7/13/217 Morning Comments

Good Morning,


Outside Markets as of 5:45am: Dollar Index down 0.0003% at 95.7560; Euro down 0.310% at 1.14185; Aussie Dollar up 0.690% at 0.77290; S&P’s are up 4.00 at 2444.00; Dow futures are up 18.00 at 21,501.00; 10-yr futures are up 0.11%; Crude Oil is down $0.28 at $45.20; Heating Oil is down $0.0117 at $1.4620; Paris Milling Wheat is down €3.25 at €176.25/MT; Paris Rapeseed is down €6.00 at €368.75/MT; Dalian corn closed down 0.83%, Dalian soybeans finished down 0.23%, Dalian soy oil closed down 0.65% and Dalian meal settled down 1.51%.

China released June import/export data last night with both stronger than expectations as imports rose 17.2% y/y vs. expectations for a 12.4% gain while exports rose 11.3% vs. expectations for a 9.0% gain.  This left China with a $42.77 billion trade surplus for the month of June, higher than the $42.44 billion estimate by analysts.  The Chinese Yuan is trading around $6.7842 this morning, just off the strongest levels since last October.

Rains on the radar again this morning which look to be dropping decent totals in E-NE/S-IA/N-MO and just making their way into W-IL.  Separately, there is also a system dropping moisture in OH and SE-MI.  Heavy rain has already fallen in N-MO with totals there based on radar showing returns of 1.0-6.0”.  After the current systems finish up, the Midwest will be mainly dry until mid-week next week when MN/WI look to see the best chances of rain.  Totals of 0.50-2.50” look possible for a large portion of those two states, keeping them well watered.  Still nothing meaningful in the way of precip for the Dakotas/MT in the next 7-days.  Extended maps show above normal temps in the 6-10 for much of the Midwest, while temps moderate slightly for the 8-14.  Precip is mainly below normal for the corn belt during that time frame, although the Northern Plains look to break from the below side at least briefly.


Broadly weaker markets overnight led by wheat which has the most traded contracts down 2.00-2.25% while soybeans are down 1.7-1.9% and corn is trading down over 1.0%.    The combination of unexpected rains in the western reaches of the corn belt this week along with a lack of bullish surprise in yesterday’s USDA reports seem to be combining to give the Ag markets a one-two punch.  In somewhat discouraging fashion, December corn is now trading at $3.95, well off from the highs of $4.1725 set just two sessions ago.  Similarly, soybeans have given back about 33c and Chicago wheat is off just shy of 50c.  It doesn’t seem to matter whether prices are up or down, open interest keeps rising in most of our Ag markets.  Yesterday on the selloff, Chicago wheat open interest was up 2,785 contracts and corn was up 20,497 contracts.  KC wheat was down 506 contracts, while soybeans were down 6,952.

The focus yesterday was squarely on production forecasts which saw corn come in 190mbu larger than last month due solely to a rise in harvested acreage while yield was left unchanged at 170.7bpa.  Many in the trade were expecting a cut to the national average corn yield, but this was unlikely given USDA’s history on the July WASDE, but also because conditions were close enough to average as a whole to punt this month and wait until after pollination has occurred.  In general, it feels as though the trade is using something in the neighborhood of 165-167bpa as it stands today.  A yield in that area would cut 310-477mbu off of the supply side of the balance sheet.  Unfortunately, yield wasn’t the only negative yesterday as 16/17 feed/residual was cut 75mbu which went straight to the bottom line.  Many quickly pointed out that might not be a large enough cut to feed demand, but nothing will be changed there until the October WASDE.  On new crop, USDA raised feed/residual 50mbu which offset some of the production increase and left 17/18 ending stocks at 2.325bbu vs. 2.110bbu.  The USDA cut the average farm price 10c/bu from $3.00-3.80 last month to $2.90-3.70 this month.  Global changes included Argentina being raised 1MMT to 41MMT which along with the aforementioned changes left 16/17 global ending stocks at 227.5MMT vs. 224.6MMT last month.  17/18 ending stocks are seen at 200.8MMT vs. 194.3MMT last month with weather the sole focus moving forward until scouts hit the fields in August.

The soybean market was given some supportive inputs, but they were easily masked by the negative money flow elsewhere.  In the 16/17 balance sheet, crush was cut 10mbu to 1.900bbu but exports were increased 50mbu to 2.100bbu which left ending stocks down 40mbu to 410mbu.  For 17/18, harvested acreage was increased slightly, but all demand side estimates were left unchanged to put ending stocks at 460mbu vs. 495mbu last month.  No is steadfast in their soybean yield estimate at the moment, nor should they be considering it is July 13th.  The USDA at 48.0bpa is just fine with most analysts, but the encouraging thing is the continued gain in exports year after year without fail.  This was confirmed in the global numbers as Chinese soy imports for 16/17 were increased 2MMT to 91.0MMT and 17/18 imports were increased 1MMT to 94MMT.  South American estimates were left unchanged for both marketing years, although ending stocks for 17/18 did increase slightly to 93.5MMT from 92.2MMT last month.  Funds most likely got net long at the tail end of last week of the beginning of this week and will now have to defend that position given the price rally.  Still plenty of time for the soybean crop to get larger or smaller, but the stronger demand is encouraging.

Besides corn production, the big focus was wheat production and specifically hard red spring production.  All wheat production came in at 1.760bbu vs. the average trade estimate of 1.751bbu and last month’s 1.824bbu.  Winter wheat production rose 29mbu from last month due to a 15mbu rise in HRW, 8mbu in SRW and 7mbu in SWW.  Other spring wheat production was shown at 423mbu vs. the average trade guess at 414mbu with hard red spring implied at 385mbu.  This is a bit larger than most in the trade have probably been using as 350-375mbu is a bit closer in our opinion.  Durum production was indicated at 57mbu vs. the average trade guess of 76mbu and 104mbu last year.  The reason most think HRS will fall further is the lack of change to harvested acreage in either ND or MT with both expected to see much larger than normal abandonment.  Other changes for wheat include a cut to 16/17 feed/residual use of 42mbu thanks to larger June 1 stocks.  Exports were also raised 20mbu which concluded a solid 16/17 campaign.  Ending stocks rose 23mbu to 1.184bbu.  On the new crop side, feed/residual dropped 20mbu and exports were cut 25mbu to inch ending stocks up 14mbu from last month to 938mbu.  Believe most in the trade were using something around 875mbu for a carryout before today’s numbers.  Not a great deal of change on the world front although USDA did cut Australia to 23.5MMT from 25.0MMT last month due to dry weather.  The EU was also cut 0.8MMT while FSU-12 was increased 2.2MMT.  World ending stocks of wheat declined from last month’s 261.2MMT to this month’s 260.6MMT.

Spring wheat has held together since the data better than anything else for obvious reasons, but a closer look at the by-class balance sheet leads on to believe inter-market relationships have a good deal further to go.  Using the USDA data, hard red spring ending stocks as a percentage of hard red winter stocks look to finish 17/18 at 27.23% which would be the lowest on record going back to 1984/85.  This compares with the previous record low from last year at 39.65% and the low in 2007/08 at 49.44%.  Soft red stocks as a percentage of hard red spring stocks looks to finish next year at 193.44% which blows away the previous record of 122.52% in 2011/12.  Looked at a different way, hard red spring stocks as a percentage of all wheat stocks is currently pegged at just 12.99% vs. the previous record low of 19.84% set last year.  In 07/08 that ratio was 22.2%.  These ratios of course could get tighter still if production estimates slip further, or demand can’t rationed at current price levels.  There would appear to be plenty of ammunition left for spring wheat whether on a flat price or inter-market basis.

Weekly ethanol production was also released before the USDA data which showed production slipping 7,000bbls/day to 1.007 million bbls/day.  This is still 4-5% below the level needed to hit the USDA’s affirmed 5.450bbu corn for ethanol demand estimate.  Stocks dropped by a sizable 390,000bbls to 21.181 million bbls.


Bottom Line: Managed funds covered most of their short position over the last two weeks and ran into a bit better precip this week than was originally forecast as well as the USDA providing no call to action just yet.  To be clear, weather has been far less than ideal, especially in the Dakotas and the ECB early.  The national average corn yield is most likely smaller than the 170.7 the USDA is using, but we won’t get an update until the August WASDE.  Until then we have to trade weather forecasts, cheaper South American maize offerings and a large spec who needs to choose which position he wants to hold.


Good Luck Today.

Tregg Cronin

Market Analyst






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