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WPI Spotlight

The WPI Spotlight showcases the best analysis recently written by our analysts.

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In my near 40 years in the business, no truer words have been spoken that what I've read in Ag Perspectives. WPI Client and Risk Manager

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Closing Bell Wrap-Up

This article originally appeared in the 2 October 2018 issue of Ag Perspectives. 

 By Matt Herrington

CBOT trading was relatively subdued today with little new fundamental information coming forth, except the usual cadre of weather forecasts. Wheat futures moved higher on the back of less-than-ideal weather forecasts for the U.S. and abroad, while soybean and corn futures moved higher on general “cheap grain” and trade-agreement buying interest. 

Wall Street is higher as of this writing with the Dow reaching a new intraday high after Fed Chairman Powell said he did not see evidence that U.S. equities have become overheated. That point has been questioned recently as the U.S. stock markets have rallied precipitously while equities in other areas of the world have languished. 

U.S. bond prices are higher as investors worry about political tensions in the eurozone, particularly those driven by Italy’s comments suggesting it would like its own currency. This has led to a higher dollar, which has rallied strongly in recent days. 

Crude oil markets are flat as the market continues to question the impact of U.S. sanctions on Iranian oil, specifically whether OPEC can fill the resulting supply void. Russia’s exports increased to a post-Soviet era high in September as it went against the supply cuts it previously agreed to with OPEC. The supply-side questions led to a sharp gain in crude oil futures yesterday, with buying enthusiasm somewhat tempered today. 

 Programming note: WPI's Closing Bell Wrap-Up will be on vacation starting next week but will resume 23 October. 

Corn

December corn closed 1 ¾ cents higher and nearly exactly inline with the 50-day MA, a point above which the contract briefly traded today. Fundamental news was light except for continued enthusiasm over the new U.S.-Mexico-Canada trade deal. Ethanol margins remain negative but have firmed in recent weeks, reassuring the market about its demand prospects. Cash prices are steady with rainy Midwest weather limiting harvest pressure. 

New Advice*

None. 

Previous Advice*

25 September 2018 – Exit short position (if not already out) and buy December futures between 360-366. Exit position on a close below trendline support (358). 

22 August 2018 – Sell December futures between 365-370 but exit position if market closes back above trendline support (372). 

Soy Complex

November soybeans gained 8 ¼ cents today and closed above the 50-day MA for the first time since mid-August. Trading volume was moderate with support coming from soymeal and soyoil futures. Soybean basis is abnormally wide across the Corn Belt with storage and shipping concerns pressuring prices. Export basis remains extremely low as well, with FOB Gulf offers nearly at parity with spot futures. The dollar’s recent pop higher is not reassuring the soybean market of its export potential. 

Soymeal finished $1.30/cwt higher after finding strong selling pressure at the 40-day MA. Soyoil futures continued their rally, closing 35 points higher, despite an overnight move lower in palm oil futures. December soyoil closed above the 100-day mA for the first time since November 2017. Board crush margins fell slightly but remain historically large with soybeans at a discount to the product prices. 

New Advice*

None. 

Previous Advice*

20 September 2018 - Buy November soybeans between 850-855 with targets of 872 and 907. Exit position on a close below the trendline (846). 

Wheat

December SRW futures rose 9 ¾ cents today while December HRW futures added 11 cents to their value and MGEX HRS futures increased 14 ¼ cents. Much of the rally was driven by strong afternoon buying after Matif milling wheat was higher overnight. Fundamentally, Australia’s forecasted rains are coming too late in the crop year to make a difference and Russia’s winter wheat planting continues to be threatened by dry conditions. In the U.S., persistent rains will bring the winter wheat planting to a halt later this month. 

Live Cattle

Live cattle futures traded near or above contract highs today with December futures closing $0.525/cwt higher and February futures up $0.475. The 10-day MA continues to be a strong support point with funds adding to long positions even on mild breaks. Momentum indicators are becoming oversold, suggesting caution is warranted for those holding or building long positions. The fundamentals are still at least somewhat bearish (despite the market’s rally) with large supplies in the pipeline. Contract highs continue to look attractive for short hedges. 

Rest-of-the-Week Outlook: Cash was minimal yesterday with a few steers traded at roughly $111 live. Those prices are roughly $1/cwt higher than last week’s trade, but the volume of trade is too low to establish a trend. Today, the country is pretty quiet through midday with one deal reported in Iowa and a few asking prices surfacing n the South at $115 live. Bids are yet unestablished. The midday boxed beef report showed the Choice cutout down $0.63/cwt and the Select up $0.15/cwt on light volume of 64 loads. Packers are likely to fill the bulk of this week’s kill with either packer-owned or contracted cattle, leaving negotiated trade to be typically light. 

New Advice*: 

None.

Previous Advice*: 

4 September 2018 – Sell October Live Cattle between $109-111 with initial downside target of $105.50. Exit position on a strong close above $112, however.

15 August – Buy October Live Cattle at $109 with target of $112 and exit position if market closes below trendline support. 

Feeder Cattle

Feeder cattle futures finished the day higher after morning selling pressure found support near the 10-day MA. February forward futures found new contract highs today while the active November contract found aggressive selling pressure near that point. 

Oklahoma City feeder cattle auction prices were higher this week whit feeder steers up $2-6/cwt and heifers largely steady on light volume. Calf demand was good, pushing prices $1-5/cwt higher for 500-lb steers.  

The cash market continues to underpin futures’ move higher. With generally good pasture conditions and cheap feed costs, stockers and feedlots could continue “paying up” for cattle and pull cash prices even higher. For futures, however, the risk (as always) is in decreasing fed cattle prices. This analysts’ view continues to be that current live cattle futures are “pricy” relative to the fundamentals (especially the supply-side), thereby increasing the downside risk for feeder cattle. Current feeder cattle futures look like great opportunities at which to place short hedges. 

New Advice*

None.

Previous Advice*

None. 

Lean Hogs

Profit taking pulled December-April futures lower while higher cash prices lifted the October contract $1.675/cwt. December futures have rallied over $14/cwt since early August and momentum indicators are starting to become oversold. However, with pork demand remaining solid (partly thanks to cheap prices) and the pork cutout heading into its seasonal rally, futures still have room to move higher. 

Hog prices on the National Daily Direct report were $0.05/cwt lower this morning on 7,237 head sold. Purchase volumes have been above-average this week as slaughter picks back up after Hurricane Florence. Prices on the Iowa/Minnesota report were $0.18/cwt lower on 3,515 head sold. The pork cutout fell $0.36/cwt on sharply weaker picnic and belly values. 

New Advice*

None.

Previous Advice*

4 Sept. 2018 – Buy December futures between $54.50/cwt and $54.75 with a price target of $58.59. 

 

*Trading commodity futures and options involves substantial risk and is not suitable for all investors. Read our Risk Disclaimer

 

Farm Bill Timeframe; Lighter USMCA Stuff; Waste Not, Want Not

This article originally appeared in the 2 October 2018 issue of Ag Perspectives. 

 By Gary Blumenthal

Farm Bill Timeframe

Technically, the U.S. Agricultural Act of 2014 expired at midnight this past Sunday. Some programs ( crop insurance and food aid under the Supplemental Nutrition Assistance Program or SNAP) are permanently authorized, and commodity programs are fine until the end of the year. However, there are 39 so-called orphan programs that have run out of legal viability. Notably, many of the orphans involve conservation and organic programs supported by Senate Democrats. Meanwhile, House Republicans are pushing for an employment/training requirement for able-bodied adults without dependents who receive SNAP benefits. House Republicans see these differing interests as an opportunity for an exchange of concessions, but the SNAP work requirement is anathema to Senate Democrats. The calculation by the Democrats is that they win the Congress in next month’s midterm election and can then better dictate the terms of the new farm bill.

 

Lighter USMCA Stuff

There is much to discuss about the new United States-Mexico-Canada Agreement (USMCA), but following are some of the lighter comments being made:

  • USMCA is not as catchy as NAFTA, and it isn’t in any logical order (i.e., alphabetical or by size of the economy). Trump just wanted the U.S. to be first and Canada last.
  • “The new deal is worse than the status quo, but disaster was avoided.” – Wall Street Journal
  • If it is just a rebranding with little substantive change from NAFTA, why does it have opponents?
  • Hmmm, USMC Agreement – why are they messing with the Marine Corps?
  • Quebec politicians are complaining that the province’s former Parliament member, Justin Trudeau, sold out dairymen in their French-speaking province to benefit the English-speaking automakers in Ontario. Note that Canadian dairy was conceded after the U.S. accepted retention of Chapter 19 dispute resolution.
  • Wow, U.S. dairymen get 3.6 percent of the Canadian market instead of the 3.25 percent they would have gotten under the TPP! 
  • Was the outcome worthwhile considering how much it ripped up relationships and had the cost of foregoing other trade negotiation opportunities?

 

Waste Not, Want Not

The Council for Agricultural Science and Technology (CAST) provided congressional staff with a report (Number 62, September 2018) on the magnitude of the U.S. food waste problem (60 MMT/annually) and why it exists as well as possible solutions. The single largest source of food loss waste occurs at the consumer level, which is where it is concurrently the most difficult to fix.

Education and awareness efforts are being deployed, the expiration label is being replaced with the “best by” dated label, and nudge strategies are being devised. The CAST paper notes that production has been pushed without regard to sustainable consumption. On the reverse side, behavioral economist Dan Ariely says that consumers need to better tie their purchasing to specific consumption plans. Waste of anything is correlated to the value of the product to its owner, and food is cheap.

 

Middle East & Africa In-Country Analysis

This article originally appeared in the 2 October issue of Ag Perspectives. 

By WPI Staff

Regional Updates

MIDDLE EAST/ MIDDLE EAST COMMENTS

The press in Russia reports that talks are underway with Libya regarding the purchase of 1 MMT of Russian wheat, both milling and feed wheat, at a cost of approximately $700 million. Although no agreement has been reached, Libya does require that level of volume.

The Russian government also reports that Algeria is very interested in a supply of wheat. A trial lot will be inspected by its officials in Russia and then, if accepted, shipped to that country for local import inspection and approval. Most of its wheat imports tend to be from France, but Russia hopes to be allowed to take part in its wheat tenders. Russian wheat is currently prohibited because it does to meet Algerian bug damage limits. This may be a difficult year to try to make inroads into Algeria as there have been complaints from other importers (e.g., Egypt) about the quality of this year’s Russian wheat crop.

Saudi Arabia has announced that the private sector will once again be permitted to import barley. Since 2016, only the Saudi state had been allowed to do so through the Saudi Arabia Grains Organization (SAGO). Information on the change is very limited, but it has been said that the private sector must follow all existing requirements for such imports once the market is opened. No date has been announced for the change.

It is reported in Egypt that the government is finding it difficult to sufficiently boost corn production every year to offset the annual rise in demand, especially with poultry production increasing 3 percent per year and corn comprising about 75 percent of poultry feed. This year’s local corn production is forecast to reach 6.8 MMT, up 400,000 MT. However, that is not enough to reduce yearly imports of about 9.5 MMT. As has been mentioned before, it is challenging for Egypt, mainly a desert country, to expand the available area for corn. Reclaiming desert land is expensive, and switching farmers from other crops to corn is a poor alternative. Egypt’s corn imports will likely continue to grow in the foreseeable future due to the animal feed industry’s rising demand.

Iran reports that the government’s local wheat purchases are expected to reach 10 MMT this year, up 10 percent, and no imports are expected.

U.S. Wheat Associates (USW) has testified before the WTO regarding “unreasonable export practices,” which it says exists with Turkey’s “inward processing system.” It believes that Turkey, the world’s largest wheat flour-exporting country, has “excessive domestic support” and “high import tariffs,” both of which are used to subsidize those exports. USW is seeking the removal of Turkey’s eligibility under the WTO’s Generalized System of Preference.

AFRICA COMMENTS

South Africa’s Crop Estimates Committee (CEC) has issued its final projection of 12.93 MMT for the 2018 maize crop, a 2 percent decrease from the last forecast and about 23 percent lower than last year’s record 16.82 MMT. Production is now expected to consist of 6.8 MMT of white maize and 6.1 MMT of yellow maize, down about 1 percent and 3 percent, respectively, from the previous estimate. The CEC’s projection of 1.85 MMT for the wheat crop is up 2 percent from the last forecast and about 18 percent over the 2017 total.

Maize farmers in parts of Kenya are saying that they must sell their production as animal feed for as much as 70 percent below the price set by the National Cereals and Produce Board (NCPB). They say that they are forced to accept whatever price is offered with the NCPB no longer buying any maize and market prices dropping due to high supply levels. The unfortunate point about this is that Kenya will soon start importing maize again. Additional good maize storage is needed by both the country and farmers so that the supply can be spread over a longer period rather than being dumped on the market.

According to Kenyan government sources, 95 percent of the NCPB’s maize suppliers have been fully approved, and payments to be issued this week will first go to the 514 small farmers in that group.

Uganda has issued new agricultural manuals for maize and beans, produced with the support of USAID and designed to help subsistence farmers become more like commercial producers. The country produces about 3 MMT of maize but has a goal of reaching 10 MMT by 2020. These manuals will be used along with increased farm training and improved post-harvest crop handling.

The Sahel countries of Africa (Niger, Mauritania, Mali, Burkina-Faso and Mali) are forecast to double their populations by 2050. Although efforts are being made to increase arable land, this region is unlikely to have the financing available to reclaim some of the desert land for farming purposes. It has been suggested that cereal crops could be greatly expanded with use of better seed stock. Sorghum and millet are currently the main cereal crops, but they are grown using very low-yielding local seeds. In addition, much of the land near urban areas is highly polluted with only stagnant water available for crops. The government of France is very active in the area, especially the French Agricultural Research Center for International Development, but there is quite far to go before the region’s grain and food needs can be met with local production.

Zimbabwe’s wheat shortage may be ending as a 30,000 MT cargo is reportedly moving to that country from Mozambique and should be delivered in about two weeks. Bread is currently just available in urban areas at only 50 percent of the normal quantities – rural areas have none. However, grain millers have asked the government for a $50/MT subsidy to help offset the high price of imported wheat and stop wheat flour/bread prices from rising further. They have also requested that it set aside $7 million per month in foreign currency so that they can pay for wheat imports. The millers don’t want that money in government funds; they just want to know that the foreign currency will be available from banks. Zimbabwe needs about 460,000 MT of wheat annually, but local production varies quite widely each year. The highest crop recently was last year’s at about 180,000 MT.

 

Weekly Tender and Sales Information

Ethiopia’s 200,000 MT wheat tender is reported to have been awarded to Promising International Trading Co. There are some concerns, though, as Promising did fail to supply the 200,000 MT awarded in a previous tender, which caused a serious wheat shortage in that country. The press reports that the current tender award could also be set aside if the government takes action against Promising for the previous default.

Iraq has purchased 200,000 MT of milling wheat: 100,000 MT from the U.S. and 100,000 MT from Australia at about $338/MT CNF and $353/MT CNF, respectively. Half of the total was purchased outside of the tender process in direct, negotiated deals.

The Turkish Grain Board (TMO) reportedly bought 252,000 MT of wheat under tender in about 42 lots (6,000 MT each) for delivery to several ports in Turkey. The lowest price offered was said to be $232.90/MT CNF, and shipment is scheduled for 2-22 October.

Jordan made no purchase in last week’s 120,000 MT barley tender and has issued a new tender for 2 October. It also did not buy anything in its 120,000 MT wheat tender and will issue a new tender this week.

 

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