Nogger's Blog

Calling A Top In The Wheat Market

15/01/11 -- I got invited to speak to a group of agri-reps a few months ago, my brief being to explain to them where the grain markets were currently at, and where they were going. I told them that it was a bit like trying to pick the winner of the Grand National months before the race, when you don't even know the going or the weights or anything.

Calling a top in the wheat market isn't exactly an easy thing to do, but there's no harm in trying is there?

I've said for a while now that I quite fancy May, and I'm still reasonably content to go with that. Here's a bit of a rationale behind my thinking.

It's seems pretty clear that UK and EU exports are running well ahead of themselves, and that availability is going to be tighter than a duck's you know what come the spring. So it seems a bit strange not to think that prices will peak in July, just before the harvest kicks off.

Certainly that is what the London futures market seems to be indicating, with July the only month to close above GBP200/tonne on Friday, and there then being a steep GBP32.75/tonne decline into new crop November.

Historically however there is a strong precedent for UK wheat prices to peak before new crop comes along, in May. Having searched the Internet high and low for a chart to back this theory up, and drawn a blank, there was only one thing for it - to gather the information necessary and produce one myself. And here it is:



As you can see, that chart is based on the last twenty years worth of information. It seems that the impending threat of harvest is frequently enough to get the market into decline well before July comes along.

I can already hear you saying, yes Nogger that might happen in a "normal" year when we are clearing the decks and trying to make room for new crop, but 2011 is not a "normal" year. And you may well be right, and there is no denying it - unless you are Defra of course.

So here's a few things to consider in this abnormal year:

1. Hefty compound feed price increases are on the cards come May. If the livestock sector can't afford current levels they certainly aren't going to fancy stumping up what's likely to be thrust in front of them in late spring.

2. Livestock numbers are in decline as producers the world over up slaughterings on the back of soaring feed costs.

3. The slump in demand associated with turnout time could be particularly acute this year I feel.

4. I wonder idly outloud if our chums at a leading grain merchant have a significant volume of old crop wheat put to one side with "new bioethanol refinery - DO NOT TOUCH" written on it. If so, and if/when it becomes clear that said refinery isn't going to be ready to open during the current crop year then that could mean a ruck of wheat coming back onto the market. May/July is the premium position after all, so it would make no sense whatsoever to carry it into Aug/Oct would it?

5. The US wheat harvest will have started in the south by May, and despite market rhetoric US stocks are already very comfortable - the second highest in the past decade in fact.



That's my thoughts on the matter anyway.

Oh, I almost forgot....Becauseicouldntsee 30/1 on Betfair for the Grand National. Nailed on cert that is!

Chicago Closing Comments

14/01/11 -- Corn

March 11 corn closed at USD6.48 3/4, up 6 1/4 cents; New crop December 11 corn closed at USD5.71 1/4, up 3/4 cent. Corn was lower early in the session, but switched in positive territory as funds bought an estimated 9,000 contracts on the day. March corn was up 53 3/4c on the week following the release of a bullish USDA report on Wednesday. After closing near limit up that night, corn managed to maintain enough bullish momentum to see it through until the end of the week, if only just. News that China continues to tighten it's fiscal policy took a bit of the bullish shine off the markets today.

Soybeans

Expiring Jan 11 soybeans went off the board at USD14.06 1/2, down 3 1/2 cents; New front month Mar 11 soybeans closed at USD14.22 1/2, up 6 1/2 cents; New crop Nov 11 soybeans closed at USD13.23 1/4, up 10 3/4 cents; Jan 11 soybean Meal closed at USD377.00, down USD1.60; Jan 11 soybean oil closed at 56.70, down 60 points. Jan beans gained 48 3/4 cents of the week. The NOPA December soybean crush came below expectations at 149.4 million bushels, 18.8 million bushels down from a year ago. Argentina will get a welcome cool down next week, but variable rains may miss some needy Central and Northern areas.

Wheat

Mar 11 CBOT wheat closed at USD7.73 1/4, down 10 1/4 cents; Mar 11 KCBT wheat closed at USD8.60, down 8 1/2 cents; Mar 11 MGEX wheat closed at USD8.90 1/4, down 3 1/2 cents. The gap between lower protein SRW Chicago and the premium wheats of Kansas & Minneapolis continues to widen. Despite corn and beans maintaining their upwards momentum stoked up by Wednesday's bullish USDA report, wheat couldn't hold onto its gains today. Mar CBOT wheat actually closed the week 3/4 cent lower overall, whereas the other two exchanges posted gains of around 15-20 cents.

EU Wheat Close

14/01/11 -- EU wheat futures closed lower Friday with Jan London wheat down GBP2.65 to GBP193.35/tonne and Nov GBP3.00 lower at GBP167.50/tonne. Paris wheat saw Mar down EUR4.25 at EUR251.00/tonne and Nov EUR4.50 lower at EUR223.75/tonne.

A stronger euro dented Paris wheat's ambitions, as too did a weaker US market on end of week consolidation and profit-taking ahead of a three day weekend in America.

On the week as a whole Jan London wheat fell GBP2.25/tonne with Nov down GBP1.10/tonne.

Commodities in general took a knock after China upped it's banks' reserve requirements for the seventh time in the recent past, in a concerted effort to try to rein in inflation. So far however this seems to have largely failed to affect demand for grains, or indeed anything else from the Far Eastern powerhouse.

Argentine wheat production estimates are creeping higher, with a crop of around 15 MMT now expected, double last season's output.

Of the three big commodities, wheat, corn and soybeans, wheat is the one where global and US stocks aren't cited as running at historically tight levels. In addition the US wheat harvest is now only four months away from kicking off in the south.

The weather in Europe has warmed up, with widespread heavy rains welcome after a cold and dry December.

Whilst demand for milling wheat remains strong, feed wheat offtake could fall off a cliff come May on a combination of falling livestock numbers and turnout following a long hard winter.

The jungle drums tell me that feed compounders will be looking at some very hefty price increases by then, which may cut demand even more acutely than normal once we get past Easter - weather permitting.

Shortly After The Bell

14/01/11 -- Shortly after the opening of today's CBOT session wheat is leading the way lower, with March down 16c, March corn down 7c and March beans 15c lower.

Profit-taking looks like the name of the game ahead of a three day weekend. Uncertain weather forecasts for Argentina could make things look different again come Monday night.

"Oppressive heat is causing serious moisture stress with 90s F but strong thunderstorms are on the way, promising for .5 to 2 inch rains. Showers began last night in the western growing areas but amounts were extremely variable from traces to 1 inch. More rain is still coming. It is a dicey situation because extreme heat will prevail in the northern grain belt. The worst conditions would be in Cordoba, Santa Fe and Entre Rios where daytime highs may exceed 100 F on the weekend," say Martell Crop Projections.

Early Call On Chicago

14/01/11 -- The overnights closed lower, with wheat leading the way down 12-13c, beans off around 6c and corn 4-5c lower.

It looks like time to take profits ahead fo a long weekend, it's Martin Luther King Day on Monday and the grains have had another good week.

CBOT July wheat is up 16 1/2 cents on the week so far; March corn up 47 1/2 cents; March soybeans up 51 cents; Mar soymeal up USD20.90 and Mar soyoil up 89 points.

China has raised it's reserve requirements again (for the seventh time in the recent past in fact), by 50 basis points this time as they continue to try to rein in inflation.

Argentina is looking a bit wetter, yesterday's weekly export figures were ho-hum, crude oil is down the best part of a dollar. Chinese buyers may be looking to cancel DDGS shipments.

The NOPA December soybean crush came below expectations at 149.4 million bushels, well below December 2009.

Wheat again looks the weakest, with further widening expected on the differential between CBOT and KCBT/MGEX.

It all looks a little tired heading into the weekend, opening calls are: Beans down 5 to 7 cents, corn down 4 to 6 cents and wheat down 10 to 14 cents

EU Rapemeal Prices

14/01/11 -- Latest guide prices for EU rapemeal.

Basis FOB Lower Rhine in euros/metric tonne, with change from previous trading session:

News Bites

14/01/11 -- News snippets that may be of interest this morning:

• The People's Bank of China has raised reserve requirements 50 basis points in a further effort to curb inflation


• January CBOT contracts for soybeans, meal and oil expire tonight


• Reuters report that some Chinese buyers with US DDGS on their books are attempting to cancel their contracts for fear that Chinese authorities will introduce punitive anti-dumping levies on the commodity in March


• Drought continues in the North China Plain wheat belt, with no relief in the 7-day precipitation outlook


• The Baltic Dry Index, the benchmark guide to drybulk shipping rates on 40 routes around the world, has fallen to it's lowest in almost two years as the Australian floods disrupt shipping


• The Rhine was closed to traffic yesterday after a barge carrying 2,000 MT of sulphuric acid sank just north of Mainz

Don't Panic The Cavalry Are Coming

14/01/11 -- After a couple of quiet weeks over Christmas and New Year it was back to business as usual this past week for EU grain exporters, with Brussels granting 675,000 MT of soft wheat export licences - the fourth largest weekly total of the 2010/11 marketing year so far.

Once again France picked up the lion's share with 537,000 MT of that. Export licences for a further 128,000 MT of durum wheat were also granted. Price clearly isn't rationing demand too much just yet by the looks of it.

FranceAgriMer currently peg their exports for the current season at 18.66 MMT, a 9% increase on last year, with exports to non-EU destinations accounting for a record 11.8 MMT of that. That is starting to look conservative.

They currently see 2010/11 wheat ending stocks declining 42% year-on-year to less than 2.2 MMT. They're going to need to slow down their sales considerably to even make them as high as that with five and a half months of the marketing year remaining.

Meanwhile French supplies of durum wheat are also dwindling after Algeria bought 225,000 MT of the grain over the Christmas/New Year period. Local prices have shot up from EUR280/tonne to EUR315/tonne since the beginning of the month as traders scramble to unearth sufficient stocks to fulfil the Algeria order, according to a report on Bloomberg.

French officials have been quick to hotly deny rumours that some form of export ban might need to be introduced before the end of the current marketing year as wheat continues to pour out of the country.

Southern hemisphere suppliers like Australia and Argentina will soon step up sales to fill the void left by dwindling French stocks, they insist.

Yet we still don't know how much of Australia's wheat isn't going to make the grade required for bread-making. Some suggest only half the rain-deluged crop might be suitable instead of almost all of it normally.

Additionally, Argentina's reputation as an unreliable trade partner is bordering on legendary, and has been built on solid foundations. The Kirchner government have a history of tinkering with export quotas and duties in an attempt to wring every last peso in income for their cash-strapped coffers.

Recent years have been littered with a series of on-off strikes between farmers and the government over taxes on grain exports. Indeed, farmers there are set to begin a week long strike on Monday. Port workers too are prone to regular strikes over pay and working conditions.

Meanwhile they're rioting on the streets of North Africa whilst we continue to turn grains and oilseeds into fuel. An activity that is mandated and subsidised by, at best well-meaning but ill-conceiving politicians that merely seem to be lining the pockets of big business.

At worst it won't just be big business who's pockets are getting lined either will it? "Bollocks to the starving in Africa, I want a yacht."