Outside Markets as of 6:20am: Dollar Index down 0.0550 at 89.9730; Euro up 0.00250 at 1.22100; Russian Ruble is off 4.08% at 59.17159; S&P’s are down 3.25 at 2081.25; Dow futures are down 30.00 at 17,982.00; 10-yr futures are up 0.20%; The Nikkei closed down 0.50% at 17,729.84; The DAX is down 0.67% at 9,855.72; The IBEX-35 is down 1.62% at 10,311.70; Gold is down $2.20 at $1193.10; Copper is down $0.20 at $281.20; Crude Oil is up $0.66 at $55.39; Heating Oil is up $0.0193 at $1.9035; Paris Milling Wheat is up €0.50 at €201.50/MT.
Greece is once again grabbing financial headlines this morning after the Greek Prime Minister announced plans for an early general election next month after parliament rejected his candidate for president, throwing the country’s international bailout into question. Recent opinion polls point to a victory for the radical leftist Syriza party, which wants to wipe out a big part of Greece’s debt, and cancel the terms of the bailout with the European Union and IMF. Also making headlines this morning was the Russian Ruble heading back towards 60:1 with the US Dollar Index after the economy began shrinking in November for the first time since 2009. The Russian Economic Development Ministry reported the economy shrank by 0.5% in November compared with a year earlier, and also the Central Bank’s foreign reserves dropped below $400 billion for the first time since August of 2009. The US Dollar Index is holding right under fresh 8-year highs set on December 23rd.
Patchy snow moving across NE, IA and SD this morning, but otherwise the Midwest is fairly quiet. The focus this week will be the plunge in temperatures with the freeze line extending all the way to the border of Mexico the next 3-4 days before moderating slightly. The obvious concern will be the amount and location of snow cover. The map below from NOAA shows snow cover as of this morning with portions of HRW and SRW country exposed to the looming cold snap. The next map shows the expected minimum temperature for New Year’s Eve Wednesday. On the international front, drier weather will move into N-Brazil the next 7-days, but soil moisture is plentiful after a beneficial December. Southern Argentina is also expected to turn drier over the next week. Will revert back with soil moisture tables when they are updated later today.
Mostly firmer markets led by wheat in our last trading week of 2014. Plenty of Russian chatter on the tape this morning, and the aforementioned forecast for US wheat areas will also keep traders anxious despite the fact damage or lack thereof won’t be known until March. Traders are also going to be using the remaining 3-days of 2014 to square positions, which as of the last COT data put funds still short a bit of wheat, long corn and flat soybeans. According to financial website FinViz.com, the best performing commodity of 2014 was Coffee which is up 52.3% on the year, followed by feeder and live cattle, up 29.0% and 22.3%, respectively. Crude Oil was obviously the worst performing commodity, down 43.6% on the year. Chicago Wheat is currently up 1.9% on the year, corn down -1.8% and soybeans off 18.2%. The performance of these commodities need to be kept in mind in regards to possible sector rotation of managed funds as well as fund rebalancing by passive long instruments.
Beginning first with Russia, the economic new mentioned above is obviously providing the backdrop for a country which is already seeing economic activity shrink compared with a year ago, something which wasn’t expected to happen until 2015. This mentality makes the need for additional tax revenue, and a slowing of domestic inflation, all the more pertinent which they announced late last week. Russia intends to add a duty on grain exports beginning February 1 to June 30 which will be 15% of the price per tonne, plus €7.5/MT, with a minimum rate of €35/MT. According to the Deptuy Prime Minister of Ag, farmers were currently receiving around €225/MT selling to the export market and €160/MT selling into the domestic market, which creates a spread larger than the proposed €41.25/MT levy, although transportation costs of any kind are not being reflected. Either way, Russia is still participating in international tenders with the intention of shipping more grain before February 1. On Thursday Egypt’s GASC said it will receive 120,000MT of Russian wheat for the shipping period January 21-31.
Even with slowed grain exports Feb 1 forward, Russia still looks set to export a sizable amount for 2014/15. Through December 28th, Russia has exported 20.4MMT of grain, up 30.1% from a year earlier. Of that amount, 15.97MMT was estimated to be wheat, 3.1MMT of barley and 1.07MMT of corn. The USDA is currently using 22MMT of wheat exports for Russia in their balance sheets, with most analysts trimming that total by 2-3MMT due to expected measures to slow export flows. It is important to remember the combined supply of Ukraine and the EU-27 is around 16-17MMT larger than a year ago, supply which will make filling the short-fall in Russian trade easily met. US wheat remains more expensive than either of the two previously mentioned origins, despite the basis weakness witnessed the past 10-days.
The most recent COT data will be released Tuesday afternoon, but a few observations from last week’s data which covered the week ended 12/16 are worth sharing. First off, the buying by funds continues to be all short-covering, not fresh buying. The net long position held by managed funds totaled +181,683 contracts, the largest since 5/13/14. While building that net long position, however, the fund gross short position has dropped to the lowest level since mid-May while the gross long has held relatively steady. In wheat, producers sold copious amounts of both HRW and SRW according to COT data with the gross commercial short position rising to -72,293 contracts of HRW, the largest since 7/1/2014. In the case of SRW, the gross commercial short is now -199,685 contracts, the largest since February 5th, 2013. End users on the other hand, have kept their positions stable while funds continue to cover shorts. The point of the aforementioned is to highlight the fact commercials are selling to the funds which are simply covering existing short positions of both wheat and corn. Sustainable bull markets can’t be fed short-covering forever. In the FWIW category, funds have moved to a record net short position in sugar, while commercials now retain the smallest net short on record. Sugar prices remain in a long-term downtrend, but are still above lows witnessed in mid-September which were the lowest prices since May 2010.
Just a brief note on corn end user margins with the most recent leg of the rally. Margins ,as estimated by www.rjomrt.com, declined notably for ethanol, broilers and hogs last week, while cattle futures jumped due to the feeder/live spread. Importantly, ethanol margins declined to $1.12/gln vs. $1.34/gln last week and $1.43/gln last year. Broiler margins were estimated at 75.18c/lb vs. 77.27c/lb last week and 71.44c/lb last year. Hog crush was calculated at $94.54/hd vs. $101.44/hd last week and $98.94/hd a year ago. Cattle margins were pegged at $40.81/hd vs. -$6.51/hd last week but $132.44/hd last year. The decline in margins by 3 of the 4 major end users of corn, with cattle still sharply negative, is cause for concern, especially when ethanol, hogs and cattle have now slipped below a year ago. This should be a factor in basis and futures positions moving into 2015.
Bottom line: Despite a fair amount of news on the tape, volumes should remain depressed as we close out 2015, and prices reverting to range bound trade. Cash basis is weak for both corn and wheat, signaling the US farmer has done a good job of moving length to the funds on the rallies, and highlighting how full the system is with grain. The ramp up to the January 12th WASDE repors will begin shortly, and a pick up in volatility is sure to emerge as desks become more fully stocked after the New Year Holiday.
Good Luck Today.
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