Outside Markets as of 6:20am: Dollar Index down 0.0530 at 92.2570; Euro is down 0.00070 at 1.17640; S&P’s are down 7.25 at 2008.75; Dow futures are down 69.00 at 17,465.00; 10-yr futures are up 0.08%; The Nikkei closed down 1.71% at 16,795.96; The DAX is down 0.25% at 9,915.84; The IBEX-35 is down 0.35% at 9,930.80; Gold is down $5.80 at $1228.60; Copper is down $13.95 (-5.28%) at $250.45; Crude Oil is up $0.03 at $45.93; Heating Oil is down $0.0098 at $1.6232; Paris Milling Wheat is down €2.50/MT at €193.00/MT.
A lot of unnerving signals from markets this morning, especially in regards to interest rates and industrial commodities. Slow growth fears contributed to the 10-yr US Treasury yield dropping to the lowest level since May 2013 while copper drops 5.0%+ to fresh 5.5 year lows. The World Bank cut its outlook for global growth in 2015 and 2016 yesterday, fanning concerns the plunge in energies and metals is more attributable to weak demand that excessive supply. On the other hand, imports by China of many commodities are surging with iron ore imports for 2014 up 13.8% on 2013 at 932.5MMT. December imports were up 29% from November to 86.85MMT. China has also been filling domestic crude reserves, and soybean imports in December were up over 8.0% from 2013.
It would appear the long-awaited warm up in US temps is finally here with the next several days expected to eclipse the freezing mark in even northern locales. Temperatures will get into the high-40’s and low 50’s as far north as NE/MO/S-IL/S-IN as the weekend approaches, and this should help with some of the ice issues on the upper-IL River and in Chicago. Temps will retain their warmer bias into the 8-14 day before a moderating of temps occurs in the West. Precip patterns look to turn above normal, however, a switch from the past 15-days of below normal returns.
No big changes to SAM weather with the area of concern still NE-Brazil in the north, but northern Argentina has its own issues with too much moisture. 14-day precip returns ended yesterday in Argentina showed many locations in Cordoba, Santa Fe, Corrientes and Entre Rios with rainfall totals between 4-8.00”. Many of these areas are the top production areas of both corn and soybeans, especially Santa Fe. Based on the maps below, these areas will remain in the above normal precip category into the 8-14 with maybe some moderation late in the period. Areas further south in La Pampa and Buenos Aires are actually a bit drier than desired, but nothing disastrous yet. Nothing on the radar which looks set to half production in either country, but there are some issues which could delay harvest and/or take top end yield potential off the table if patterns don’t normalize soon.
A sloppy overnight session to follow up a weaker than expected day session yesterday as it seems our markets have taken a second look at the data received Monday, and what seemed bullish isn’t so anymore. Not helping the situation is the broad-based commodity selloff occurring in energies, precious and industrial metals which raises the question of whether a long-only index vehicle is a suitable investment for diversification and inflation-hedging purposes? Specifically to our markets, the corn market seems caught between slightly tighter supply, but signals which suggest weaker demand in coming weeks/months. Despite this, basis levels have firmed almost every day this week as bin doors get locked shut. Soybeans are fighting an uphill battle against South American production, even if a few trouble areas exist. US wheat has a serious demand problem which is totally outweighing any short-term supply issues which may exist. At times the forest is difficult to see from the trees, and right now, commodities seem to be falling out of favor with both managed and index funds alike. Cash and spreads will continue to be our best indicators.
While several days old at this point, thought it worth pointing out from the most recent COT data the aggregate index fund long for C,S,W,MW,KW,SM,BO,LC,FC,LH,CC,KC,CT,SB given the discussion above. As of 1/6, the combined position of those markets was 1,330,309 contracts, the smallest net long since 11/15/2011. It has always been my goal to isolate Ag, Livestock and Fiber from energies and metals so as to get a clearer picture of the health of our sector specifically. In this case, however, it appears as though the larger downward push by commodities in general is taking our space along for the ride. Index rebalancing is taking place, but the articles about commodity index funds posting negative returns for the third year in a row isn’t lost on investors. The commodity super-cycle and runaway inflation arguments just don’t have the same pull as they did when crude was $100/bbl+ and drought was taking hold in both North and South America. If index fund redemptions continue, we will be removing a passive long underneath our markets which has been a staple going back to the economic crisis in 2008.
While still on the COT data, it is worth noting the changes in the corn position heading into the USDA reports. Interestingly, the Gross Commercial Long (end user) bought heavily heading into the USDA report, with their position rising by 30,423 contracts. Managed funds sold their net long down slightly, but remained at a healthy 169,212 contracts, near the longest since May. The big difference between now and May, however, is the fact in May we had relatively little certainty about the US corn crop, while now we realize it was the largest on record. Also, in May, crude oil was trading at $102/bbl, while now it is trading at $45/bbl. With prices taking out some downside support the last two sessions, one needs to be wary of further liquidation by the managed funds. One last note on the managed soybean position, the last several weeks have witnessed funds refusing to take a net position in the soybean market despite holding nearly 260,000 contracts of soybeans. Similarly to corn earlier this year, funds could be waiting for the outcome of January weather in SAM before taking a large-scale soybean position, which if whether remains benign could be a significant short position.
Switching gears to the margins of corn end users, it’s been a tough week for those with an input as corn. Margins as compiled by www.rjomrt.com showed gross ethanol margins slipping to $0.79/gln from $0.91/gln last week and $1.16/gln last year. Margins at these levels would be the lowest since July of 2013 as ethanol prices continue to plunge with neighboring energies. Broiler margins actually improved to 79.75c/lb from 75.84c/lb last week and 73.83c/lb last year. Hog margins continued their plunge to $85.33/hd from $88.93/hd last week and $98.93/hd last year as margins here slide to the lowest since July of 2013 also. Cattle margins remain weak near $40/hd, and C-IL cash soybean crush margins have fallen off notably as of late to $2.14/bu, but remain well above the $1.78/bu from last year. NOPA crush data will be released later today with average trade guesses lining up near 166.9mbu vs. 161.211mbu in November and 165.384mbu in December of 2013.
Corn bids continue to improve with CIF NOLA trades all higher yesterday going home. January had +62H trade, Feb at +63H trade, March at +62H trade and AMJ packages at +54/56K, higher. As mentioned above, barge freight is higher due to icing issues on the Illinois River, so premiums are really just keeping pace with elevated freight near 500% on the IL. Still, corn premiums are helping hold cash near gross delivery equivalence in Zone 3, which should help support spreads around current levels of -8.00/-8.50c. Aside from the river, ECB train markets are also higher with Columbus and Evansville 90’s around +5H for spot, while Ft. Wayne 75’s are near -3H spot. Ingredion is indicated around +0H with a 4c carry to March. Despite a relative sense of confidence over the weekend, it is looking less likely China actually purchased US corn last week according to sorghum and DDGs pricing. Both sets of premiums remain at handsome overs relative to corn, and in the case of DDGs, nearly 150% better than corn. If China was banging out US corn boats, both of those commodities should see considerable weakness in their premium structure which to-date hasn’t happened.
Deliverable stocks reports were released yesterday, showing another sizable build on the MGEX with Duluth up 1.483mbu to 17.470mbu, and up 376,000 bushels from a year ago. Minneapolis was relatively flat at 5.659mbu. CME-SRW stocks saw a modest draw of 655,000 bushels on the week to put stocks at 61.775mbu vs. 50.531mbu last year. Deliverable grades of SRW, however, stand at 41.413mbu vs. 46.855mbu last year with non-deliverable grades up well over 400% from a year ago. Supply vs. useable supply. KCBT-HRW stocks saw another healthy draw this week, down 2.167mbu to 46.384mbu vs. 67.325mbu a year ago. These stocks levels combined with the Dec 1 stocks data mentioned yesterday do point a rather tight winter wheat situation, but the demand to make things interesting just does not exist. Still, large and high quality winter wheat crops will be needed in 2015/16 to ensure stocks and carryouts don’t tighten further. While it seems light years away today, winter wheat will begin breaking dormancy in other 45-days, giving us our first indication of what we’re going to be working with.
Weekly ethanol production out later this morning which will be watched very closely given the collapse in margins for producers as of late. It would stand to reason we will see another dip in production and another build in stocks, unless gasoline demand rebounded mightily in the last seven days. Still, even at last week’s production level of 949,000bbls/day, production remains well above the 900,000bbls/day needed to hit the USDA’s revised production target.
Bottom Line: Prices appear in for another sloppy session with corn support another 3-5c away. Dynamics are changing quickly with energies and industrial commodities continuing their selloffs, while cash levels are remaining firm to improving, and SAM weather remains mostly favorable. Corn and wheat need demand while soybeans need less competition. Techs are turning heavy.
Good Luck Today.
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