MARKETS:
Check-in
Prices are having a zig to the top of their recent range, but are unlikely to make new highs.
Summary
- The US Dollar took a breather from falling.
- Corn prices recovered from season lows but will likely find further gains harder.
- Wheat prices have begun a likely modest bounce.
- Oilseed price gains are now likely to slow but allow canola to hold its premiums.
Macro
FX: The US Dollar regained a little ground last week. But only a little. The greenback’s larger fall since earlier this year largely remains in place. The fall has supported US$ prices. But, as usual, it is hard to disentangle the currency impact from other influences. The greenback’s fall so far, and any subsequent falls, do some of the job of lowering prices. Therefore, further decline is a handbrake on lower prices.
Energy: Oil price volatility has cooled with political temperature in the Middle East. The oil futures curve has remained in backwardation throughout. That curve inversion makes some investors more likely to maintain allocations to commodities.
Rates: US short-term interest rates are taking longer to fall than markets had anticipated. That delay means carrying costs for crops remain higher than otherwise.
Wheat
Crop: Season 2025 wheat crops have had problems in many places. Crops in the US, Ukraine, Russia and China will be somewhat below expectations. And, there are current worries about production in Australia and Argentina. Scaled to the global market, the likely losses are modest.
Closer in magnitude to the usual losses that occur in any season. And, therefore, generate little surprise for forecasters.
SnD: The wheat market remains on a trajectory for supply to be the whitest shade of pale tight. Crop losses for season 2025 look modest. And so, not large enough to move the supply needle out of that range.
Moreover, US inventories remain way too large. Those inventories mean the market has ready access to supply.
Markets: Investors were large sellers up until last Tuesday in both Chicago and Kansas. The short position is large but not yet extreme. Chances are, investors continued selling – at least until Friday’s big gains. Neither open interest, nor investor short positions, are at extreme levels. Thus, investor short positions can continue to scale up.
Long-cycle momentum remains weak, as it has been for the best part of a year now. Counter-momentum suggest the recent price zag had left the market a little stretched on the downside. So, a brief period of consolidation is most likely.
The View: Season 2025 prices remain very low. Of course, merely being very low does not prevent even lower prices for a while. But, that low starting point is relevant when assessing where prices go next. Supply close to neutral and a weakening US Dollar are supportive in that context. The sharp gains to end last week perhaps reflect that to some degree. The sharp fall ahead of that bounce, though, left the market a little stretched. So we were due a bounce. The bounce likely dissipates quickly. Ultimately, the global benchmark prices likely have limited upside. So, better to have modest ambitions for that component of the price.
That context means that other price components – currency and basis – are likely to play a bigger role. So, chances are, it will be better not to pass on basis- or currency-driven opportunities to wait for higher global prices.
Coarse Grain
Crop: New weather worries emerged over the past few days for corn crops in the US, Ukraine and Russia. The worries cover a hefty chunk of global coarse grain production. The emergence of these issues likely had a hand in lifting prices last Friday.
While the scale of worries is large, they will not immediately translate into lower crop forecasts. Yet they are likely enough to chill the march higher of US corn yield forecasts.
Markets watching the US corn crop and debating yield guesses is normal for this time of year. Less normal for this time of year is a debate about Brazil’s corn crop (for season 2024). Official estimates from the USDA and Conab are 130mt and 132mt. Market forecasts are anywhere up to 150mt! Obviously, such a wide range of estimates makes coarse grain SnDs even more fluid than usual. And, Brazil’s delayed harvest is compounding the uncertainty. That fluidity is an extra source of volatility for prices.
SnD: Those weather worries though are the first issue for a while that is supply negative.
US corn used in high-fructose corn syrup (HFCS) emerged as another issue that would add supply.
The US President, MAHA-ing, posted that Coca-Cola had agreed to replace HFCS with cane sugar in their products. The proposal is important because HFCS production absorbs around 3-3½% of US corn. As usual, the proposed change is light on details about extent and timing. The change would also roll through a minefield of other policies. The highly-protected US sugar market, and its supporting political patronage, not least among them. And, of course, we have only the faintest idea on the chances of implementation. All that complexity means forecasters will find it hard to make sensible adjustments to their corn SnDs. So, in market terms, the HFCS will sit dormant as an unpriced risk.
Markets: Corn’s CoT profile continues to show shrinking open interest. Participation has fallen by about 200k (12%) since early June to modest levels by historical standards. Investors cut their short position again to leave it large-ish but nowhere near extremes.
Even so, last Tuesday, the investor short was still large enough to be influential. The price trajectory since suggests the investor short is probably now smaller again. Other (momentum) investors’ buying are competing with them, fuelling the gains.
Long-cycle momentum remains weak. Short-cycle momentum and counter-momentum, though, likely have a bullish bias for now.
The View: We think the coarse grain market remains set up for prices to trade in a low range. The zig that started last week likely has a little further to run. But, the momentum and position fuel for those gains is diminishing, and might even be spent this week. Dec Corn prices above 435 likely meet stiffer resistance. At that level, the market starts to erase the drop that priced in larger Brazil and US crops. Also, the physical trade, likely impatient, still has substantial selling to do. The crop context likely ends this rally phase.
Oilseeds
Crop: US soybeans now come into focus as the weather forecast horizon extends into August. Crop worries are on the radar for the first time this northern summer. The hot, dry weather in parts of the US and around the Black Sea grow market-material amounts of soybeans and sunflower.
And some of Australia’s canola remains at peril. Almost all of those concern remain early stage, so they will not immediately translate into lower crop forecasts.
SnD: Even if those crop issues flow into lower forecasts, their impact is not large enough to shunt supply into a tight position. For that reason, the market’s focus remains on demand and trade issues.
On the demand side, the changed US biodiesel program has re-split the feedstocks into RVO and non-RVO categories. And that re-split has seen the market pay-up to fund more US ‘bean crushing and soy oil. The market thinks that is the new status quo. There is a trade segue to the RVO feed stocks. At the time of writing, Indonesia is still negotiating with the US to finalise a trade deal. Indonesia is seeking favourable treatment of its palm oil exports to the US. Whether that favour will be granted, and have any impact on RVO feedstock supply, is unclear for now.
The larger Trade War issue for oilseeds is how demand is re-arranged around China (mostly) avoiding US soybeans. The conjecture was that China would be hoover up much of South American soybean supply. The conjecture seems to playing out. Trade data shows lots of South American soybeans flowing to China. And, the price premiums on South American soybeans have jumped, most recently in Paraguay. The next consequence to monitor is whether other importers turn to cheaper US soybeans.
Markets: Investors’ positions in the soy complex remain, both, very large and spread-oriented. Open interest in soymeal and soy oil are at record levels. Investor shorts in meal are at record levels. And investor longs in soy oil are very large. We are cautious about viewing those positions simply as directional positions. A chunk, possibly a large one, is likely part of a spread combination across the soy complex. Thus, we cannot simply treat extremes, like investors’ meal short, as a barrier to still larger positions. Nor should we see large-ish investor bean shorts and oil longs in isolation. Even so, the implication is clear. Investors remain heavily invested in a bullish oil share view.
Soybean futures lack momentum of any sort. Long-cycle momentum remains solidly sideways. Likewise, short-cycle momentum. And, counter momentum suggests the downside stretch has been eliminated. So, there’s no obvious next phase from the technicals.
The View: Soybean prices remain most likely to zig and zag sideways. Likewise for canola. The premium on oils, though, means that canola prices will keep their premium. That premium is not without risk. The Trade War means that Canada’s relations with both China and the US are in a testy moment. Therefore the status of two large markets for Canadian canola and its products is under an active policy cloud. Other canola producers, Australia included, likely benefit in that context because they have less of an issue. At the risk of joining some unconnected dots, Australia’s Prime Minister paying China yet another visit was timely. The possibility that China will be open to importing Australia’s canola is likely supportive for Australian prices. So, oilseed pricing strategies ought to be less about timing for global price levels, and more about targeting basis.
