5/8/2014 Morning Comments

Good Morning,


Outside Markets as of 5:50am: Dollar Index down 0.1130 at 79.0890; Euro is up 0.00250 at 1.39400; S&P’s are up 0.25 at 1874.50; Dow futures are up 19.00 at 16,487.00; 10-yr futures are down 0.04%; The Nikkei closed up 0.93%; The DAX is up 0.44% at 9,563.21; The IBEX-35 is up 0.76% at 10,493.30; The Russian MICEX is down 0.42% at 1,357.74; Gold is up $3.00 at $1291.90; Copper is up $0.40 at $303.65; Crude Oil is down $0.41 at $100.38; Heating Oil is down $0.0131 at $2.9144; Paris Milling Wheat is off €0.75 at €206.50.

Global equities are mostly better this morning after improved Chinese trade data, and comments from Fed Chair Yellen suggested low interest rates will continue until the US job market is healthy.  China’s exports in April rose 0.9% from the previous year following a 6.6% decline in March, and imports grew slightly after a contraction in March.  Russian President Putin is also on the tape this morning with a slightly softer tone on the confrontation with the West, something stocks were taking at least brief solace in.  Putin has endorsed plans for fresh elections in Ukraine, and called on pro-Russian militans in eastern Ukraine to delay referendums on autonomy.  In the US today, unemployment claims are expected to decline 19,000 to 325,000, just offsetting last week’s 14,000 claim jump.

A busy radar this morning with systems strung out across the southern plains, western corn belt and Great Lakes.  Portions of central-TX and SW-OK saw some decent rains in the last 24 hours with heaviest totals measuring an inch near OKC and just west of Abilene, TX.  Otherwise fieldwork is expected to be impacted across SD/ND/MN/NE today with more disruptions occurring in IA/WI/IL/MO as the storm tracks East later today and into tonight.  Precip totals for the next 3-days will be heaviest in MO/IL where as much as 2.90” could fall (MO).  The entire corn belt should be impacted at some point the next 7-days, although dry areas of SW-KS/Panhandle-OK/N-TX look to receive little to no moisture.  The Eastern halves of OK/KS/TX should see solid moisture prospects.  NOAA extended maps remain the same: below normal temps for the entire Midwest, but below normal precip as well.


Mixed bag overnight with grains softer and the soy complex firmer after slightly better than expected rains in the southern plains as well as stronger than expected Chinese import data for the month of April.  The totals which fell yesterday and overnight in OK/TX were seen as better than estimates, and should help at least some of the withering HRW crop.  Chinese customs data for April showed soybean imports up 40.7% y/y to 6.5MMT, and Jan-Apr imports were up 41.2%.  This is obviously due to Brazilian imports getting off to a stronger start than last year with fewer transportation issues, but the strong imports are also the reason for the cancellations/defaults as Chinese stocks at ports remain oversupplied.  Nonetheless, soybeans which are already in the country won’t be canceled or sent back, so the data is supportive in-and-of-itself.  Corn was quiet, awaiting fresh data today and tomorrow.

On the basis front, corn continues to trade very heavy at destination rail markets.  PNW corn shuttles slipped further yesterday with nearby and June bids now sitting around +88/90N vs +95/98N a week ago.  This weakness, caused by free-falling rail freight prices, is now weighing on other rail markets like Hereford, TX and California as their remains too much corn in the upper-Midwest if there is no west coast program.  Some perspective is necessary, however, as over the last 30-days, PNW corn shuttle bids have dropped from around +122K to +88N (+94K), or around 34c.  Yet rail freight has dropped from around $2200/car a month ago to tariff this week, or the equivalent of around 55c/bu.  So in effect, basis should have appreciated roughly 20c based on where elevators can sell corn and buy freight today.  The problem arises from elevators not knowing where they could buy freight the last 30-days, and the rail market dropping faster than anyone could adjust their positions.  The system is trying to get cleared of distressed shuttles on the market right now, but once it does, some basis strength could be seen.  PNW is still the cheapest source of corn for Asian importers.  CIF bids largely steady w/w at +58K.

Switching gears to wheat, there was a Reuters article yesterday talking about the jump in open interest in Chicago wheat puts off the July options.  Below I’ve posted a chart which shows the July Chicago Wheat $7.00 puts (Black and Green) vs. July wheat futures (Red and Green) with open interest for the $7.00 strike in the bottom pane.  As one will notice as price continued to rise on futures, and the price of the puts continued to drop, open interest climbed dramatically, going from 1,875 on April 7th to 7,057 this morning, an increase of 376%.  Similar increases were witnessed by the $6.90 strike.  In addition, the put/call ratio for July has gone from 134.80% a month ago to 145.80% last night.  This pessimism seen in the options market suggests doubts about the rally continuing dramatically higher.  As noted earlier this week, Commercial longs are at the lowest level since December 6th, 2011.

There were an additional 23 HRW deliveries by ADM last night in Hutchinson, KS bringing the MTD total to 173.  Corn saw 16 deliveries last night, but none by house accounts.

WASDE Discussion

Tomorrow will see the May WASDE released with old crop balance sheets updated and the first look at the 14/15 marketing year.  Corn will, and should, receive the most attention.  On the old crop portion of the balance sheet with the average trade guess looking for carryout to come in around 1.314bbu vs 1.331bbu last month.  I think carryout could drop further than the average trade guess as exports will see a bump higher of 25-50mbu, and it wouldn’t be unreasonable to see higher ethanol, although the USDA may choose to wait another month based on status quo production data recently.  Export sales have averaged 39mbu over the last 3-months, and 27mbu over the last 4-weeks.  We only need to average 5mbu the rest of the marketing year to hit the USDA’s current 1.750bbu estimate.  Exports during May-Aug the last 10-years have averaged 23mbu.  An increase looks likely.  With strong margins and the driving season right around the corn, ethanol production could see a further seasonal advance in coming weeks.  Feed and Residual should hold steady.  On the new crop balance sheet, the USDA’s February Outlook yield of 165.3bpa looks high considering the slightly delayed start and the difficulty of hitting record yields at any point the last 5-years.  If one adjusts yield lower by 1-2bpa, and bumps demand slightly, we’re already staring at near a 10% stocks/use ratio for 14/15, on-par with 13/14.  Hard to see corn price breaking under this scenario until June/July weather is upon us.

The old crop soybean balance sheet should see a further increase in exports based on recent shipments, so a 10-15mbu jump there wouldn’t be unexpected.  The USDA will have a difficult time bumping crush as well considering imports will have to be raised to cover the increased exports, and it seems a bit too early in the marketing year for them to resort to a negative residual.  Imports through March have totaled 23mbu, but will obviously pick up with the Brazilian program underway.  All told, old crop soybeans could see carryout hold steady to drop 5-10mbu.  On the new crop side, the USDA will increase acres from their Feb outlook number to 81 million to relect the March Plantings report.  If they hold their February yield at 45.2mbu, supplies jump notably.  Here again, 45.2bpa, a new record, looks high considering the previous record yield of 44.0bpa in 2009/10 and the fact no year since 2009 has been over 44.0bpa let alone 45.2.  In addition, record acreage will rely on fringe acres which won’t have the yield potential as those in IA/IL/IN.

Wheat changes on the old crop balance sheet will be minimal.  On the new crop balance sheet, the focus will obviously be on the USDA’s first assessment of the winter wheat production.  The issue is whether they will take a measured approach to reducing the crop or slash it to a Wheat Quality Council Tour type number?  As much focus should be on the harvested acreage percentage as this can sway production nearly as much as yield from estimates.  It should be noted, the USDA has tended to come in above trade estimates as of late with production higher than the average trade guess in 4 of the last 5 years and in 7 of the last 9.  Over the last 9-years the average trade miss has been around 38mbu.  It should be noted, and the USDA is likely to reflect this, the world production is ample and growing.


Bottom Line: Markets should remain in ranges today as we await updated balance sheets tomorrow.  The highs and lows are likely in for the week, although export sales will obviously be a focus this morning.  Corn basis remains weak, as does wheat, despite the strong futures performance.  Continue monitoring cash markets as a signal for underlying demand.  Managed Money is comfortable in grains right now, but the May report can be high-risk.


Good Luck Today.


July CGO Wheat options 5-8



Tregg Cronin

Market Analyst






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