8/4/2017 Morning Comments

Good Morning,


Outside Markets as of 6:10am: Dollar Index up 0.002% at 92.7920; Euro down 0.004% at 1.18935; S&P’s are up 2.25 at 2474.00; Dow futures are up 45.00 at 22,019.00; 10-yr futures are down 0.05%; Crude Oil is down $0.19 at $48.85; Heating Oil is down $0.0024 at $1.6365; Paris Milling Wheat is up €0.75 at €164.25/MT; Paris Rapeseed is down €0.25 at €365.75/MT; Dalian corn closed up 0.36%, Dalian soybeans finished down 0.05%, Dalian oil closed down 1.08% and Dalian meal finished down 0.57%.

Later this morning will see the release of the July non-farm payroll report which is expected to show job growth of +180,000 which would match the 6-month average but be down from June’s 222,000.  The unemployment rate is expected to fall by -0.1 point to 4.3% which would put it exactly at the Federal Reserve target for later this year and on-pace for the 4.2% in 2018-19.  The market is also expecting July hourly earnings to ease to +2.4% y/y from June’s +2.5%.  Unlikely today’s unemployment rate on its own would be enough for the Fed to alter monetary policy at next month’s meeting, with odds for a rate hike at the next FOMC meeting in September at just 12%.  Odds increase to 34% for the Oct/Nov meeting and are up to 50% for the December meeting.

Light showers in the ECB and patchy rain in OK, otherwise the Midwest is mainly quiet.  The Plains will be fairly active this weekend with multiple rain chances for the Dakotas and eastern portions of the southern plains.  After a fairly wet week, parts of North and South Dakota could pick up another 0.25-1.00” by Sunday.  Rains will also be heavy in E-KS/MO/OK/AR and the southern parts of IL/IN/OH.  Totals in the heaviest locales could be as high as 1.25-3.00”.  Iowa finally sees a decent rain chance next Wednesday/Thursday, but the forecast is only calling for 0.10-0.25” on fairly light coverage.  SC-IA is running a severe moisture deficit over the last 30-60 days and crops are likely going to deteriorate further.  Well below temps remain the norm through the 14-day outlook, while precip is mainly normal/above outside of the Northern Plains.


Light gains this morning as markets limp to the finish line after a particularly bruising week in wheat and soybeans.  For the week, Chicago wheat is down 21.50c, soybeans are down 51.25c and corn is off 8.0c as the forecast shift to cooler and wetter seemed to set production worries aside.  Open interest has risen in wheat and corn, but remained relatively flat in soybeans which is a bit of a head scratcher.  One would think the remaining fund liquidation in soybeans would have witnessed a drop in open interest, or if funds were adding short positions and increase.  Flat open interest suggests a change in ownership which could be commercials buying soybeans from the funds, a development which wouldn’t be all that bearish given current price levels.  Would appear funds are rebuilding short positions in corn and wheat which could be partially revealed on this afternoon’s COT report.  Corn has been unwilling to press to the downside, and likely won’t until next week’s WASDE report is released.  Bloomberg released their average survey results yesterday and are looking for a national average yield of 165.9bpa vs. 170.7bpa last month while soybeans are seen at 47.4bpa vs. 48.0bpa last month.

While much of the focus in wheat has been fresh contract lows in calendar spreads on a daily basis and the soft cash markets for most of July.  In the process, however, US-HRW has closed the gap with many of its key competitors into destinations like Morocco, Algeria and Saudi Arabia.  Earlier this year, most analysts were busy stripping North African demand out of the US export grids, but that may have been a bit hasty based on current relationships.  Using the MATIF/KW spread as a proxy, the spread is currently trading $31.59/MT premium MATIF which would compare with $3.67/MT premium MATIF in early July and the 200-day moving average at $22.25/MT.  To be clear, this spread doesn’t spend a great deal of time above $30.00/MT, but the concern over continued rainfall in Germany and other Baltic states impacting production and quality is definitely manifesting itself in these price spreads.  Informa Economics released their latest World Production estimates yesterday and took another 1MMT off of all-wheat production in the EU to 147MMT which compares with the USDA at 150MMT.  Without changing demand, ending stocks slip to 6.578MMT which would be the tightest on record.

In looking at the current corn and soybean balance sheets with USDA demand, some interesting observations are gleaned.  Current old crop carryout is 413mbu, which has the potential to change next week given the possibility of higher exports and slightly lower crush.  Acres will be left unchanged for 17/18, so applying a yield of 47.4bpa yields production of 4.204bbu.  USDA is currently using 1.950bbu for crush and 2.150bbu for exports, neither of which have much reason to change at this point although new crop soybean exports are running woefully behind the same point a year ago.  This is a situation which will need to be monitored closely.  Keeping all else unchanged, we get a carryout of 407mbu which would be down 6mbu from last year and just 7mbu above the psychologically important 400mbu threshold.  The fact we are already staring at a sub-400 carryout in August when the USDA has a striking history of overestimating carryout early in the year is noteworthy.  Now, better rainfall the last couple of weeks combined with a non-threatening balance of August could push yield back higher but difficult to just throw out the particularly difficult June and July many areas faced in the WCB.  Worth noting, a yield of 46.2bpa puts carryout at 301mbu if demand is left unchanged.

If the same exercise is completed with corn and a yield of 165.9bpa, production totals 13.856bbu.  One can take issue with USDA demand, but using it for now gives us a carryout of 1.923bbu.  This would not be considered especially bullish as plenty can be argued with USDA’s demand being too high.  However, it doesn’t take much more yield cut to turn the balance sheet more constructive.  Some prominent analysts have yield down as low as 162.5-163.0, which would provide a carryout of 1.648bbu and a stocks/use ratio of 11.49%.  We were not as inclined to use a yield that low until seeing some of the data published by private tours in spots which were thought to be better than average.  The USDA report will give us plenty to chew on until the combines roll, but caution against getting to bullish corn yield without considering demand looks inflated to compensate for a large crop.  In addition, December corn has remained especially resilient in its recent range, so there doesn’t seem to be a real call to action for bulls or bears until more is known about this crop.

Data yesterday included export sales which were fairly disappointing for most everything including wheat at 5.3mbu vs. the 14.0mbu needed weekly to hit the USDA marketing year forecast.  Total commitments now stand at 369.8mbu vs. 370.0mbu a year ago, although we would expect commitments to pick up in coming weeks given the price set back and the US’s newfound competitiveness.  Corn sales were dismal at 1.4mbu vs. the 13.3mbu needed weekly to hit the USDA mark.  Total commitments stand at 2.218bbu vs. 1.930bbu a year ago and the USDA full year estimate at 2.225bbu.  Soybean sales were 8.6mbu vs. the -11.5mbu needed weekly.  Total commitments are now 2.232bbu, up 16% from a year ago and already 130mbu larger than the full year USDA estimate.  Also important to remember Census exports are running stronger than the USDA inspections data by 30-40mbu.  New crop sales for corn were light at 17.2mbu and now push that total to 174.7mbu vs. 317.0mbu a year ago.  Soybeans aren’t much better with 234.9mbu of commitments vs. 402.5mbu a year ago.


Bottom Line:  Friday’s are trend days, and the short-term trends have slipped lower.  Rainfall has been solid in many parts of the Midwest the last several weeks, but not in Iowa.  It makes a person wonder how long we can maintain production estimates if the largest corn and soybean producing state in the US is running such severe deficits?  Still maintain we won’t know the full story until combines roll in October, and for the Dakotas that could be November in many spots given the cool off in temperatures.  2017 continues to be a unique growing season and it is far from over.


Good Luck Today.

Tregg Cronin

Market Analyst






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