Wednesday, March 28, 2012

Strong Sell off before USDA report


International futures were all sharply lower on Wednesday, with the trade jostling positions ahead of Friday’s nights US acreage and stocks report. Whilst warm weather across the US has winter wheat growing rapidly and ideal early planting conditions for intended record corn acreage, enough to quell bullish. In order to break out into new highs, renewed fears need to emerge. It may either be a late spring frost and/or continuing strong demand emerging.

Wheat gave up all of the previous three days of steady price hikes, settling near the bottom of the two-month trading low. The short covering buying was absent; with EU crop fears being shelved, with focus more on improving US crop conditions and subsequently bearish wheat prospects. Short-term corn market outlook is stuck in rationing of increasingly tightening old crop stocks with potentially monster new crop being available in Sep/Oct.

Big reverse in sentiment in the oilseed market, first there was bullish news on further sales to China, 10 month high in Malaysian palm oil, and further talk of more downgrades to the South American crop. Also combined with the need for beans to stay high to encourage bean plantings helped to provide underlying support. Some are saying that the US needs to plant 80ma (USDA Outlook Forum forecast 75ma) to make up for South American losses and rebalance world supply (which are forecast at 243mmt, 22mmt lower then 10/11). However, with the funds being at a record high long position (28.7mmt) sparked long liquidation selling ahead of Friday’s night report.

Chinese released their latest imports figures, and it just reinforces the reality that demand from the country (contrary to recent ideas) will only be going up.  Feb wheat imports were at 372kt (Jan 258kt), up 220% from last year, with most demand coming from Australia.  Chinese also bought 350kt of Aussie feed wheat last week. Whilst domestic corn demand now outpacing supply (usage +40% since 2008!). Imports are likely to exceed 2011’s 5mmt, with that annual shortage rising to as much as 20mmt by 2020. March soybean imports will total 5mmt, +33% from last Feb, with imports forecast at 29mmt of soy in the first half of 2012, up 25% from last year. China is the biggest importer of soybeans in the world, estimated at 55mmt.

According to the USDA, at the end of 2011/12 China will be sitting on 22% of the world's soybeans, 30% of the world's wheat and 47% of it's corn stocks. But is it really there, record domestic prices and strong imports would perhaps portray not.

In the weekly US progress report, aggressive wheat development has continued over the week due to the warm/moist soil conditions. Kansas winter wheat crops are rated 59% good to excellent (+5% from last week) and +28% compared to this time last year.  36% of the winter wheat has jointed, up 24% from last week as warm weather speeds up development. And although conditions have improved rapidly since they were sown in dry conditions last year, a late April frost still could be on the cards, and risk will be priced in until this period is over.

Whilst early sowing should commence in northern US spring wheat regions the next week or two, a month before average. However soil conditions are dryer compared to the south. Spring wheat acreage could be lower this year though, with extra corn and soybean acres have to come from somewhere. Whilst there will be some acreage that will come from land that was too wet last year, it looks like most may come from wheat.

Subsoil moisture is badly depleted in a wide swath of the Canadian prairie grain belt from eastern Alberta across northern and eastern Saskatch into Manitoba.  The six-month moisture deficit is 65 – 125mm in hardest hit prairie farms.  Less extreme drought growing areas have a 20-60mm moisture deficit.    

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