LKCW on Corn Into the October Report

It is difficult to be bullish, especially where it counts, in the medium- to long-term (I know blu, that construction reminds you of my chigger). Here is why: It was sizzling hot in late July throughout the whole Western corn belt, without a whole lot of rain. In the old days that meant, yield hits! But I guess not anymore if the USDA is still the world’s best numbers (and they are). No irrigation, no problem in Nebraska this year, from what I heard. Either way, if I was paying for a newsletter that printed “better than expected” more than twice in the last eight weeks, I would unsubscribe. What’s the yield!!!? A broker told me today Informa had 175 bushels per acre national average! Weren’t those guys at 160 a few weeks ago? Thanks for the Informa guys!

More bad news, South Americans have been dumping a lot of cheap corn into the export channels. I don’t use the term “dumping” lightly, but in Brazil first-crop soy goes into the bins, and the saffrinha crop goes straight to the barge. They’re practically giving away the corn. But South American farmers have held soybeans. I have chided Michael Cordonnier, but he said on a non-subscription blog exactly that would happen months ago. I didn’t believe him, maybe partly because of his crummy bullish yield forecast for Brazilian soybeans, dude, stop killing the crop…(Big smiles here, I love soybeansandcorn.com, accessible and timely intelligence for sure, and for free, nothing but respect and gratitude from here.) I need to shut up and move on I think.

Okay so the corn bull is getting kicked in the left nut by a USDA forecast for slowdown in the US export pace. And the ache is lingering because we’re falling behind even the reduced targets. The right nut kick is from Informa’s 175 bushels per acre (I didn’t read that, I only heard it, so please correct any error).

The middle nut is being kicked by the Managed Money, who have amassed extended gross and net shorts in the futures market. Someone is going to get their rear kicked on the December contract, too many longs, too many shorts. Subsequent to the October 2 CFTC report, open interest is up 25k contracts (or so?), a big chunk of that came in Wednesday trade with a test of support. The USDA has the carryout of 2.2 billion bushels. Hedge fund net short positions amount to, by my estimates tonight, 750 million bushels of that. The gross short amounts to the full 2.2 billion bushels.

And if we could lift our gaze beyond tomorrow’s WASDE report, maybe we could see that once Midwestern farmers can get through the mud to harvest their crops, that will mark the last wave of supply into the export market until the saffrinha crop comes out next spring. And that’s a long time in the grain business. Sure, the global corn trade has never been the same since the Chinese government reformed domestic corn policy, and simultaneously curtailed imports, three years ago. Six or seven years ago the Chinese bought a lot of US corn, but overwhelming stocks there finally translated into large reductions of imports. But the world will need corn between now and the spring, and the US is edging into a dominant supplier role for that short period at least. All we need is the Brazilians to lighten up on their corn offers, which will happen, as the premium to soybeans is supported, and the new crop soybeans have to compete with the large old crop stocks there for storage. Of course come March, there will be dock worker strikes and grounded barges at the loading facilities. But we’ve seen those problems before, and they have been quickly resolved. The imperative to keep the logistics primed will amplify as stocks in Brazil grow this year. Beans will move, as low prices and uncertainty over the saffrinha crop withdraw corn from the market. (I guess this is where I should say futures and options are risky).

Anyway, the point is, for the next six months, if you want a barge of corn, you’re probably going to be calling someone in Texas or the Midwest. I hear there isn’t anybody good in Portland or Southwest Washington. So I am long corn futures going into tomorrow, with stops. And I will see YOU in the wheat pit!

 

 

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LKCW Returns

Please find here my first post in years, and, yes 420 days counts as the plural. My last post was a hysterical alarm on Chinese crop losses from what were truly historic floods throughout much of the heartland of that country at a critical crop period. The news blackouts were real, the crop losses were not. So on to marginally more pleasant matters. I will leave to you to evaluate the inner motivations behind my return to this effort. But before you become too concerned, let me at least say, family is well, everyday here we are nearer our first hard-freeze, and the dermatitis circling my chigger- and urushiol-plagued ankles is fading into the cool autumn evenings (if you know what I’m talking about, I advise the cocktail of moisturizer, calamine lotion, benadryl, and 1% hydrocortizone). And maybe that’s enough shtick, so let’s get down to business.

Buyers and sellers entered the pit in muted fashion as the USDA released the Q3 stocks report mid-day. Beans reversed to a good gain off a bad week with inventories below estimates. But in the last hour, the price reaction approaching resistance near $9.75/b left hope for my short position into next week. Bean volatility has been pitched in recent months (if not much longer), and buyers earn respect through their consistent record of sudden and explosive bids off support levels. But the short-term fundamentals, and probably the short-term technicals, are weak.

On the fundamental side, if buyers are going to re-enter next week, we can look for them in two corners. First Chinese purchases out of US ports may continue the seasonal inflow. But unless the Chinese soy crushers left some junior traders at their desk during next week’s Golden Week Holiday, appearances are that the recent frenzy in orders may keep things on schedule without any purchases next week. And even if some trader has been assigned to fill some needed slot, Brazilian offers are becoming more attractive with a breakdown in the Brazilian currency amidst the US dollar firming up some. The second corner issuing bids recently are the funds. They’re a good bit long at the moment in fact, but their position in the entire soybean complex is so cattywompus, I am skeptical that they will stay committed. Funds’ largest position in soyoil, and that has already begun unwinding with petroleum-refining lobbyists gaining the EPA’s ear over biodiesel mandates, and soyoil prices in a steep decline. Part of the unwind is adding soybean and soymeal longs, and with the funds still short meal, fuel for a rally does linger. But funds would be fighting an uphill fight, which is contrary to perhaps their only virtue, they like to go with the flow. I say uphill because we’re harvesting record acreage with the USDA estimating excellent yields, and because of the fore mentioned currency moves, and finally because of the record world stocks at the moment, with an atypically large percentage of the socked-up Brazilian crop withheld from the market to date, and because a collapse in cash basis at inland river terminals. The weekly-chart bar looks like a rejection of $9.75, but with funds short meal, price direction next week needs careful attention.

The corn market continued to play possum this week even into the quarterly stocks report. The old crop carryout has made this a very long summer for many farmers, but the stocks report showed things were at least no worse than feared. Futures prices have been unable to budge from $3.50, sure last year they went to $3, but at least they came back up! This year’s market is stagnant. Last week funds took their gross short contracts to 360k, which is right where they backed off last year, and sure enough, for the first time in a while, this week, we see funds covering some shorts, but farmers are right there to take the baton and sell corn, with Managed Money shorts down and Producer shorts up. With the best weekly performance in some time, I am long and I like chances that funds will continue to cover for now, and corn’s chances next week of pushing resistance at $3.62 and then $3.66. Woo-hoo!

The wheat market made a 40-cent push through September with a seasonal rally into planting of the winter variety, as funds have been trying to push one another since September expiration. But wheat buyers looked exhausted by Friday afternoon, with an unattractive weekly outside doji. In such a competitive export market, even with very solid recent exports, it is very difficult for US values to maintain premium to European or Black Sea offers, and that matter is made worse if the US dollar has in fact bottomed out. The high-pro contracts took the worst abuse Friday in response to the small-grains summary, which is concerning, because it is those very varieties that have at least shown some supply elasticity in the current depressed-price environment. There is an open gap on Minneapolis contract below the market, and continuous chart gaps on the Kansas City and Chicago contracts. I am short, and see support at $4.25, if that price can be reached I will attempt to go long. A spread a really like—but do not own—is long KC short Chicago in July, the new crop. It currently has Chicago at a premium, which reflects very old news, last year’s market conditions. Hard red wheat inventories are forecast to be declining, with soft red wheat inventories flat.

That’s all for now. I’m trying to come up with snappy sign-off line, something better than, “I’ll see YOU in the wheat pit!” but I haven’t been able to come up with anything, so suggestions are welcome.

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Extent of Flood Threat to the Chinese Corn Crop

I’m compelled to dust off the blog this evening after my longest break yet, hopefully I can still remember the login passwords.  I have not been tempted lately to make updates, and honestly, I’m not all that motivated at the moment either, but I’m doing it out of duty.  The urgent call I feel arises out of spending a few days attempting to gather information on events which my common sense tells me are quite significant to the grain markets, and yet have gone completely absent from the early-week wire reports and agricultural-market advisory notes.    These events relate to the extent of damage to the Chinese corn crop from this week’s massive floods.

 
The effort to gather information on these events has not been helped by the fact that, in the immediate aftermath of the floods, the Chinese government imposed an effective news blackout.  According to Bloomberg news, the government “instructed the operators of mobile and online news services to dismantle ‘current-affairs news’ operations on Friday…The sweeping ban gives authorities near-absolute control over online news and political discourse.”  The Financial Times directly linked the media crackdown to coverage of the floods.

Sometime around July 21, an enormous and largely unanticipated storm brought devastating quantities of rain to a very large section of northeastern China.  The rains were concentrated on one of the world’s most important regions for corn production, the agricultural provinces surrounding Beijing.  The hardest hit province was Hebei, which accounts for 9% of Chinese corn production, and Henan, which accounts for another 7%.  Reference to the map below suggests that within these two provinces, there is no reason to think of flooding as in any way localized.  The footprint of the most intense rain covers nearly the entirety of both provinces.  The precip maps also suggest that large corn-producing areas in Shandong, Liaoning and Shangxi provinces may also be suffering less severe flooding.  These two provinces respectively account for another 11% ,7%, and 4% of Chinese corn production.  Comparison of the maps leads me to estimate that approximately 20% of the Chinese crop is now threatened by these floods.  China is one of the world’s leading corn producers at around 10 billion bushels per year, leading to an estimate of 2 billion bushels of production area under threat.  What is uncertain is the fraction of the crop loss in those areas.  Note harvest should have been well under way in these areas within the next 6 weeks.

The rain over the weekend is largely off the scale of the 1-week accumulation NOAA maps, so I’ve turned to the 15-day maps.  Almost all of Hebei, and about half of Henan, Shandong, and Liaoning look to have received approximately 7 inches of rain or more.  A very big portion of countryside, centered on the corn production area along the borders of Hebei, Henan and Shangxi provinces appears to have received around 13 inches.

Note that the size of Hebei province is 20% larger than the state of Iowa.  The extent of damage will likely depend on how quickly the rains can drain off and the soils can dry.  With such a huge section of the country receiving so much rain, it seems unlikely that the areas will dry quickly.  My correspondent Crowbar informs that major river on the China High Plain, the Yellow River, is leveed and raised decreasing the effectiveness of that channel for the water to reach the sea.  NOAA is forecasting another 1-3 inches for the hardest-hit areas over the next week, and another 2 inches for the week following.

CPCGR

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LKCW Nightly: 06-09-16

Admit it, my long break has left you sad and unfulfilled.  But take courage, there is much more of my idiosyncratic perspectives on the grains to come.

My most recent, or should I say least distant, post expressed dubiousness on the soybean run up from it’s year-long depressed trading range.  My shriveled trading account is evidence that at that time, and since, I have not shown near enough respect for the power of this rally.  Only the most cautious of bearish soymeal traders have made it through the spring without leaving spouses widows and children survivors, as  numerous rumors circulated of commercial traders getting crushed on the front-end meal contracts.  It is impressive how quickly trade analysts are willing to whittle 100 million bushels at a time off US carryout.  Late-season Brazilian drought, whfft, 40 million bushes of increased US demand.  Harvest flooding in Argentina, whfft, 40 million more.  Record import demand from China, 40 more again.  Reduced US acreage, 60 off the supply side.  Prospects for La Nina summer-weather and a midwest heat dome, another 80 hit to the supply side.  With this arsenal of contingencies and a price chart lacking defined resistance, hedge funds and speculators have scared the hell out of sellers while piling on 10s of thousands of new longs each week.  So yes, when a new crop carryout goes from 400 million bushels to 300, it raises the prospect for going to 200, which raises the prospect for 100, and then we’re out of soybeans!

But it ain’t gonna happen soon.  Farmers in the South will be harvesting soybeans in a few short weeks.  My drive-by inspection of some fields in Mississippi showed good starts with lots of moisture.  Then we’ll have the midwest bringing in the crop just as the Brazilians will be determining their acreages and beginning their sowings.  At the moment prices for beans  in Brazil are record high, and that will provide record incentive to plant.  In February, the world’s hog population will begin to enjoy whatever bounty results from that crop.   Another factor which has led to the bean rally and in which I hold little confidence, is the energetic strength in the Brazilian real.  I wonder how long currency traders will maintain their infatuation with the treacherous new leader Lula, who Zerohedge has called a Brazilian Frank Underwood,
http://www.zerohedge.com/news/2016-05-12/following-rousseffs-coup-brazils-problems-are-only-just-starting
I just wonder how long political and economic chaos in Brazil can continue to whet hedge-fund appetite for the currency there.  Recent spread behavior in beans give a clue to the tickey-tac nature of the rally and its fragility.  Last week, calendar spreads in beans went from 75 cents to 25 in 36 hours.  With that kind of downward volatility in the spreads, you can imagine what the flat-price is capable of.

Like the beans, it is South America driving the corn market.  In an incredible and mostly pretty terrible development, the world’s powerhouse feed-grain exporter and meat producer has evidently exported themselves right out of corn.  In an event animal-loving vegetarians and meat-lovers will agree is very sad, poultry have been left to starve because of the unavailability of corn “at any price,”  according to Reuters.  The safrinha crop ran short leaving livestock operations in a bad situation.  This has been, and probably will continue to be, bullish for US corn exports.  In fact, this morning the USDA reported sales of old crop US corn to China, a rare development recently.

Today I read that Brazilian feeders have resorted to feeding wheat, even high-quality wheat, which could be just what the US wheat market needs.  Whatever wheat demand out of the Middle East that has survived Dick Cheney’s experiment seems amply supplied by every corner of Western and Eastern Europe, while Asian buyers can look to Australia.  This has left US exporters with tough competition right as a record crop is about to be harvested in the US Plains, and storage is still burdened with last year’s crop. (I had a dream last night that an augur was pouring a steady flow of beautiful golden wheat above me, and I couldn’t scramble quickly enough to keep my head above the grain to keep from suffocating).  Brazil has at times in the past been a good customer for US hard red winter wheat, and with the scarcity of feed grain there, and the surge in the currency, maybe some of the US hard red can find a Brazilian home, easing the supply glut here.

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Brief History of Spring 16 Soybean Rally

Over the past month, soybeans have given the best rally seen in the ag complex (besides perhaps sugar) since the mayhem last July.  Part of it was related to a recovery in the Brazilian real, which helped the competitiveness of US beans on the export market.  (By the way, the rally in the real was catalyzed by political instability, a sure indication that the unrest is bourgeois.)  But the story is deeper than that, here’s what happened:

 

Last summer signs of El Nino were global: choking smoke from rain-forest fires engulfing the financial center in Singapore, crop-damaging rain in North America, a very wet South American winter, and consecutive barren monsoon seasons in India. Months later the El Nino registered on palm oil production, which on a global scale is comparable to vegetable oil production. I don’t know why it took so long, those tropical plants are strange: coffee, palm, agave, they all have peculiar 2-year cycles it seems unlike our friends the row crops which go seed to stubble in a few short months every year.

Eventually, the hedge funds got record-long bean oil. At about that same time, it appeared US farmers were stubbornly determined to plant corn in of spite below-cost prices, and it gave the funds a green light to complement their bean oil positions with long soybean positions. In a clever gambit, they simultaneously worked in a record-short bean meal position. That left the funds in a great position to lift the meal shorts when it looked like the buying in bean oil, and its support to crush margins and soybean prices, could not be sustained. Meal prices exploded in a few short days, giving great crush opportunities for US plants and a quick shot of adrenaline to soybean prices.

So that leaves us with hedge funds holding 150k long contracts of soybeans, not to mention the bean oil contracts. This is at a time of record world stocks (sure record global demand too), but there is an estimable possibility that the upcoming US crop could tip the global supply-demand balance bearishly. Maybe we’ll go full cycle to El Nina, get a poor US crop, and the fund longs will hold up. But it looks like a big bet.

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Ergot and Ambrosia

My posts have been sparse, as I’ve been intensely occupied making sure my bead on the market is true.  Finally though, the numerous inquiries from places like Dalian, Rosario, Odessa and Kuala Lumpur became too urgent in their need to know my thoughts, and I’m forced to commit them to writing.

You may be wondering now if Ergot and Ambrosia is a lame pretentious attempt at humor in Latin, or perhaps a poem I have been working on recently.  But ergot and ambrosia are fungi found in grain, and they have been in the news recently.  (The sizable percentage of LKCW readers who show degenerate tendencies will be titillated to know that, according to Agrimoney, ergot is psychotropic).  A couple weeks ago, Egyptian importers sealed a deal on wheat cargos, and refused to unload shipments out of a new standard for ergot.  Prices on the Matif exchange sunk toward support levels on the news, and the Egyptians invited more offers at the lower price, but got none, and a European grain conglomerate prepared to sue the Egyptian importers.  A third tender turned up offers at a premium.  Then this week, the Egyptians rejected a Canadian cargo of wheat out of the ergot rule, and also rejected US soybeans for ambrosia contamination.  There have been conflicting statements from different Egyptian agencies, and some speculation that the importers lack financing to take the grain.

These headlines have been more than enough to keep wheat prices depressed, especially considering last week’s WASDE which put US carryout at 50% of use for this year.  Spreads and FX values have kept Chicago wheat way out of line with Matif, or  with the hard red contracts for that matter, and US shipments continue to be dwarfed by those out of the EU, Russian, and Ukraine.  I read an interesting quote on Reuters from an observer today, ‘ “The market is a bit stuck. There’s no room for prices to rally as this would leave us too expensive against Black Sea origins,” one French trader said.  “At the same time if prices fall too much we don’t really have the logistical capacity to cope with the demand that might bring.” ‘  That almost sounds bullish to me.   In fact I am bullish KC wheat, at least against Chicago.  Speculators are record short in that contract, and my guys in the Central Plains (I’m sure they love it when I call them that) tell me it’s a hot and dry winter.  That might leave the winter crop vulnerable to either warm dry weather, or cold snaps, into the spring.

Soybean and corn markets have been quiet for weeks, in the midst of wild macro-market conditions, including powerful rallies in gold, volatile trade in the Japanese yen, and parabolic moves in US notes.  Financial tension and instability is accompanying international tensions, with the horrors of Syrian war worse than ever, and ongoing territorial disputes in the South China Sea.  I was taught that free markets among nations promoted stability and ultimately peace.  With Russia at war with its major wheat customer Turkey, and a common interest for higher crude prices amongst the warring parties of Saudi Arabia, and Iran and Russia, it sure would be nice if the world’s governments could pause the war long enough to make some money at least.

Corn prices have bumped nicely off support at $3.60 to open this week, with strong front-end calendar spreads.    I’ve thought for weeks that there were too many shorts in the corn market, some of them likely spread off wheat and soybeans.  Dalian corn futures in China have been rallying for a few weeks, just as the government there begins its attempts to clear poor-quality corn to market from its huge old crop reserve.  The reserves may not be of sufficient quality to stem import demand, and the situation is a wildcard for the price in my opinion.

The South American soybean crop is finishing up, and now we’re left to see if Chinese demand can continue to surprise, and if so, how much of the business will come to the US.  Dry weather has likely been great for planting safrinha crop corn, but it also increases the stakes for rainfall further down the line.  Some of the maps two weeks out are in conflict, but mostly they continue to be dry.

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LKCW Nightly: 1-22

In the last installment of this wander through the darkness, I said I’d try to keep my eye on today’s closing trends for any clues, and that I’d be paying attention to the weekly USDA export books.  Breakfast’s most bullish moment was the soymeal report of nearly 300 tons of meal committed overseas, a much larger number than the recent normal.  At that moment, it looked like the whole soy complex could have a big day building on late-week strength through Thursday night and Friday morning.   Vegetable oil was being carried away by the stiff crude correction, with meal and beans holding their own towards the top of the near-term range.  At the end of the day though it was only corn bulls who could claim small victories on the day and the week.

I won’t try to explain why meal puked an outside reversal down on the day and a doji top on the week with the excellent export numbers.  But there may be reasons for the recent strength, from supply and demand sides.

On the demand side, Chinese import of feed goods has been very strong recently in spite of the headlines on commodities and Chinese growth.  (Aside:  the persistence of above-projection demand might turn on the world’s dominant livestock market:  hogs in China.  Dim Sums today had a tough time getting a read on the situation)
http://dimsums.blogspot.com/2016/01/hogs-rebounding-in-china-pick-your.html

On the supply side, the news pace has been brisk recently out of Argentina, which leads the world in meal exports.  Argentina has suffered right along with everyone else through the current depressed conditions in commodities.  Maybe making matters worse there, the country has been shunned from international bond markets since reneging on loans during a crisis at the turn of the millennium.  A couple months ago the leftists were kicked out of office.  The new open-markets guy, Macri, slashed taxes on corn and wheat exports and backed off supporting the currency.  The policies unleashed a sudden and massive inventory of corn and wheat on to the world export markets in December.  But domestic holders of soybeans remained tighter.  The USDA even reported small imports of soybeans from the US this week.  The lack of a bean gush from Argentinian storage may have nudged meal demand back to the US some.  Macri was hobnobbing in Davos today trying to woo the world’s bond dons.
http://www.reuters.com/article/us-argentina-president-idUSKCN0V00UP

A few months back, US billionaire trader Paul Singer—one of the country’s leading supporters of Republican PACS—successively sued the Argentinian government in US courts over a debt he bought for about a penny on the dollar.
http://www.bloomberg.com/news/articles/2015-05-12/singer-s-latest-argentina-payday-bid-58-000-frozen-in-belgium
If I were an Argentinian farmer, I would tell him he could have about as many of my soybeans as he can shove up his arse.

From a bigger picture, the ags continue to rattle around in a range from this summer.  Funds have covered a fair chunk of their shorts this week, but they remain stoutly short.  Painfully for the bulls it sometimes seems the crude oil cuts grains from both sides.  When crude fails it brings biofuels with it, and when it rallies it brings along the stock market and the dollar index.  In this environment I’m giving corn the best chance for price strength.  It had the best technical performance for the week, and the South American production cycle might tip more risk premium in corn’s direction.

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