Outside Markets as of 5:50am: Dollar Index down 0.00090 at 80.7790; Euro down 0.00040 at 1.35240; S&P’s are up 0.25 at 1944.50; Dow futures are up 5.00 at 16,860.00; 10-yr futures are down 0.09%; The Nikkei closed down 0.64% at 14,973.53; The DAX is down 0.3% at 9,947.10; The IBEX-35 is up 0.17% at 11,093.40; The Russian MICEX is up 0.56% at 1,499.11; Gold is up $2.70 at $1263.90; Copper is up $0.35 at $304.40; Crude Oil is up $1.52 at $105.95; Heating Oil is up $0.0499 at $2.9542; Paris Milling Wheat is unchanged at €189.25/MT.
Crude oil is grabbing headlines this morning as it traded over $106/bbls for the first time since September as an insurgency in Iraq raised the risk of disruption to supplies after OPEC vowed to keep output unchanged. Al-Qaida inspired groups, which have captured two key cities in Iraq earlier this week, vowed Thursday to march on to Baghdad. One of the two cities, Mosul, lies in an area that is a major gateway for Iraqi oil. Yesterday’s EIA report also showed a larger than expected drop in US stockpiles of crude, down 2.6 million barrels in the week ended June 6th. Weekly unemployment claims out later this morning are expected to drop 2,000 to 310,000, while continuing claims are seen increasing 2,000 to 2.605 million. Retail sales out today are expected to increase +0.6% and +0.4% ex-autos for the month of May.
Systems are moving across OK/TX/KS this morning, adding to moisture which has already fallen the last 48-hours. Since Tuesday, nearly the entire state of KS has received 0.25-3.0” of rain. The plains states will be active the next 3-days with various systems bringing moderate to heavy rainfall, with concentrated totals in E-TX/SE-NE/SW-MN. The central corn belt will also see rain early next week, ensuring the entire corn belt continues to see adequate rainfall. 6-10 and 8-14 day maps also look accommodative with below normal temps for the entire Midwest as well as precip in the normal to above category during the extended time frame. Based on offer prices of wheat and USDA projections yesterday, it would also seem as though the Black Sea region isn’t as dry as originally advertised.
Mostly better trade this morning following the post-WASDE bloodletting yesterday. While the data itself could mostly be called a non-event, it’s hard to dismiss a nearly 3.0% move in wheat futures as a non-event. Updates to corn and soybean balance sheets were about as expected, and will be covered below. The real surprise was the increase in world wheat production and carryout thanks to unexpected jumps by various exporting countries. The report hit home the fact that while KS/OK/TX HRW production is going to be down this year, the US is really the only place in the world with a crop production problem. Without any fundamental data points for the bulls to really sink their teeth into, we revert to trading weather which at the current time period is bearish for grain prices. The next big price driver will be the June 30th acreage and stocks report later this month.
The big changes in the world wheat balance sheet included Russian production up 1MMT to 53MMT, Kazakhstan was unchanged at 14.5MMT, Ukraine unchanged at 20.0MMT, India up 1.85MMT to 95.85MMT, China up 1MMT to 124MMT and EU-27 up 1.37MMT to 146.25MMT. While not all of the before mentioned countries saw increases, the fact that some didn’t see expected decreases caught the market of guard. To wit, Russian production up 1MMT, Kazakh production unchanged and the EU-27 up 1.37MMT were all headline grabbers. In the USDA’s lockup briefing slide package, they had several slides detailing the favorable weather to date in the European Union, and frankly, it’s difficult to argue with the largest production in six-years. Above normal rainfall coupled with above normal temps, but not searing heat, equal solid production. Looking at Paris Milling Wheat and it’s price spread with US prices, it would appear MATIF has more downside room than upside and should compete heavily with Black Sea supplies in 14/15. Global exporters and Chinese supplies are on the rise. Not good for rallying wheat prices.
On the US side, the report was actually fairly favorable with larger than expected cuts in US wheat production. All winter wheat production came in at 1.381bbu vs estimates of 1.394bbu. HRW was pegged at 720.5mbu with KS at 243.6mbu vs 260.4mbu on the May WASDE. Many thought the recent rains in KS and the southern plains would lead to a stabilization or even increase in production, but it would appear the rains came a bit too late. Feed demand was reduced for next year with no arguments given the wheat/corn spread throughout the 14/15 curve. Only other thing worth noting on wheat that hasn’t been discussed already it the drop in the July put/call ratio for Chicago Wheat. At the close yesterday the ratio was at 116.6% vs 139.10% 2-weeks ago and 151.6% a month ago. As prices have been dropping, the options pit has gotten less and less bearish, possibly signaling the early stages of a bottom.
Really not much to discuss on corn and soybeans either with no changes made to either the 13/14 or 14/15 corn balance sheet, and just a 5mbu increase in 13/14 soybean crush to drop the carryout by a like amount. 125mbu seems like the line in the sand for the USDA, and they didn’t seem in too big of a hurry to increase their already record soybean imports after April census data showed lower than expected imports. If conditions do continue to hold, however, new crop soybeans at $12.25 definitely seem as though they have the most downside vulnerability. With current projections, US carryout stands to more than double in 14/15 to 325mbu, and world stocks will increase 15MMT (550mbu). Unless Chinese demand jumps even further next year, we will have the largest soybean supplies since 06/07 when prices traded under $7.00. Review that $12.00 handle often.
Looking forward to the June 30th stocks report, a few observations are worth noting, especially for the bulls. On the acreage report, corn acres over the last 10 years have increased from the May report to the June report nine times. This is a mixed bag this year given acreage switches in the north, but probably additional acres in the corn belt. Either way, real tendency to come in above the March figures. Soybean acres have increased from March to June in 4 of the last 5 years, but have been down 6 of the last 10 years. On the stocks report, corn stocks have come in above the average trade guess in 6 of the last 8 years, while soybean stocks have been above the average trade guess in 5 of the last 7 years. The real notable figure is wheat stocks which have been above the consensus estimate in 7 of the last 8 years and 12 of the last 14 years. Point of the aforementioned is despite the current downtrend, and mostly negative news flow, the tendency for the end of the month reports is to come in bearish vs the average trade guess. Hoping for some sort of Waterloo moment on June 30th might not be the best marketing strategy, regardless of how far prices have fallen.
Weekly ethanol production out yesterday before the report was bullish with weekly production jumping to 944,000bbls/day vs 938,000bbls/day the week before and the 899,000bbls/day needed weekly to hit the USDA’s marketing year estimate. Stocks continue to surge too, however, with supplies up another 172,000bbls to 18.422 million, the largest stocks levels since March of 2013. This is due in large part to declining gasoline demand which has plunged over the last two weeks from over 9.25 million barrels to 8.65 million, down near the lowest levels in the last 5-years for this time frame. The combination of lower gasoline demand, and declining DDGs prices could have a real negative effect on production margins and therefore production run rates in coming weeks. This isn’t something corn demand needs to deal with right now.
Without going through the entire rundown, it suffices to say corn basis was again firmer on yesterday’s sell off with CIF NOLA barges pushing the river well above gross delivery equivalence. Unfortunately, the stronger cash basis and mostly firmer spreads haven’t been enough to pick the futures board up on its own. Still has to be monitored for clues the selloff is running its course.
Export sales out this morning with corn seen at 350-650TMT of old crop, 80-120TMT new. Wheat at 100-450TMT, soybeans at -125/+100TMT old crop and 250-700TMT new crop. Product sales are seen at 0-135TMT old crop meal and 0-20TMT old crop soy oil.
Bottom Line: The June WASDE is now behind us, and the focus shifts back to almost exclusively on weather. Conditions are favorable for developing crops both in the US and abroad outside of the southern plains. As long as weather remains ideal, balance sheets for all of the major commodities will grow in 14/15. We can’t count on a surge in demand at this stage of the marketing year to help clear supplies. It will take adverse weather between now and August to alter the current price trajectory.
Good Luck Today.
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