9/13/2017 Morning Comments

Good Morning,


Outside Markets as of 6:30am: Dollar Index down 0.124% at 91.7810; Euro up 0.084% at 1.19830; Aussie Dollar up 0.224% at 0.80390; S&P’s are down 3.25 at 2492.75; Dow futures are down 16.00 at 22,108.00; 10-yr futures are unchanged; Crude Oil is up $0.42 at $48.65; Heating Oil is up $0.0074 at $1.7480; Paris Milling Wheat is up €2.25 at €161.75/MT; Paris Rapeseed is up €0.25 at €363.75/MT; Dalian corn closed down 0.06%, Dalian soybeans closed down 0.03%, Dalian oil settled up 0.35% and Dalian meal settled down 0.37%.

Scattered rain across the radar this morning in the Plains and ECB.  Light rains moved through SD and NE last night dropping 0.10-0.25” with locally heavier amounts along the border.  The heavier round of showers is expected to start in MT tomorrow and spread into the Dakotas Friday/Saturday before eventually making it into N-MN.  The 5-day forecasted precip totals are impressive with 1.25-3.00” for all of MNT/ND/MN with slightly lighter amounts in SD.  Rains eventually make their way into IA/N-MO/IL/IN with totals there close to 0.50”.  Rains in the central and ECB are needed badly but again reaching the point where additional moisture will do little for yields.  Above normal temps and above normal precip is the trend for the Midwest in the 6-10 and 8-14.  Not too many folks going to argue with that kind of forecast as we try to speed immature crops across the finish line.


Mostly better markets this morning led by the three wheat contracts which are adding on to impressive gains from yesterday’s session.  While the focus after the USDA report was the losses witnessed in corn and soybeans, wheat staged a late session rally to see winter wheat close 5-7c higher as world carryout dropped, major revisions to past production in Australia has that country’s balance sheet seriously tight and the increases to Russian production were clearly already in the market.  As we’ve written about here, the global wheat S&D is counting on massive exports from Russia, but it will still come down to export capacity and eventually winter wheat which can impact loadings.  Further, all signs lead to stable to lower winter wheat plantings in the United States again this year which will keep pressure on carryout and the need for trendline yields next season.  Corn and soybean markets were caught off-guard by the USDA as they increased the size of both crops when the average trade estimate had both crops getting smaller.  The tools employed by the trade and the analyst community this year has not lined up well with USDA methodology, and unfortunately, we may never know why.

The USDA pegged the corn crop at 14.184bbu vs. the average trade estimate of 13.992bbu and 14.153bbu last month.  They left harvested acreage unchanged which gave us a yield of 169.9bpa vs. 169.5bpa last month and 174.6bpa last year.  The increase to production overshadowed the increase in old crop exports and decline in old crop carryout, but new crop demand also dropped by a net 50mbu.  It is very difficult to find positives with the corn market at the moment as balance sheets are oversupplied, export cash markets are weak and calendar spreads are trading in excess of 80% of full-financial carry.  Given the increase to yield from August to September, and the historical tendencies of the USDA between now and January, hoping for a 3-5bpa cut to national yields doesn’t look like a solid proposition.  World carryout for 17/18 is expected to decline to 202MMT from 16/17’s 227MMT, but there is no shortage of corn anywhere in the world, and early ideas on South American production have them down just 2MMT.  Anecdotal yield reports once harvest begins at the end of the month will be important for gauging both the USDA and analyst community.

Soybean production was increased to 4.431bbu vs. 4.381bbu last month, the average trade guess of 4.323bbu and the 4.307bbu last year.  This increased the national average yield to 49.9bpa vs. the average trade guess of 48.7bpa, 49.4bpa previously and 52.1bpa last year.  Changes to demand included a 20mbu increase to old crop exports and a 5mbu increase to crush.  In the new crop balance sheet, exports were increased 25mbu which kept 17/18 carryout unchanged at 475mbu.  Analysts are taking both sides of this situation with some lauding the fact supply increased but we remain below 500mbu carryout, while others think the onus is now on demand to prove it is worthy of such lofty levels given the slow start to the new crop export season.  No changes were made to South American production in either marketing year, although Brazilian soybean exports for 16/17 were raised 1.5MMT to 62.5MMT.  Old crop Chinese soybean imports were raised 1MMT to 92MMT while new crop imports were increased 1MMT to 95MMT, which is a new record.

No change to the US wheat balance sheet as that carryout remained unchanged at 933mbu with production to be updated at the end of the month on the Small Grains Production report.  Yet, there were still plenty of global changes to work through.  The big change was to Australia which saw both 15/16 and 16/17 production and exports aligned with official Australian Bureau of Statistics figures.  Planted area was reduced for both marketing years resulting in 15/16 production being cut by 1.9MMT and 16/17 being cut by 1.6MMT.  These are look-back, book-keeping cuts which would ordinarily be brushed aside.  However, when one removes that supply as we head into a year hampered by drought and frost, supplies grow especially tight.  When one makes the appropriate changes to balance sheets, 17/18 ending stocks tip all the way down to 3.696MMT, the lowest ending stocks since 2008/09, and a stocks/use ratio of 14.49% which is the lowest since 2008/09 as well.  Unfortunately, production ideas today are closer to 20MMT or under as opposed to the 22.5MMT the USDA is currently using.  If 20.5MMT is used for production, ending stocks and stocks/use fall to levels not seen since the mid-90’s.  Few in Australia are using an export figure anywhere near 18.5MMT, but that simply means importers will need to look elsewhere to secure their needs.

Segue to Russia which saw production increased to 81.0MMT and exports raised to a new record 32.5MMT, but the market seemed to already have this data discounted based on our close.  The 32.5MMT of wheat exports would be up 17% from last year’s record and would be 53% larger than the 5-yr average.  There are many who don’t believe Russia can execute on such a program while still maintaining exports of corn of barley in the neighborhood of 10MMT.  The best indicator will be FOB offering prices out of the Black Sea which haven’t shown any signs of disagreement yet.  When winter approaches, however, the real test will be at hand.


Bottom Line: Futures markets are holding together fairly well considering the size of the production misses witnessed yesterday.  The market will quickly be shifting to yield report mode as its main fundamental input, leaving the USDA data on the back burner for the moment.  Wheat has performed well and would certainly lead one to believe there is more in the market than we currently have priced in.  US wheat exports in 17/18 are on the rise and could end up meaningfully higher than the USDA has them.


Good Luck Today.

Tregg Cronin

Market Analyst






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