11/3/2017 Morning Comments

Good Morning,


We’ve written about the rallying crude oil market in recent days, but one of the surest signs of this market’s strength is the response in calendar spreads.  This week, the 6-month calendar spread between December and June trading to $0.19, moving to backwardation for the first time since May.  In other words, for the first time in 6-months, the market is pricing nearby crude oil higher than it is pricing crude for next summer, a sign traders are not willing to pay someone to store for that amount fo time.  The one-month calendar spread between Dec and Jan has not inverted yet, trading at -$0.22, but is well off lows hit in September over -$0.50/bbl.  While Brent crude has moved out of its 18-month trading range, WTI has not, remaining between $42.00-$55.00.  Until we move above our upper trading band, we will be susceptible to set backs.  Trade through $55.00 would open upside to $62.00.

Snow showers across the Dakotas and MT this morning, beginning what will be a rather wintry weekend in the Northern Plains.  Areas of the Dakotas and MN are expected to see 2-4”of snow in the next 24-36 hours, some of it starting or ending with freezing rain which could create treacherous conditions.  This will also add to delays to an already behind schedule corn harvest.  The Northern Plains will remain active in the 7-day, with more chances of snow Monday/Tuesday.  The ECB will also see a heavy round of moisture in the coming week as IL/IN/OH/S-MI are slated for 0.50-3.00”, predominantly in the form of rain.  The 6-10 remains below normal on temps, but the 8-14 day sees us move toward normal/above finally in the Plains.  The ECB sits below normal on precip, while the majority of the Midwest should see below normal precip.


After a two-sided week, markets are mixed on our final session of the week with soybeans trying to close the first week of November with 10c gains, while Chicago wheat is unchanged and December corn is up 1.75c.  Wheat’s recent performance has been both interesting and perplexing as yesterday we saw 8.0c gains in Chicago, but prior to that we saw six straight sessions of losses.  Looking back at the current downtrend since September, Wheat goes 3-4 sessions with losses followed by a single day of 7-10c gains before the losses resume.  Yesterday’s session was not technically a reversal in any classical sense of the word, but momentum indicators are certainly turning the right direction, possibly hinting at a bullish divergence.  Despite the sharp bounce in price, SRW open interest actually rose 3,323 contracts, suggesting it was not just managed fund short-covering.  KC wheat was also up 1,292 contracts, corn was up just 878 contracts as funds move positions into March and May, while soybeans were up 10,425 contracts on the lower close.  Most impressively, December corn is right back at its $3.50 magnet, a price it has had so much difficulty in moving away from.

Export sales yesterday included wheat at 12.8mbu vs. the 13.4mbu needed weekly.  This brought total commitments to 569.9mbu which is down just 5% from a year ago, even though the USDA continues to forecast a 19% drop.  By-class sales were led by HRW at 6.2mbu vs. the 5.4mbu needed weekly.  HRS sales at 3.0mbu were just under the 3.8mbu needed weekly, while total HRS commitments of 161.0mbu are down 13% from a year ago.  Corn sales were ok at 31.9mbu vs. the 26.7mbu needed weekly, bringing total commitments to 670.4mbu vs. the 974.4mbu a year ago.  Total commitments are down 31% from a year ago, but shipments are drastically behind year ago levels.  Soybean sales were solid at 72.3mbu vs. the 26.3mbu needed weekly.  Total export sales of 1.116bbu are down 16% from a year ago while the USDA is still maintaining a y/y increase.  This will be a tall task considering the slower start to the year, larger carryover stocks in South America and no major weather threats there just yet.  The larger export sale story yesterday was the daily corn sale announcement of 1.356MMT to Mexico, split 60/40 between this marketing year and next.  This sale would move into 10th all-time for single daily sales of corn.  Largest corn sale in a single day on record is still held by the USSR on January 9th, 1991 when the bought 3.720MMT.  They also own the number two spot with 2.00MMT purchased back on October 3rd, 1989.  Ahh, communism.

We’ve discussed the prospect for a decline in winter wheat acres here for the last couple months, but with the sowing campaign wrapping up, we can feel a little more confident about some of those assumptions.  While the focus has been on the tardy pace in Kansas due to dry conditions early, followed by too wet conditions in October, SRW states are also facing delays.  As the 7-day forecasted precip map shows below, the ECB and SRW belt is expected to receive quite a little bit of moisture in coming days, right as many states hit their final insurance planting dates for full coverage.  IN and OH began hitting final plant dates for insurance purposes on October 20th, with more counties falling off by the end of October and the two states had 19% and 9% of their acres left to plant, respectively.  IL also began to hit final plant dates on October 20th, and had 24% of its acres left to seed as of 10/29.  The northern 1/3 of MO hit final plant dates on 10/31, while the southern 2/3’s has until November 15th to plant.  As of 10/29, MO still had 45% of its acres left to plant.  74% of Kansas counties had hit final insurance plant dates as of 10/31, but there was still 16% of intended acres left to plant.  To be clear, farmers can’t plant past these dates, but they lose 1% of insurance protection each day that passes until they lose total coverage.  With prices already hovering near 10-yr lows, producers won’t think twice about switching to another crop if conditions warrant and full coverage cannot be achieved.

Previously, we had been working with ideas of unchanged to a 5% acreage cut, but the aforementioned delays have us leaning toward a 10% national reduction in winter wheat planted acres.  The majority of those would be HRW, but SRW acres could also now be affected.  Looking specifically at HRW, if we see a 10% reduction in acres, planted acres would be 21.4335 million vs. 23.815 million last year.  Using 77% for harvested acres, we would have 16.503 million which would be harvested.  Using 5-yr averages for yield and demand, that would push carryout down to 276mbu vs. 487mbu for the current marketing year.  This would be well below the 5-yr average carryout of 411mbu, and the lowest since 2013/14.  Many things will happen before we can have confidence in a carryout number like that, but if acreage does decline 5-10%, it will put even more onus on HRS acres increasing substantially next spring.  Even with a 16% increase in acres, we don’t see carryout moving above 200mbu unless demand is materially affected or yields reach blow-off type levels.  The tightening carryouts for next year should remain supportive moving forward.

Speaking of HRW and demand, would be remiss if we didn’t discuss cash premiums which are on fire, and the export business which most do not have in their grids.  First with the sale, cash merchants said C & A of ABCD sold a combined 450,000MT of HRW to Iraq yesterday, helping ignite TX-Gulf and domestic premiums this week.  This comes in addition to the 100,000MT of HRW Iraq bought in October, a good deal more than most were counting on this marketing year.  Correspondingly, HRW registrations at Cargill’s Salina-KS elevator fell 139 contracts last night, leaving 450 outstanding.  This would only be 695,000 bushels of the rumored 16.5mbu sold, but if the total is anywhere near the rumored level, we should see some sort of announcement from the USDA either today or early next week.  The trades helped push spot floor 12.0% to +175/190Z vs. +166/181Z a week ago while 13.0% pro is seen at +240/255 vs. +215/230Z a week ago.  TX-Gulf premiums are also a great deal firmer with Nov/Dec at +215/225Z vs. +198/208Z a week ago.  The firming basis continues to support calendar spreads with the KWZ/KWH at -17.00c the firmest since 8/11/17, but KWH/KWK and KWK/KWN remain well inside ranges.  Until futures rally to get producers to sell, or calendar spreads rally enough to get commercials to pitch hedged length, it will be difficult for end users to source wheat against storage revenue.  The protein shortage we’ve known about since harvest is finally starting to sink its teeth in and its only November.


Bottom Line: Mixed close to the week as private analysts release their guesses for next week’s WASDE report.  Looks like corn supply is going to get larger while analysts are on both sides of the fence as far as soybeans.  The question is whether more bushels at this point will cause a big break in the corn market, or whether those bushels are already priced in?  We haven’t been able to leave our $3.50 post in December corn for any meaningful amount of time, so a big plunge from here would definitely be a surprise to the market.  Wheat is slowly building its demand story at the same time producers continue to throw in the towel on winter wheat planting.  Most likely not a story which is going to sneak up on anyone, but constructive ground work is being laid.


Good Luck Today.


Tregg Cronin

Market Analyst






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