7/26/2017 Morning Comments

Good Morning,


Outside Markets as of 6:20am: Dollar Index up 0.0050% at 94.0900; Euro down 0.107% at 1.16710; S&P’s are up 2.50 at 2476.50; Dow futures are up 21.00 at 21,581.00; 10-yr futures are up 0.04%; Crude Oil is up $0.37 at $48.26; Heating Oil is up $0.0004 at $1.5734; Paris Milling Wheat is up €1.00 at €169.25/MT; Paris Rapeseed is up €1.25 at €360.50/MT; Dalian corn closed down 0.36%, Dalian soybeans finished up 0.03%, Dalian oil closed down 0.07% and Dalian meal finished down 0.70%.

A band of rain on the radar this morning stretching from SC-NE up to W-WI this morning which looks to be bringing with it decent rainfall amounts.  Spots in the WCB have received decent rainfall in the last 24-hours including NC and NE-NE, SE-SD and parts of S-MN to the tune of 0.50-2.50” in the heaviest localized areas.  The area of focus this morning is NW-IA with rain in that area badly needed.  The entire state of IA looks to receive 0.50-2.60” over the next 24-hours, and those rains will also spill into IL to drop another 0.50-1.90”.  Thur/Fri will see rain in S-MO/S-IL/S-IN/S-OH/KY to the tune of 0.50-1.25”.  By Friday, most of the Midwest will be mainly dry through the 7-day period.  Temperatures the next week will be in the upper-80’s to low 90’s for the plains and mainly the low 80’s for areas west of the MO-River.  Cooler but definitely drier on the extended maps for the corn belt.


Meager overnight bounce as commodity traders try to figure out what hit them the last two days.  After a big sell off Friday, more losses Monday with a bit of recovery, followed by sharp overnight gains on crop conditions Monday evening and then a flush yesterday, corn now finds itself having traded to the lowest level since June 30th.  Gaps don’t always get filled, but they usually do, and the ones made this week didn’t take long.  The recent longs in the Ag room have had a rough week as forecasts turned wetter this for IA, and then cooler the next 15-days for the majority of the corn belt.  To the folks hitting the sell button, the weather to come is still more important than the weather received apparently, even if crop conditions continue to suggest yields quite a bit smaller than the USDA.  To be clear, however, the selloff in our opinion has not been all about the weather, but more a realization that weather alone will have a difficult time cleaning up the excessive stocks we are carrying around in several markets.  A 2.4bbu carryout in corn was not created overnight, and it will take much longer than one night to get rid of it.  Despite the impressive volatility in corn and soybeans, the selloff in Minneapolis has been even more impressive as traders realize the issue with the HRS balance sheet will not come until Q4-2017/Q1-2018.  The Wheat Quality Council Tour concluded their first leg yesterday which is discussed below.

First data from yesterday which included deliverable stocks of HRS.  Stocks in Duluth/MPLS grew a combined 923,000 bushels last week with stocks now at 20.204mbu vs. 23.14mbu a year ago.  Stocks have now risen in three of the last four weeks by a net  2.417mbu, setting their seasonal trough about a month earlier than normal thanks to the heavy movement of producer wheat during June on the rally.  This is one more reason the rally in Minneapolis has hit the skids as rallying futures prices are not usually tied to rising deliverable supplies.  Deliverable supplies are the supplies of last resort, and the stocks commercials know they can usually get their hands on.  This compared with buying wheat from producers or elevators which is subject to a host of factors like the calendar, income, work load, etc.  Deliverable stocks were trending tighter before the rally in May, but the cushion is being rebuilt swiftly.  The rise in deliverable stocks fits perfectly with softening spreads and basis, with the former slipping to -9.75c overnight, the lowest since May 9th and compared with the +35.00c inverse at the June highs.  Spot floor basis was softer again yesterday with 14.0-15.0% protein down 10-25c.  Spot 14’s are now bid +65/120U vs. +80/115U a week ago.  All three combined certainly point to the HRS balance sheet issue, which is still a very real and bullish problem, being down the road.

That provides a good segue to Day 1 of the HRS tour which according to Ag media found better wheat than expected.  Two things about the expectations: 1) No one has ever said there was an issue in E-ND or much of the eastern half ND for that matter which was where many of the routes started and traversed yesterday.  2) A lot of SW-ND, NW-ND, NW-SD, NC-SD and E-MT are not surveyed at all or particularly under surveyed which is where the drought and wheat conditions are the worst.  Having said that, Day 1 found an average HRS yield of 37.9bpa vs. 43.1bpa a year ago on the same route and compares with the 5-yr average of 45.7bpa.  Crops obviously deteriorated as groups went west, and the group that did get into SW-ND estimated as much as 40% abandonment for fields in that region based on wheat in a bale.  Would still expect a tour average yield to come in a bit higher than the market is currently trading based on surveying bias toward the eastern half of the state.  Harvest is advancing quickly in NC-SD with reports all over the board.  Some producers are finding protein content higher than yield while other are finding wheat around half their APH.  Highly variable to say the least.

Worth a quick look at the current corn balance sheet to help understand why the corn market is struggling to the degree it is despite yields estimated smaller than a year ago.  As it stands today, and based off the USDA’s latest S&D from earlier this month, we are going to carryout 2.367bbu of corn on August 31st.  This combined with the current yield and demand assumptions for 17/18 will see carryout of 2.325bbu.  The market is probably trading a yield of around 165-166bpa, or at least that is the sentiment in the trade.  With a 165bpa national average yield, carryout drops to 1.848bbu with a stocks/use ratio of 12.88% which is to say nothing about the USDA’s demand estimates.  Outside of last year this would still be the largest carryout since 2005/06 and the highest stocks/use ratio since 2009/10.  Now it becomes a bit more clear why the trade is struggling with $4.00+ futures.  Many in the trade think the yield is lower than 165-166, with one respected analyst in our opinion issuing a 162.6bpa yield yesterday.  With that yield, carryout would drop to 1.648bbu with a stocks/use ratio of 11.49%.  This yield, in our opinion, would support $4.00+ futures for an extended period of time provided demand can hold up.  Unfortunately, as we’ve been discussing for a couple of weeks, with the high degree of variability, a true handle on yield isn’t likely to be gained until combines roll in October.  One thing is for certain, the trade must believe yield is sub-165 to stem a price slide toward $3.70-3.75.


Bottom Line: Insert any market cliché about bullish markets needing to be fed every day, or bear markets after July 4th, etc.  Point is the trade married themselves to weather model changes which have been as erratic as any in recent memory.  The corn belt is incredibly variable this year, making good spots great and bad spots terrible, adding to the uncertainty.  We have solid old crop supplies to help buffer against a shortfall and the market needs to feel like those supplies are in jeopardy.  Today they do not.


Good Luck Today.

Tregg Cronin

Market Analyst






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