Commodity Index
The CCI/CRB Index closed the last week of 2017 sharply higher. Crude oil pushed to new 2.5 year highs with nat gas and the metal markets following. Even the grain/soybean market appears to be bottoming with the key USDA Jan 12th Crop Report just ahead. The CRB/CCI chart bottomed right at support and is now in position to make fresh yearly highs. With the US dollar weakening and President Trump pushing for a new US infrastructure program in ‘18, its late to be bearish of raw material prices. Commodities topped during the 2011/12 timeframe and have pushed lower into 2016. The last year has featured levity and some argue that the energy and metal markets have turned upwards. Unfortunately, adverse weather is needed for a lasting ag recovery with old crop supplies large and export competition keen. ARC continues to hold to a view of buying breaks in the CCI.
Corn
March corn fell a penny on the week, but sustained support above its 20-day moving average. Managed funds hold a sizeable net short position – in fact a record short for late December, ahead of a S American growing season – and price action in the opening weeks of 2018 will hinge largely upon weather in Argentina and Brazil. Large moisture deficits persist in Argentina, and recent one-off rain events will do little to change this trend. Evidence is mounting to suggest yield there could be upwards of 10-12% below trend without a major weather pattern shift in early January. We also mention the recent modest bounce has been led by cash prices, rather than simple fund short covering. South American basis continues to rally, as does Black Sea feed wheat & barley, and so US Gulf corn is firmly positioned as the world’s cheapest feedgrain.
We look for better pricing opportunities as energy prices rise, and as US ’18 corn acreage is very much in question following rallies in sorghum, barley, cotton and spring wheat.
Wheat
US futures rallied by varying degrees, with CME up 8 cents, KC up 5 and MGE up 2. Funds near record short position last week was cited (funds are still short a sizeable 146,000 contracts) along with winterkill concern in the Plains. As ARC has mentioned in recent wires, unlike a year ago, interior HRW basis is rising and since the beginning of Dec as US export sales have been well above the pace needed to meet the USDA’s annual forecast. In 2018, we look for KC to gain on Chicago as HRW seedings fall for an 4th consecutive year, and as stocks in 18/19 look to reach 370 Mil Bu, vs. 590 Mil in 2016 – a nearly 40% reduction. Otherwise, wheat as a whole looks to be well supported on breaks as the US balance sheet tightens, and as major exporter stocks/use tightens without another year of record Russian production.
Currencies are not the bearish factor that they were in 2016 as energy prices reach new 2.5-year highs. ARC expects further strength in major exporter currencies, which reduces the incentive to continually expand seeding. ARC sees wheat in a bottoming phase, but it’s premature to chase rallies amid abundant world supplies