August Soft Commodities Update

US dryness fears shift south as wheat sowings near

21st August 2012
The southern Plains, the seat of drought in the US last year, revived as a centre for this year too, seeing its crops continue to deteriorate even as those in much of the Midwest improved – and ahead of the important wheat sowing period.

The US Department of Agriculture, for a third week, rated domestic corn as 23% in "good" or "excellent" health, showing no further deterioration towards the levels of 1988, the last year drought caused such devastation to US crops.

Soybeans were rated at 31% in good or excellent health as of Sunday, an increase of 1 point on the week, if still the worst figure since 1988, and an improvement at the bottom end of market expectations.

Reports of poor yields, below even USDA expectations, were revealed on Monday on the first day of the ProFarmer tour of major US row crop areas.

'Continued to deteriorate'

However, the overall USDA crop condition data concealed a difference in experience between states - crops in parts of the southern Plains continued to deteriorate, even as those in much of the Midwest improved.

While some of the Plains state of Oklahoma received rainfall last week, more than half did not and overall the rains "provided no significant improvements to conditions", USDA officials said.

"Concerns about aflatoxin in corn were reported," they added, a reference to a fungal residue commonly found in crops stressed by drought.

In Kansas, "row crop conditions continued to deteriorate last week as the state received only scattered rainfall", they said, cutting their good or excellent ratings of Kansas soybeans by two points to 3%, and of corn by three points to 5%,

"While average temperatures dropped last week, continued lack of precipitation still plagues farmers," the USDA staff said.

'Greened up considerably'

The comments contrasted with those from Midwest states such as Indiana, where rains allowed soybeans to recover by four points to 20% rated good or excellent.

"Rain showers helped to improve drought conditions with less than half the state still in extreme-to-exceptional drought conditions compared with nearly 70% on July 31," the USDA said.

"Pastures and hay fields have greened up considerably in the last two weeks.

"Later-planted soybeans are benefitting from the recent rainfall with additional growth and pod fill," besides lower spider mite activity and reduced aflatoxin risk in corn.

'Tight grip of drought'



The concerns over the southern Plains are particularly important since the region is a major winter wheat growing area - Kansas is the top wheat-growing state - and with farmers preparing for sowings, potentially into dry ground.

The USDA warned last week that "prospects in most of the winter wheat area are not good especially in the western winter wheat area of the southern Plains".

At broker RJ O 'Brien, Richard Feltes highlighted data showing the condition of the US sorghum crop continuing to decline, by two points to 23% good or excellent, "underscoring the tight grip of drought in the southern Plains"

'Record high' grain prices here to stay - Rabobank

17th August 2012
Rabobank hiked forecasts for grain and oilseed prices, to above values markets are pricing in, saying "high and even record high" values need to be sustained to shrink demand to match drought-hit supplies.

The bank lifted by up to $1.50 per bushel its forecasts for quarterly average soybean futures prices in Chicago, cautioning that market rises to record highs had "not yet caused a severe decline in usage" required as the US faces up to a drought-hit harvest.

"The smaller crop size and pipeline carry-over will require the largest year-on-year drop in US soybean consumption on record," of more than 160m bushels, the bank said.

However, there has been "little evidence of a slowdown in global soybean consumption", with US use rising at an "alarming rate", as highlighted by industry data earlier this week on processing volumes last month, and Chinese demand "likely to be a key support to prices".

"Given that Chicago soybean prices have consistently treaded above $16 a bushel since the beginning of June and have not slowed Chinese demand, we expect that higher prices are needed."

Need for feed

The bank, one the world's main agricultural lenders, upgraded forecast for corn and wheat futures to show – unusually – continued price increases even into summer 2013.

The upgrades reflected ideas that rationing demand for corn "will prove difficult" given reasonably resilient production of ethanol - needed as an oxygenate additive to gasoline whether or not the US waives mandated levels of use – and the need to feed US livestock.

While US livestock numbers - as measured by grain-consuming animal units, a combined measure of cattle, hog and poultry populations - are set to fall only 1.4% this year, the US Department of Agriculture has pegged domestic feed demand tumbling 10.4% year on year.

Such a reduction in corn use for feed "will be much more difficult than commonly expected", given that pasture conditions are "the worst on record", with just 17% rated in good or excellent condition, according to official numbers.

Switch to wheat

Indeed, the hunger for feed will drive livestock farmers to use wheat in 2012-13 at levels far greater than the 220m bushels forecast by the US Department of Agriculture.

Rabobank, forecasting wheat feeding at 400m bushels, more than three times the 2011-12 rate, said: "Farmers will choose to feed wheat rather than reduce their herd in the short-term."

Many commentators believing livestock prices will rise further ahead as improved pasture conditions, and eventually a pullback in grain costs, encourage herd rebuilds.

Furthermore, the bank warned that wheat production estimates "have increasing downside", cautioning over the threat of dry weather to crops in Australia and India, and pegging Chinese production at 105m tonnes – 13m tonnes below the USDA estimate.

USDA foreign staff have flagged damage to China's crop from disease outbreaks, encouraged by poor weather and more concentrated planting patterns.

Price potential

The bank forecast wheat prices averaging $9.20 a bushel in Chicago in the April-to-June period next year some $0.40 a bushel above the price that the May 2013 contract was trading at on Friday.

For Paris wheat, which set a record price of E295.50 a tonne in 2008,the bank foresaw values averaging  E273 a tonne during the quarter.

May 2013 futures closed on Thursday at E228.00 a tonne.

Separately, RJ O'Brien vice-president Richard Feltes also cautioned that the USDA's estimate for wheat feeding may be too low, although by less of a margin that Rabobank believes.

"We could see 50m-70m bushels more wheat feeding than USDA August estimate," he said.


Soybean futures better bet than corn, banks say
15 August 2012
Soybean futures look a better bet than corn futures, analysts at both Australia & New Zealand Bank and Societe Generale said, despite ideas that improved weather is reviving US soybean yields.

The failure of Chicago corn prices to rise - despite a cut on Friday of more than 20 bushels per acre, to 123.4 bushels per acre in the US Department of Agriculture's forecast for the crop - "is telling", ANZ analysts said.

"Short-term event risk for grains has diminished," the bank said, noting that, with the crop's vulnerable pollination period now all but over, "the key period determining US corn yields has passed".

"With a lull in catalysts now likely over the next month until the September USDA report and current weak US Gulf corn basis, grain prices are likely to have peaked for the current quarter."

Demand hits

Separately, Societe Generale lowered to "neutral" its rating on corn futures, cautioning over the prospect of reduced demand from ethanol plants as the US summer driving season ends, leaving "an already weak US domestic gasoline market is set to see seasonally lower demand into year-end".

Furthermore, export demand has "severely waned", sapped by corn prices which remain at historically-elevated levels and by competition from Brazil, where farmers have enjoyed a record harvest of safrinha, or second crop, corn.

"Basis at the US Gulf has dropped dramatically in recent weeks with no meaningful end in sight," SocGen analyst Christopher Narayanan said, adding that "Brazilian corn remains the most competitively-priced origin".

And the experience of futures in previous years of disappointing corn crops suggested that declines in corn prices may lie ahead.

"It is interesting to note, especially in 1988 and 1996, that the December [Chicago corn] contract typically saw an end-of-summer high and factored in demand destruction into year-end, taking pressure off prices."

'Rationing not apparent'

However, SocGen remained upbeat over prospects for soybeans, noting resilient exports, and strong domestic demand evident in industry data on Tuesday showing a bigger-than-expected US crush last month, of 137.4m bushels.

"Soymeal demand remains strong," Mr Narayan said, flagging the boost from weakened supplies of distillers' grains, a byproduct of ethanol production used as a high protein feed, and whose output has waned with US manufacture of the biofuel.

"We continue to monitor the cash soybean market for signs of demand rationing.

"Given the fact that such an indication is not yet apparent, we remain bullish on soybean prices and, in our view, the highs are not yet in."

'May be misjudging drought impact'

The comments contrast with caution among investors, amid ideas of reviving US soybean yield potential, after rains fostered an uptick in the official condition rating of the domestic crop in the week to Sunday, the first upgrade since this season's ratings began two months ago.

"The corn market seems confident that poor yield reports will continue, while soybean traders are more guarded on how new crop soy yields will track relative to expectations," Richard Feltes at broker RJ O'Brien said.

However, ANZ said that the "market may be misjudging US drought impact" on soybeans, and recommended investors "to position for the next upward leg" in prices.

"The market needs to ration a record amount of supply before the next South American crop in early 2012. We maintain a bullish outlook for soybeans," the bank said.


Ensus reopens as US ethanol priced out of Europe
14th of August 2012
Europe faced the prospect of annual wheat demand of more than 1m tonnes coming back onstream as the £300m Ensus ethanol plant confirmed speculation that it is to reopen.

The UK site, Europe's biggest biorefinery, said that it would restart later in August, 15 months after being mothballed in a move blamed on cheap imports of US ethanol.

The move, which comes four days after Agrimoney.com was told that "no formal decision" had been made on a restart, will bring some 100,000 tonnes a month of wheat consumption back online once full capacity is reached "within the next two months".

"Everyone is absolutely delighted that things are moving in the right direction once again and we are in a position to restart," Ensus chief executive Peter Sopp said.

'Improved conditions'

Ensus, whose ethanol is sold to Shell, said its decision followed an "improvement of market conditions" in Europe since the European Commission acted to close a loophole which allowed exporters, largely US, to export ethanol to the region at reduced tariffs.

By mixing ethanol with gasoline, it was imported as a chemical rather than a biofuel, which attract duties roughly three times as high in the UK, and even higher rates in countries such as France and Germany,

US ethanol has also lost export competitiveness thanks to the country's decision at the end of last year to allow a tax credit of $0.45 per gallon for blenders to lapse.

Meanwhile, US ethanol prices have been inflated by the surge to record highs in values of corn, the main feedstock for American plants.

UK-based sugar and ethanol consultancy Czarnikow last week, flagging "an increasing possibility" of Ensus restarting, highlighted that ethanol imports were "currently priced out" of the European market.

"Import margins into the European Union are now closed," Czarnikow said.

Poor harvest

The announcement comes amid prospects for a disappointing UK wheat harvest, thanks to persistent and heavy rains, although the poor weather could underpin supplies of the feed grain which Ensus uses in seeing downgrades of milling grain to lower grades.

UK grain traders, with links to Ensus, said last week that results from the UK harvest "so far have been variable with specific weights being very poor in many samples.

"This raises doubts about how much of the UK milling crop the millers will be able to use."

Meanwhile, UK demand for the grain is also set to be boosted later in the year by the opening of the Vivergo site, of a similar size to Ensus, which a spokesperson confirmed to Agrimoney.com on Tuesday is scheduled for opening in the October-to-December quarter.

The UK typically exports some 2.5m tonnes of wheat a year.

London wheat futures for November delivery stood 0.8% higher at £196.00 per tonne in lunchtime deals.