11/20/2014 Morning Comments

Good Morning,


Outside Markets as of 6:15am: Dollar Index up 0.0680 at 87.7130; Euro down 0.00100 at 1.25370; S&P’s are down 8.75 at 2038.50; Dow futures are down 64.00 at 17,595.00; 10-yr futures are up 0.19%; The Nikkei closed up 0.07% at 17,300.86; The DAX is down 0.85% at 9,392.10; The IBEX-35 is down 2.06% at 10,162.00; Gold is down $0.20 at $1193.70; Copper is down $2.70 at $300.55; Crude Oil is up $0.29 at $74.78; Heating Oil is up $0.0098 at $2.3510; Paris Milling Wheat is up €0.75 at €173.25/MT.

Equity markets are mostly weaker this morning after shaky economic data in China and Europe overnight.  Manufacturing activity in China fell to a six-month low in November according to HSBC’s factory survey.  This comes after an official report showed property prices softened in October in all but one of 70 cities across China, falling 2.6% overall.  In Europe, a purchasing manager’s index for factories and services activit dropped to the lowest level in 16-months in November. The Japanese Yen slipped to a new 7-year low overnight of 118.189 amid speculation Prime Minister Shinzo Abe will win re-elections and extend his economic-stimulus program.  In the US, unemployment claims are expected to show a 6,000 claim decline to 284,000, reversing part of last week’s 12,000 claim increase.  The October CPI is expected to edge lower to +1.6% y/y from September’s +1.7% gain.

Another dry start in the Midwest today, although more snow is slated for Buffalo, NY which can’t handle a flake more.  Precip starts in the southern plains tomorrow and Saturday, bringing fairly heavy totals to E-TX/SE-OK/LA/AR/MS in the 0.75-1.90” range.  Late in the weekend and early next week the system will push north and east, impacting the central/east corn belt as well as the Great Lakes region. This is likely to delay harvest efforts in WI and MI, the two states with the greatest amount of corn left to harvest.  As of Monday, WI still had 36% of its corn left to pick, and MI had 41% still in the field.  Cool temps roll back into the Midwest during the 6-10 day with below to much below normal temps for almost the entire Continental US.  Precip is expected to remain normal to below.  The 8-14 day is a carbon copy of the 6-10, so cold, dry weather for the next 15-days it looks like.


A tepid bounce in the Ag markets this morning following the drubbing witnessed yesterday in our space.  While everything was down hard, the focus was certainly on soybeans and meal as the first cracks in the bullet-proof meal story started to show.  Domestic basis levels at some locations in the ECB finally started to ease from their record levels, and train performance according to the STB actually improved in the east.  COT data has been reflecting farmer selling in both corn and soybeans, and it appears the counter-seasonal rally worked to shake loose enough stem.  It was a matter of getting it where it needed to go.  Weather continues to improve for Brazil as well, which will stem any further drop in production estimates, even if Argentina has their own issues.  Weekly ethanol production was a boost for corn, but weak longs are being tested in the managed money community.

According to cash sources, US domestic truck meal basis is down $2-6/ton vs. a week ago, while ECB rail values are now said to be down around $20-35/ton depending on location.  CIF-NOLA meal premiums were said to be unchanged around +80Z, but this has always been a domestic issue.  Add in the fact Columbus rail corn basis continues to appreciate to around -3Z vs. -30Z LH-Oct, and it speaks further to the improvement in rail with meal/soybean priority.  According to the STB’s weekly update, the CSX railroad saw average grain train speed improve to 17.7mph and average dwell times drop to 22.1 hours vs. 16.6mph and 39.5 hours the week before, respectively.  The Norfolk Southern watched grain train speed improve to 18.1mph and dwell times drop to 51.46 hours compared with 16.3mph and 67.15 hours the week previous.  Couple the aforementioned with calendar spreads which have been breaking lower for 10 sessions, and it becomes apparent the worst of the meal squeeze is over.  So now the question becomes how much premium should be extracted from our markets?  Jan soybeans look ready to defend the $10.00 area, and Dec meal he $365 area, but one must remember the large short positions commercials have built up the last several weeks.  It will most likely come down to who has more resolve: funds or commercials?  I never like betting against the people who actually use the stuff.

One more note before leaving the soy complex, both Jan soybeans and Dec meal have potential Head and Shoulders patterns forming, which could be warning of lower prices.  Yesterday and today’s lows look as though they are forming the right side of the neckline, awaiting a corrective pop to form the right shoulder.  Should this pattern unfold perfectly, which they never do, a rebound to the $10.40-10.50 area would be an optimal selling objective before prices broke through the neckline.  Using a measurement from the head down to the neck line and projecting that lower forms a downside target around $9.20, or the Sep/Oct lows.  An almost identical pattern is forming on December and March corn, so any sort of corrective rebound will need to be met with extreme caution.  Volume and momentum will be the key tools to watch.  At current, both On-Balance-Volume and Stochastics are forming bearish divergences which would be confirmed with a break of the left shoulder area around $3.60 December corn and $10.00 in Jan beans.

As mentioned above, ethanol production jumped sharply during the last week, and is worth revisiting here.  Weekly production surged 24,000bbls/day to 970,000bbls/day, the second highest tally on record, and sharply above the 898,000bbls/day needed to meet the USDA’s marketing year objective.  Ethanol production at these sort of levels clearly suggests the USDA’s marketing year target is too low, but more time is probably needed to assess an increase.  Despite the jump in production, stocks levels actually declined to 17.335 million barrels, near the lowest levels since March.  Helping stocks decline was a jump in gasoline demand to an 11-week high, which is undoubtedly due to the drop in RBOB price.  Ethanol prices corrected sharply yesterday, but are positive on the day so far.  The contraction in the RBOB/Ethanol spread remains a concern for discretionary ethanol demand, but so far it is not impacting ethanol production.  Margins remain solid, and ethanol plants continue to lead the charge in corn origination.  Keeping tabs on the aforementioned spreads and margins will be important.

Export sales are due this morning and will be watched closely for any additional meal cancellations or switches.  In addition, the torrid pace of soybean exports and sales will be monitored.  Export basis has been less than impressive for all commodities during the last 7-10 days, so corn and wheat exports are likely to continue disappointing until world buyers re-emerge at lower prices.  Corn and wheat don’t have the export program to defend current price levels, and CIF-NOLA premiums suggest the river is over-supplied with soybeans at the moment.  Nothing bullish spreads about the aforementioned.


Bottom Line:  A pop today won’t hurt, but export data this morning is likely to confirm the slowdown in interest for US grains.  The rally shook a lot of bushels loose from the farm which are now in position.  While the next round of bushels may be difficult to buy now that they’re locked in the bin, the market feels fairly well supplied at current.  Funds have built up some shaky long positions, while commercials are sitting on a pile of shorts.  Charts already look weak, and won’t take much of a shove to send them sharply lower.  Option protection might be a good play here.


Good Luck Today.

Tregg Cronin

Market Analyst






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