continues to come in key states. In the absence of any major issues for the crop I think it will be difficult for corn to stage much of a rally and I think we will eventually see selling come in. Maybe the key for corn values is that growers may be reluctant to sell corn at these levels and they may instead sell the soybean crop and hold corn for later in the season. Certainly the soybean market remains inverted whilst the corn market is paying carry so this would make sense. Short term I am remaining neutral on corn. Key points on corn:

8 The corn SND remains very comfortable with ample global stocks USDA estimate mmt ( July) US carryout stocks 1706myn bu and 2409 mbu (2081 July) US 5675 mbu (5500 July and /16) Corn 2175mbu (2050 July and /16) Global corn production is up 18mmt whilst use is forecast up by 8mmt US corn prices are competitive globally however feed wheat remains cheaper than corn and will likely continue to displace corn into some feed rations in the coming months USDA has increased feeding by 5mmt globally after cutting by 4mmt last report Funds have been heavy sellers of corn since the weather turned and now short 119k contracts vs a high of 272k long back in mid-june. Likely ethanol demand will remain robust especially as corn remains competitively priced versus other feed stock such as sugar. Bottom line: I remain neutral on corn as it feels like the heavy SND will take some time to chew through and I can t see prices running away from current values. SOAM production potential for next season may well hold the key but for now everything looks ok. Expected range nearby corn

9 CBOT Corn daily continuation chart

10 CBOT Corn weekly continuation chart Soybeans Soybeans have continued their volatile run as the market wrestles between improving weather, increased yield potential and a generally strong demand profile. Whilst the market still holds some upside risk the production outlook is a little clearer today and the market unknowns will more likely come from the demand side in the coming months. The US remains the default supplier of beans and in recent weeks we have continued to see strong export sales being reported which has ultimately been supportive for values since prices bottomed out in early August. US ending stocks remain comfortable at 330mbu however this remains vulnerable to tightening and as such the market will remain fairly sensitive in the coming months. Weather remains in play for the soybean crop to finish off but today everything looks ok. The market is continuing to price the potential for a tightening of stocks with Nov16-Nov17 trading at an inverse around 60 cents and likely this will incentivise US farmers to sell beans and store corn at current values. Key points on Soybeans Global bean stocks are up 4mmt at myn mt US stocks 15/16 at 255mbu (down from 350) and 16/17 at 330mbu (up from 290) with increased production also balanced by modest increases to crush and exports

11 US yields are up 2.2bu/ac to 48.9 giving us a production increase of 180mbu which has been offset by lower carry in and higher demand with both crush and exports higher Demand outlook remains robust with Chinese demand forecast at 87mmt by USDA and reported export sales continuing to post strong numbers. Chinese crush margins are reportedly good which should be supportive for soybean values. Tighter SOAM supply continues to push export business towards the US Some discussion that planted area may be smaller in SOAM next season but early days. Given that export taxes on corn have been abolished there is a likely trend towards more corn and less beans. Funds still holding decent longs in beans at around 105k contracts which has stabilised in recent weeks. Still feels as though funds are trying to hold bean longs and happy to spread against corn and wheat. Bottom line: The global balance sheet is ok but is certainly not loose at 330mbu. Demand remains strong and any issues with production from here can quickly tighten things up however the market is far more comfortable today than early July. Crop conditions look good today and hence the strong uptick for yield potential. My bias remains neutral to friendly on soybeans but I think the upper end of the range has come down a bit in recent weeks. Likely soybeans will remain very volatile short term and my preference is to play from the long side buying dips. Expected range SX next couple of months.

12 CBOT Soybeans daily continuation chart

13 CBOT Soybeans weekly continuation chart Crude Oil weekly continuation chart Well crude is proving to be an ideal trading market over the past few months with something for everyone. The 5 month uptrend in crude oil ended early June after stalling in the key $50-52 region and market sentiment suddenly turned more negative. We saw a month of increased volatility followed by a straight line move lower towards $40. As quickly as the bears came out of hibernation they have gone back in and the bulls are back in charge of the crude market as we push back towards the $50 level. What has changed? Not a lot outside of some market chatter that OPEC might have another crack at organising a production freeze on crude at an upcoming industry meeting at the end of September in Algeria. The market remains divided as to the merits of a freeze but for the bulls looking for a story it has been the ideal platform to reverse the market fortunes. The story around the crude oil balance sheet finding equilibrium at some point in 2017 remains in play with growing demand expected to catch up with shrinking supply at some stage. Certainly production has been falling in the US as shale wells get switched off although this does appear to have stabilised recently. On the other side of the globe many key OPEC members have been pumping oil pretty much flat out in a bid to preserve market share, even if they do freeze it may well be at elevated levels versus recent production numbers. OPEC is currently pumping at around 33.1mb per day which is the highest level for several years. Total global supply is currently running at a small surplus to demand but with demand forecast to increase from 94.3mb/day in 2016 to 95.4mb/day in 2017

14 we should start to see the market become more balanced during The bigger question hanging over the market may well be the delayed impact of lower exploration investment in the oil and gas industry which may not kick in for some time but something that certainly has the potential to be very supportive for crude values in the future. Global stocks remain at very high levels and in theory this should stabilise crude values in the short term although looking at recent price action I am not so sure this makes complete sense. Short term I am continuing to run with the trend on crude looking at a target of $52 based on the October contract. Outside of this I think the market can see further corrective action towards $45 as market sentiment ebbs and flows but eventually I will be positioned firmly in the bull camp looking for crude to move into the $60-70 range at some point during My short term trading range is $44-52 CLV6 whilst my medium to longer term bias is positive and I favour a trading range of $40-65 nearby contract. My optimism says I would like a chance to buy crude in the $36-38 range but something tells me that we may not get this opportunity anytime soon. Silver weekly continuation chart Silver is continuing a period of consolidation and has largely been trading sideways over the past two months. We continue to like precious metals as an investment with both gold and silver seen as

15 good longer term plays against the back drop of global uncertainty. No doubt these markets can remain volatile but longer term we see them as value plays and we favour buying dips with a medium to longer term objective. Gold is likely the more conservative play whilst silver is likely the more speculative play. Like many commodities when you look at the longer term time frame precious metals are at multi year lows and look appealing at these levels as a longer term play. We are long silver at with a medium term target at 25 and a longer term target at 35+. AUD USD Weekly chart The AUD is in a short term uptrend but bigger picture remains firmly stuck within its medium term trading range. I don t hold a strong view today but my bias remains neutral to negative until I see a break above the 0.78 levels which have not been seen in over a year. The key may well be USD strength and with low inflation and some market scepticism around potential interest rate hikes we may well be set to remain range bound for some time.

16 USD Index weekly chart The USD index continues to gyrate and after a relative period of strength the USD is now on the back foot again is the current range and we are again testing the lower end of this range and in reality the market still appears a little confused around what direction to take. The interest rate environment continues to look extremely flat whilst expectations from the US FED suggest that there remains a low probability of further interest rate rises in the coming months on the back of ongoing low inflation. I don t really have a strong view on the USD other than to say it feels as though it can outperform most of the other key currencies in the coming months especially if global uncertainty continues as a theme and so my bias remains positive.

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