Commodity market overview: August 2017

Due to improvements in the Black Sea region, USDA global wheat production forecast for the 2017/18 season year witnessed a small upward revision in August. Despite the decrease in EU and Canada supply forecasts, global production is currently estimated to reach 743.18 million tons, a 0.7 percent increase from July’s forecasts. World consumption forecasts have been revised higher as well and are now at 737 million tons. With consumption growth being limited, global inventories are currently forecast to reach 264.7 million tons, a 2.4 percent increase from the last year’s level of 258.56 million tons.
Following the strong short covering in late June, large traders returned to maintaining a short exposure to wheat futures. While the current non-commercial short position is significantly below the average for the last couple of years, news of wildfires in the western US might be key to the near-term developments on the wheat futures market.

Current 2016/17 season year crop estimates have been revised higher due to higher volumes in Brazil and are now estimated at 1.07 billion tons. Global production levels are expected to show a minor year-over-year decline in 2017/18, mainly as a result of downward revisions for Canada and the EU. Partially offset by a stronger Russian crop, world production is currently forecast at 1.03 billion tons, nearly unchanged from the previous season year. USDA sees total 2017/17 total consumption at 1.06 billion tons, with ending stocks declining 12 percent to 100.87 million tons.
The corn market has witnessed a substantial decrease in non-commercial futures positioning following the brief rally in early July. While the current large trader positioning is neutral, corn futures bounced off the recent lows on the USDA report which indicated that corn quality decreased to 61% “good or excellent” vs. 62% a week ago.

Despite the upward revision from July, USDA’s August forecasts point to a 1.2 percent year-over-year decline in global soybean production in 2017/18, which is now expected at 347.4 million tons. While there have been no changes to the 2016/17 crop estimate since July, global consumption is forecast to demonstrate a 4 percent year-over-year increase and reach 148 million tons. In the meantime, ending stocks are projected to increase by 0.8 million from the previous year, reaching 97.8 million tons in 2017/18.
With a small non-commercial net short position, current large trader positioning is signaling a neutral-to-bearish view on the soybeans market. Despite the improved physical demand and lower acreage, analysts at Angel Commodities cite weak spot demand as a reason for soybean futures to trade sideways as the market is preparing for the new crop arrivals.

In August, USDA 2017/18 soybean meal production forecasts were revised lower to 236 from 237.4 million tons projected in July, with annual production change expected to demonstrate a 4.4 percent increase. While total consumption levels are now expected at 233.9 vs. 222 million tons in the current year, ending stocks are forecast to contract 2.5 percent to 13.06 million tons in 2017/18.

Expected to remain nearly unchanged from the current year, 2017/18 rice production levels are currently forecast at 482.6 vs. 483 million tons in the current year. Following the minor 1.7-million-ton upward revision in August, global rice consumption is now projected at 737 million tons, a 0.3 percent year-over-year decrease from the current season year. Global ending stocks remain in an uptrend and are currently forecast at 264.7 million tons in 2017/18.
Non-commercial positioning in rice futures has been rather bullish lately. Following the strong short covering rally in May, net long positioning is currently at its highest since 2011.

Global cotton production remains in a long-term uptrend. Next season year production levels are expected to reach 117.3 million bales, up 10.1 percent from the current year and slightly higher compared with July forecasts. Although stable on an annual basis, consumption growth is somewhat less pronounced, and is currently expected to increase 3.3 percent to 117.4 million bales in 2017/18. Ending stocks – forecast at 90.1 million bales in the next season year – are forecast to remain nearly unchanged from the current year.

With the EU sugar production ban expected to be lifted in October, sugar supply is forecast to significantly increase in the next season. Since the beginning of the year, total sugar beet plantation area in the EU has rebounded by approximately 16 percent. With EU-based sugar production projected to increase 19.6 percent in 2017/18, the region is expected to shift from a net sugar importer (1.5 million tons in 2016/17) to a 1.3-million-ton exporter in 2017/18. Supportive of the EU production increase are the current sugar prices in the region, which currently stand at $450 per ton vs. the world market price of approximately $300 per ton.
Despite the sugar’s seasonal tendency to bottom in April and rally into the year end, raw sugar prices have been in a strong downtrend before bottoming in late June. While the downtrend has been reversed, large traders continue trimming their long exposure and have already accumulated a significant net short position. While the rising ethanol prices in Brazil are supportive of sugar prices, multiple sources maintain a bearish view and expect a supply surplus 2017/18.

There have been no major fundamental changes to coffee outlook in August. Continuing to pressure prices, upbeat Brazilian crop expectations are still among the key narratives for the coffee market this season. Amid a looming supply tightness, Robusta market remains in backwardation for contracts maturing between September 2017 and March 2018. In the meantime, Arabica futures are in a strong contango as expectations for Brazilian crop remain upbeat, causing divergence of the Arabica-Robusta spread following the recent short-term narrowing.
Recent uptrend in coffee futures has been brought to a halt by a bearish USDA WASDE report which sent the coffee futures tumbling. While the correction appears to be over, large traders maintain a small net short position as the market is focusing on the rising Brazilian Real and the weather.