Views on commodities and energy
MasterCard SpendingPulse has been publishing weekly retail gasoline purchase data on a weekly basis since August in an effort to nail down actual American fuel consumption in a timely way.
Now it looks like the data could be used in predicting U.S. gasoline inventories as reported by the U.S. Energy Information Administration — a key headline for energy traders. The graph seems to show a negative correlation between SpendingPulse gasoline purchases and EIA gasoline inventories with two-week lag, though the relationship vanishes when U.S. refiners hit the brakes.
Two cold fronts have brought winds, waves and rain to Mexico’s Bay of Campeche, stopping the country’s crude oil exports and triggering an accident that left at least 21 offshore oil workers dead
The incidents propelled crude prices to a record high over $93 a barrel on Monday and highlighted the energy industry’s vulnerability to Mother Nature’s whims.
The dollar at record lows, crude oil at record highs, the euro at record highs have been the impetus behind the Chicago Board of Trade markets for the last several weeks. There’s no reason to believe that will change in the week ahead.
“The definitive driver was the outside markets,” one floor trader said after the CBOT markets closed on Friday, Oct. 26.
CBOT soyoil hit a 32-year high of 41.55 cents a lb on Friday and December corn neared its 200-day moving average of $3.74-3/4, moving up as crude oil hit an all-time high of over $92 a barrel. Soyoil as well as corn are closely linked to the energy markets given the expanding biofuels industry which uses those feedstocks to produce ethanol and biodiesel.
So any strength in the dollar or weakness in crude oil will have a negative impact on CBOT corn and soyoil, the soy complex leader, traders said.
Wheat seems to be on another track — deflating after its all-time high of $9.66-1/2 a bushel last month when flour millers panic bought wheat on outlooks for the world’s wheat supply to shrink to a 30-year low in the coming months.
December wheat tumbled 70 cents in the week ended Oct. 26, closing down 2 cents at $8 a bushel on Friday.
“Friday’s closing wheat levels represented an outside close to the downside for the week from a technical standpoint. That might be the catalyst for further breaking action for next week,” one CBOT wheat options trader said.
More bearish inputs for wheat surfaced by Saturday morning when Egypt announced it bought 190,000 tonnes of Russian wheat — none from the U.S. — after last week’s tender.
Chicago wheat traders were also a little nervous about the Friday’s expiration of November options since December futures closed at the exact $8 strike price. (Since there’s no November CBOT wheat futures contract, anyone wanting to exercise a Nov $8 call or put would end up with December futures position.)
Open interest in $8 November options was about 2,400 puts and 1,200 calls going into Friday’s session. While a fair amount of $8 options traded, there’s still the risk that firms holding long $8 calls or $8 puts could exercise them over the weekend.
Depending on how many are exercised it could lead to some volatility near the $8 level in December wheat when the markets open Sunday night and continuing Monday morning, option traders said.
For the week ahead traders will be monitoring the dollar, crude oil, and the following factors:
South American planting weather. Brazil’s No.1 soy state of Mato Grosso was benefiting from recent rains. However, traders were a little uncomfortable with Brazil’s Rio Grande do Sul region which is getting too wet. More rains are forecast for the coming week.
Export pace. The sliding dollar has helped the export pace. So traders will continue to react to any demand signals. Asia has had a steady appetite for vegoils, including soybean oil, and last week corn saw its 13th consecutive week of U.S. export sales over a 1.0 million tonnes.
Midwest harvest conditions. The Midwest harvest is moving into the background as a price signal. After this weekend, the corn and soy harvest should be wrapping up soon. That should ease hedge selling pressure. There continues to be a smattering of disappointing soybean yield reports, so that’s helping underpin soybean prices.
The Chicago Board of Trade wheat market may have fallen more than 10 percent from last month’s record highs but Friday showed that the market’s rally still has some legs.
CBOT December wheat closed up the daily limit of 30 cents a bushel at $8.55-1/2, well below the record of $9.66-1/2 set in the March contract last month before profit-taking set in from the hot-money hedge funds and speculative pools which have powered the market to historic highs amid fears of coming global wheat shortages.
That tight-supply scenario grabbed the market by the neck again on Friday as talk circulated that Russia will choke off its wheat exports by slapping on a tariff of as much as 30 percent. Russia has already set a 10 percent tariff to begin in mid-November.
That move was a fresh signal to the world cash market that the breadbasket may only be offering crumbs for some buyers in the coming year, given drought-reduced wheat crops in many key regions including top exporters like Australia and Canada.
CBOT March wheat also soared the 30-cent daily limit. Buying demand in December wheat options after futures locked up implied a close in December of $8.57-1/2, traders said.
The bullish sentiment in wheat did nothing to hurt the nearby corn pit. Corn seemed to follow along, also getting some chart-based buying after advancing to near a three-week top when the December contract cracked nearby resistance at $3.68 a bushel this week. The high was made in the midst of an expected record large U.S. harvest of over 13 billion bushels.
CBOT December corn closed up 3 cents at $3.70-1/4.
Grain traders and analysts noted that the gains in both bellwether grains on Friday bucked the big tumble in the stock market, where the Dow Jones Industrial Average plummeted 367 points on earnings and subprime fears — on the 20th anniversary of the global 1987 market crash, no less.
Commodities continue to draw in speculative funds from Wall Street, analysts noted, be they in the oil market (where crude hit a record $90 a barrel late in the week) or metals of grains. That seemed another element in the “flight to quality” seen on Friday as U.S. Treasuries soared as equities fell.
Over in soybeans, however, it was a different story as traders cashed in profits after a big run this week. CBOT November soybeans fell 8-1/4 cents at $9.83-1/4 a bushel and December soyoil down 0.43 cent at 40.56 cents per lb;
Traders were sanguine about the day’s drops, however.
Soybeans continue to be inspired by historic highs made in soyoil, a key food ingredient but where the biofuels craze — this time for soy-based biodiesel — has carved out a new, unexpected and powerful a piece of the demand pie. That is the same as in corn, where ethanol demand has kicked corn prices well above their decades-old historic levels of $2 a bushel.
This week soyoil set a 23-year high at 41.14 cents per lb in the spot delivery, just shy of 41.15 cents made in May 1984. The next target will be 42.65 cents, notched on Nov. 14, 1974. The record high in soyoil is 51 cents made in October 1974.
Are the markets getting “toppy?” Wheat’s bounce, corn’s strength despite a bin-busting harvest, and soyoil’s push all served as reminders of fundamental supply/demand strength.
Analysts also note that the vaporous state of the U.S. dollar does not look set to change any time soon, given worries about credit crunches and recession. The Fed may want to raise interest rates, which would aid the dollar. But can it? No, analysts say, given weak economic signs emerging almost daily.
The cheap dollar, therefore, while weighing on the Fed and the stock market, will continue to give importers of U.S. food and feed more buying power — and demand for CBOT grains.
Things to watch in the coming week starting Sunday night, October 21 -
SPILLOVER EFFECTS FROM OUTSIDE MARKETS
“We’ll be watching outside influences – the dollar, the stock market, gold and silver, the crude market – which were big influences this week,” one CBOT trader said.
U.S. HARVEST WEATHER
Chicago traders will also be watching Midwest forecasts to see if rains stop so farmers can resume harvesting corn and soybeans. Until the last week the U.S. harvest was ahead of schedule. But rains caused some slowdowns and boosted cash basis bids at many elevators.
The soybean harvest west of the Mississippi River, where the weather has been wetter, is under the greatest chance of being behind, traders said. The U.S. Agriculture Department will update its crop progress data on Monday afternoon.
On the other hand, rains in the Plains (and Delta region) are good news for winter wheat prospects as soil moisture is replenished and next summer’s crops gets a solid start.
SOUTH AMERICAN AND AUSTRALIAN WEATHER
South American seeding weather is also improving, especially in Mato Grosso, Brazil’s No. 1 soybean region. Rains there last week were good enough that farmers were able to kick soybean seeding into high gear.
The other key crop area CBOT traders are watching like hawks is Australia. Wheat crop estimates in the number two exporter have been cut drastically in the last two months by drought, a major factor behind CBOT wheat’s drive to record highs. But traders note that any rains in Australian wheat fields now will not only be “too little, too late” but also likely add to crop losses with early harvest under way.
Last, but certainly not least, CBOT grain markets will be watching for — and expecting — continued strong export business as worried importers may continue studying their own and foreign crop prospects decide to hedge their bets and book even more supplies in a rising market.
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Despite a bullish government crop report issued ahead of the Chicago Board of Trade opening on Friday morning (Oct. 12), wheat and soybeans took a nose dive as traders said much of the data was already priced into the markets.
CBOT December wheat closed 25-1/2 cents lower at $8.57-1/2 per bushel and November soybeans closed 4-3/4 cents lower at $9.76-3/4.
“Today you could say it was buy-the-rumor and sell-the-fact,” said Prudential Financial analyst Shawn McCambridge in Chicago.
Corn, on the other hand, got a shot in the arm from the crop report. The December contract closed up 7-1/4 cents at $3.51 per bushel as USDA surprised traders by not raising its yield estimate, as many had expected of the record crop.
“Big crops get bigger,” is another old saw of the trading pits — but it didn’t work this time.
With the USDA’s monthly production report behind Chicago grain traders, in the week starting Oct. 15 the pits will be focusing on:
–Will stress in the southern Australian wheat crop be relieved by any rains? The dryness in the major exporter sparked the USDA to cut its estimate for the Australian crop by 7.5 million tonnes to 13.50 million.
However, northern Australia is beginning to harvest wheat. So any rains there could damage the already reduced crop.
–Will export demand for corn to stay strong? U.S. customers bought a whooping 2.3 million tonnes of corn last week. Strong export demand has underpinned the corn market all season, countering the effects of an expected record-large harvest of 13.3 billion bushels.
— Will South American fields now being planted, especially in Mato Grosso, Brazil’s No. 1 soy state, get welcome rains? Mato Grosso has been hot and dry, delaying early soybean planting. But the region is now expected to see its first beneficial rains of the season this weekend. Any rains would weigh on prices in Sunday night screen trade. Additionally, some areas of Argentina needed rain, analysts said.
— Will U.S. winter wheat planting keep lagging the season average? Parched conditions in the Texas Panhandle, southwestern Kansas and eastern Colorado are the main concern — these are all key growing areas for hard red winter (HRW) wheat, the par grade for delivery against Kansas City futures — and the main U.S. bread wheat for milling and export.
USDA will issue its next crop progress update on Monday afternoon. Any rains in dry wheat areas will improve the HRW wheat outlook. Traders are also beginning to talk more about the strengthening La Nina, the Pacific Ocean weather anomaly that has a global effect — and could result in a dry fall and winter for the HRW wheat belt in the southern U.S. Plains.
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Ideal weather this fall across the U.S. Midwest is pushing the corn and soybean harvest along at a near record pace in many areas. Harvest for both crops was nearing the half way mark by October 5, with reports of strong corn yields continuing to filter into the Chicago Board of Trade markets — anywhere from 5 to 20 bushels an acre more than expected.Soybean yields were looking more variable — some fantastic at 50 to 60 bushels per acre but others looking more “iffy” in the southern Midwest, where it was dry late in the summer.
In a history-making race this autumn between wheat and soybeans to reach $10 a bushel, the traders who bet on beans won in the week ended September 28. But by Friday’s close, wheat was getting a second wind.
The spot, or front-month, Chicago Board of Trade November soybeans rose as high as $10.17-3/4, the highest price for a spot futures contract in three years, before ending the week at $9.91-1/4 on profit-taking on Friday after USDA data.
Soybeans bounced on the strength in all commodities, including wheat. Worries about grain supplies, strong export demand for all U.S. grains amid the record lows in the dollar and China easing grain import rules, and rising domestic prices sent all CBOT grain commodities flying.
Meanwhile, CBOT spot wheat — the grains leader most of the summer — resumed its march toward $10 with a series of all-time highs, peaking on Friday when it reached $9.61-3/4. It closed at $9.39, up 6 cents on the day.
Before this summer, the CBOT record wheat price in more than a century of trading was $7.50 a bushel.
Wheat was firm all week but got a finishing boost on Friday from the the U.S. Agriculture Department.
In its annual report on small grains production issued early on Friday morning, USDA shaved another 47 million bushels from its U.S. 2007 wheat production estimate, putting it at 2.067 billion bushels.
At the same time, wheat stocks are shrinking. USDA said in its quarterly grain stocks report that U.S. wheat stocks fell 806 million bushels since June 1, more than 25 percent faster usage than in the same period a year earlier.
Wheat eked out a gain but corn and beans weren’t so lucky in the face of active end-week and end-quarter profit-taking by hedge funds and other hot money. USDA stocks data for corn and soy was also bigger than expected, triggering the selling.
But next week volatility should continue with wheat the focus and once again the expected market leader, traders said.
The biggest factor wheat traders will be watching is Australian crop weather. Australia — usually number 2 behind the U.S. in wheat exports — has seen its crop once more shrink with drought and little rain in sight. CBOT traders are now talking a 10-12 million tonne crop, down from the Australian government’s last number of 15.5 million tonnes of Sept. 18 — and from the 22.5 million tonnes once predicted.
In the soybean pit, the area of concern is Mato Grosso, Brazil, the top soy state in that huge producer.
Hot, dry conditions have been delaying early soybean planting with no significant rainfall expected until Oct. 7.
Any fresh export demand will likely spur additional buying in the Chicago markets. Supply worries, and the weak dollar, have fed voracious foreign buying of U.S. grain stocks.
There does not yet appear to be any sign of rationing as the world’s biggest importers of food and feed continue to book huge amounts of corn and wheat even at historically high prices. Week after week export sales have been at well over 1.0 million tonnes in both.
The U.S. corn harvest is advancing rapidly with the Midwest weekend expected to be active given clear, warm conditions. Truck dumps will be open at hundreds of elevators.
That added to some commercial prehedging on Friday. But the hot fund speculative money in corn and soybeans was a ready absorber of such selling pressure most of the week.
Traders have also been especially interested in hearing the latest on soybean yields. Early yields were disappointing and later reports have been mixed.
Soybeans are usually harvested before corn to prevent crop losses and allow corn to bring moisture levels down “on the husk.” Stronger stalks allow wind-drying in fields, saving farmers money on drying or on paying penalties to merchandisers for delivering corn above 15.5 percent moisture.
But this year the push has been to harvest corn first, especially in the drought-plagued South and mid-South.
A last weather factor will be the interest in U.S. winter wheat planting progress. Concern is already there because seeding lags on dryness in the central Plains — Kansas is the top wheat state. But concerns were also cited about the southern Midwest and northern Delta where soils are parched.
The assumption has been that farmers will chase $10 wheat prices and create an orgy of wheat planting that could cost both corn and soybeans acreage next spring, notably in regions where winter wheat cannot be harvested by June, preventing any “double-cropping” of soybeans.
USDA will issue its next crop progress update on Monday afternoon after 1600 ET/2000 GMT.
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Australian weather forecasters, the Federal Reserve and big U.S. grain exporters make strange bedfellows — but together they made for another roller-coaster week in Chicago Board of Trade grain markets.
Wheat rose to a record high above $9 a bushel the prior week, awaiting confirmation that Australia’s important wheat crop — which has been baking for two months — has been hurt yet again by drought.
On Tuesday, Australia confirmed a third of its expected crop had been lost — and CBOT wheat promptly tanked on profit-taking. By the end of the week, though, booming exports and fresh “hot” money from Wall Street had bounced wheat back up to near where it began the week.
That was thanks largely to the Fed. The Fed’s surprise 50 basis point cut in both the Fed funds and discount rate on Wednesday had coursed through the grain markets like two shots of caffeine by Thursday.
One boost came from the weaker dollar. The Fed’s cuts made the dollar even weaker, and the U.S. currency set record lows against the euro and Canadian dollar on successive days.
Both those currency zones, along with many Asian grain buyers, instantly saw U.S. grains get cheaper as the dollar fell. The result was a fresh wave of bookings by grain buyers on Thursday and Friday, heating up an already sizzling export picture for wheat, corn and soybeans.
The second Fed effect from its cuts was a “boomerang.” By cutting more than most expected, and doing so as gold and oil were already near record levels — to say nothing of CBOT grains — the Fed injected tremors in the financial system about inflation. Those expectation merely fed a fresh wave of speculative money into commodities, including grains.
After the Fed cut rates, CBOT grain traders said speculative funds had added at least another 30,000 contracts in their long positions in grains by the close on Friday.
The same themes should continue next week — inflationary fears, the weak dollar, the export boom — attracting even more fresh speculative money into commodities.
Traders said any more sharp spikes in in beans, corn or wheat prices could prompt commercial grain firms — now hedged on the short side — into short-covering if prices get away from them. Commercially, and contractually, lifting hedges can be tricky. But no grain firm wants to stand in front of a freight train, any more than a “local” alone in the pits.
But many traders also warned that the spikes might not be long-lived. The reason? The markets are technically overbought and both corn and soybeans are defying the usual seasonal trends ie. to trend lower during the Midwest harvest.
What’s surprising many veteran traders is also the strength in corn: U.S. farmers are still poised to harvest a record 13-billion-bushel crop. But they noted that 2006 also defied historical trends as corn rallied from September to December.
The key points to watch in the coming week will be:
–South American weather. Both Argentina and Brazil are in the midst of planting their corn, wheat and soybean crops. Conditions in Mato Grosso, Brazil — prime soybean country –will be monitored. It has been hot and dry, delaying early soy planting. Long-term forecasts looked a little wetter.
–Australian weather. Maps will also be watched as the country’s wheat crop needs a big drink during the key stages of forming and filling heads on the plants. This week the Australian Bureau of Agricultural and Resource Economics (ABARE) slashed its country’s wheat crop estimate by 31 percent due to 15.5 million tonnes. CBOT trade talk at end week circulated that could shrink to 12 million if it stays dry.
–The U.S. Agriculture Department on Sept 28 will issue its U.S. small grains summary and quarterly stocks reports, showing how much grain was held by farmers and commercials on Sept. 1.
–U.S. Census Bureau August soybean crush on Sept 27. Traders are particularly interested in the soyoil stocks number after USDA last week cut its end-season U.S. soyoil stockpiles for the year ending October 2008 by 490 million pounds. The drop was directly linked to huge and growing amounts of soyoil to be consumed by the biofuels industry for biodiesel.
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Chicago Board of Trade wheat prices rocketed to an all-time top of $9.11-1/4 per bushel in the week ended Sept. 14 as export business remained strong despite record prices. But soybeans, soybean meal and soyoil also hit multi-year highs.
The leader was soyoil, which like corn for ethanol has been buoyed in part by the craze for renewable fuels. Soyoil is the feedstock to produce biodiesel.
Soyoil set a 23-year high of 39.45 cents on Friday, grabbing a bit of the glaring spotlight on wheat that fund investors have been mesmerized with since late summer.
The oil rally took off on Wednesday after the U.S. Agriculture Department’s monthly supply/demand report. USDA issued shocking drop in projected end-season soyoil stocks.
Then, on Friday, the threat for a surprise weekend frost in the upper Midwest — potentially freezing late-maturing bean yields or killing off plants — spurred even more worried speculator and commercial buying in soybeans and soyoil.
But the shocker was the USDA number, which reduced the estimate for end-season U.S. soyoil stockpiles by October 1, 2008 by a whopping 490 million pounds from last month. That was directly tied to projected higher amounts of soyoil sought by the green fuels industry to produce biodiesel.
Wheat, on the other hand, started acting “toppy.”
Wheat prices slid more than 70 cents on profit-taking over two days despite bullish USDA data. USDA on Wednesday cut its forecast of world wheat stocks by another 2 percent to a 30-year low and on Thursday reported weekly export sales at 2.13 million tonnes, the biggest in 11 years.
“When you react that way to what should have been a fairly friendly report — that’s usually a sign,” said Jack Scoville, analyst with The Price Futures Group.
But Chicago analyst Roy Huckabay said it was too soon to say the high is in because if everyone really believed the market had peaked, the sell-off would be even more severe.
Analysts noted that, with harvest, we are now moving into the season when U.S. corn and soybean prices slide as supplies move from fields to bins and hedge selling of futures by commercial grain firms taking ownership pressures the markets.
This should be especially true of corn with farmers due to harvest a record crop of more than 13 billion bushels after plantings rose to the highest level in 63 years.
Buoyed by wheat and soy, corn futures stayed in their recent range during the week. But a key cash market bellwether — CIF barge corn prices for the New Orleans Gulf export terminal – fell 16-18 cents per bushel between Tuesday and Thursday afternoon. Southern harvest gained momentum and yields remain strong, with many farmers reporting 5 to 15 bushels more per acre than they expected.
Soybeans — with potential supplies already reduced this season by all the acreage switched to corn for ethanol — are being buoyed at harvest by a little different scenario.
The futures market continues to try to entice farmers to plant beans — including South American farmers now readying their planters — at a time of record high wheat prices and red-hot demand for corn. The fight for acres is on.
Over the next week Chicago traders will be watching:
–Midwest weather reports for potential frost.
–The latest South American acreage estimates.
–Whether the parched Australian wheat crop gets rain.
–Export business buoyed further by the weak dollar.
–Chart-related signals that could trigger long liquidation in soycomplex futures markets technically overbought after the week’s rally in Chicago.
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There doesn’t appear to be anything stopping wheat these days. Demand from hungry nations worried about once-and-future crop losses seems insatiable despite wheat prices well over $8 per bushel — levels never seen in history and more than double the average historical price in the United States.
In the week ended Sept. 7 the dizzying strength in wheat continued to spill over to other grains. It now looks like U.S. farmers are gearing up to plant much higher acreage of winter wheat this fall — which will take acres away from soybeans and corn when it’s time to plant those crops in the Spring of 2008.
Bottom line: all eyes will remain on wheat next week, despite the advancing U.S. corn harvest that is certain to yield a bin-busting record crop this year. Nearby CBOT corn prices closed 7-8 cents higher on Friday and soybeans rose 11-12 as CBOT spot wheat rose 24 cents to $8.40.
For wheat traders, the biggest concern is now the Australian wheat crop which needs rain. The forecast is calling for weekend rains, so that will be a key market indicator traders will be monitoring. Rains were short or absent down under a week ago, spiking CBOT wheat higher.
The U.S. is the single largest wheat exporter with 29 million tonnes to be shipped in the 2007/08 season. Australia ranks second at 15.5 million tonnes and Canada third at 15 million. But the latter estimates (from USDA) appeared before recent weather-related losses in wheat in those countries.
“I just don’t think anybody wants to be short Monday morning if they come in and it doesn’t rain in Australia, or Egypt buys some more wheat or India tenders for some more wheat. There’s a lot of little things going on here that is triggering a rally,” Steve Freed, analyst with ADM Investor Services.
Algeria’s surprise purchase of 500,000 tonnes of wheat, mostly from the U.S. and reported on Sept 6, was the latest demand jolt to buoy wheat prices this week.
Traders will gear up for downgrades to production or exports of wheat from overseas producers in next Wednesday’s (Sept 12) monthly U.S. Agriculture Department supply/demand report. The USDA’s latest corn and soybean production estimates will also be released that morning at 0830 EDT (1230 GMT).
Most are expecting the government to bump up its current corn estimate of 13.054 billion bushels — already an all-time high — as well as its soybean forecast of 2.625 billion bushels. Early harvest reports point to strong corn yields while soybean crop conditions have improved over the past two weeks, which has likely enhanced final yields.
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