8/2/2017 Morning Comments

Good Morning,


Outside Markets as of 5:55am: Dollar Index down 0.082% at 92.9580; Euro up 0.245% at 1.18605; Russian Ruble down 0.821% at 61.2932; S&P’s are up 1.75 at 2474.00; Dow futures are up 40.00 at 21,944.00; 10-yr futures are down 0.11%; Crude Oil is up $0.06 at $49.22; Heating Oil is up $0.0087 at $1.6500; Paris Milling Wheat is down €0.50 at €165.50/MT; Paris Rapeseed is up €0.75 at €367.00/MT; Dalian corn settled down 0.24%, Dalian beans closed down 0.60%, Dalian soy oil finished down 0.88% and Dalian meal closed down 0.81%.

Showers in western ND/SD/NE this morning along with more rain in C-TX, but most of the Midwest is fairly quiet this morning.  Shower activity is expected to pick up in the Dakotas today with the entire state of ND receiving 0.50-1.25” with localized areas in the RR Valley seeing upwards of 2.00”.  SD is also expected to see a broad 0.50” with totals pushing into MN.  Another round of showers is expected for SD over the weekend with totals of 0.10-0.50” forecast this morning.  Late in the weekend and early next week shower activity is expected to pick up in the southern plains with solid totals expected for OK/TX to the tune of 3.00-4.00”.  There are rain chances for the central corn belt in the next 7-days, but not as widespread or as heavy as the Plains.  Two week percent of normal deficits continue to increase for SC-IA and NC-MO.  Extended maps maintain below normal temps and above normal precip.


A little bit of recovery today led by soybeans after the flogging they received yesterday on forecasts turning cooler and wetter, the surprise increase in national condition ratings and a negative August seasonal for soybean futures to boot.  While the entire growing season is important for achieving maximum potential, there is no denying that the last week of July through the last week of August is arguably the most important period of weather for a soybean plant.  The shift to cooler temperatures and more rain for every growing state from ND to OH cannot be denied, and certainly seems to have taken some of the low-ball yield estimates off the table.  Too early to put a trend line yield into the balance sheet with pen, but August is certainly shaping up better than July for the majority of the corn belt.  Wheat has been a bit more resilient after its futures selloff, thanks in large part to the newfound competitiveness of winter wheat into major import destinations.  Also, the selloff has taken new crop winter wheat prices back down to levels which don’t guarantee acreage increases this fall.  Corn has the benefit of yield uncertainty, but FOB prices are a major pressure point vs. SAM.

First the data of the day with deliverable stocks released yesterday morning.  Combined HRS stocks in Duluth/Minneapolis rose by 404,000 bushels last week to 20.608mbu, the third straight week of stock builds and the fourth out of the last five.  These stock levels would compare with 25.485mbu a year ago, and also sit well under levels from 2015.  Still, the pickup in movement ahead of harvest by the farmer has been felt in basis and spreads, causing cash prices to the farmer to fall considerably.  At current prices, it would appear the farmer will go home to his ample storage before selling any bushels off the combine, setting up what should be a period of basis strength Sept-Dec.  Chicago wheat stocks rose by 1.334mbu from last week to 95.854mbu and compare with 84.135mbu a year ago.  HRW stocks in Chicago sit at 4.678mbu vs. 2.885mbu a year ago and remain a threat to Chicago wheat calendar spreads if they get redelivered against a long who doesn’t have a need for HRW in St. Louis or Chicago.  Non-deliverable grades at 7.953mbu remain well below a year ago at 14.084mbu with reports of solid quality this year.  HRW stocks rose 1.355mbu to 124.784mbu vs. 111.380mbu a year ago.  Non-deliverable grades are about 900,000 bushels above a year ago, but nothing close to the level implied earlier in harvest.  Commercial hedged inventories are huge as everyone sits back and picks up the carry.  HRW basis should get firm later this year as well as bushels need to be pried loose from the elevator and farmer.

As noted above, US-FOB corn prices are getting beat up nearby and through December by our South American counterparts which has many analysts eager to trim exports further.  Spot offers at the Gulf yesterday were $157.28/MT FOB vs. no offer from Argentina but $152.55/MT from Brazil.  Argentina’s first offer was indicated for October at $152.16/MT FOB which compares with $163.18/MT for US-Gulf and $158.06/MT FOB for Brazil.  Even out to December, the US is carrying a premium at $167.51/MT vs. $154.13/MT for Argy and $158.06/MT for Brazil.  It is not difficult to see why new crop corn export sales commitments are running so far behind last year at 157.5mbu vs. 281.8mbu a year ago.  In addition, not difficult to explain the spread weakness with CU/CZ trading out to -14.00c this week, a new contract low.  CZ/CH is also sitting at new contract lows of -12.00c.  Contrast this with soybeans which were offered at the Gulf yesterday at $377.27/MT FOB for September vs. Brazil at $384.45MT/FOB and no indications for Argentina.  Even still, new crop soybean commitments remain well behind last year at 221.4mbu vs. 361.0mbu a year ago.  New crop soybean spreads remain weak as production prospects stabilize and/or increase.  New crop commitments for both corn and soy remain a concern, although for this analyst, corn is more of a concern than soybeans at the moment.

The second chart below shows the gross commercial short position in KC wheat as a percentage of total open interest which is another way of looking at producer/elevator selling and hedging.  As one will quickly notice, the amount of selling/hedging during June and early July shot 2017 way past each of the last four years and right below 2012.  While 2012 is still higher as a percentage of total open interest, 2017 has about 65,000 more contracts than 2012 thanks to the larger market size.  This surge is selling was completely consistent with the amount of selling off the combine which was reported from the southern plains and Nebraska.  Farmers with bushels rewarded the rally in a big way, and elevators socked those bushels away to earn the profitable carries available.  KWU/KWZ traded to a new contract low of -27.75c yesterday, a new contract low and 89.1% of full financial carry (LIBOR +200bp).  When one considers a farmer or elevator can earn 60c/bu sitting on wheat from now until May, there isn’t much risk in keeping the wheat hedged and waiting for basis appreciation.  As noted above, this should promote basis strength as US wheat offers are now competitive and bushels will be hard to buy outside of those who need to make room for fall harvest.

Commercial giant Bunge reported second quarter earnings this morning which missed estimates rather badly.  Earnings were reported at $0.17 in Q2 compared with $0.79 during the same period a year ago.  Net income attributable to shareholders fell 33% to $81 million.  Bunge cited “weak global margins and slower than expected farmer selling in South America led to a challenging environment in agribusiness.”  Bunge also said it expected the agribusiness unit to deliver earnings before interest of $550-650 million in 2017 which had been as high as $800-925 million before the profit warning last month.


Bottom Line: The selloff yesterday in the soy complex seemed a bit overdone considering we still have an entire month of weather to watch, and US FOB offers are competitive with SAM during a time in which they shouldn’t be.  Brazilian farmer selling has slowed appreciably as evidenced by the weaker Bunge earnings.  Wheat looks stout here after the correction considering farm gate selling has slowed, Northern Plains selling off the combine should be minimal, Canadian crop prospects are still getting smaller and US wheat is competitive against Europe.  Corn needs more verification from USDA.


Good Luck Today.


Tregg Cronin

Market Analyst






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