11/10/2017 Morning Comments

Good Morning,


Snow showers across North Dakota this morning, otherwise quiet.  The entire Midwest will be locked under high pressure today, making for a dry day across the corn belt.  Rain/snow chances increase tomorrow for IA/IL/MO which works east to IN/OH by Sunday/Monday.  Totals look light and generally less than 0.25”.  Another round moves into MO/IA/IL/WI Monday-Wednesday, bringing another 0.10-0.30” to those states.  That same system sets up shop a bit midweek next week as it moves east, bringing similar totals to IN/OH/MI/KY.  Could make for a start and stop affair the rest of the way through harvest.  The Plains and WCB will be bone dry the next 7-days, and potentially longer as the extended maps show below normal precip through the 8-14 day.  Temps are above normal for the Midwest throughout.


Weaker markets to close the week as we see a bit of follow through selling after yesterday’s USDA led selloff.  While the session is far from over, and intensity could increase when desks are fully staffed later this morning, there doesn’t seem to be a huge sense of urgency in driving our markets to zero just yet.  Big volume and big open interest changes yesterday as one would expect given the increased participation surrounding USDA reports.  The market was certainly not prepared for a record corn crop from the USDA, and even the unchanged estimate on soybeans felt bearish.  The supply side of the equation is more or less set now, pushing almost all of the focus to demand where we have plenty of work to do.  SRW wheat saw open interest drop 8,133 contracts as wheat tried to remain high with row crops lower, and there was probably some inter-market spreading being lifted or adjusted.  Chicago wheat volume was the largest since June 26th, 2015.  HRW saw open interest drop 5,894 contracts for many of the same reasons while volume pushed to a new, all-time record of 137,038 contracts.  Corn open interest increased 25,915 contracts as new fund shorts were undoubtedly added, and there was also probably some panic selling by producers.  Corn volume was the largest since June 7th.  Soybean futures saw open interest rise 12,029 contracts with volume jumping to a two week high.

A full review of the WASDE changes isn’t necessary, but is worth highlighting a few finer points.  The national average corn yield bumped up to a new record 175.4bpa vs. the average trade estimate of 172.4bpa, 171.8bpa last month and 174.6bpa last year.  Total production totaled 14.578bbu which was 249mbu above the average trade guess, 298mbu above last month but still 570mbu below last year’s record.  One of the more interesting things is not a single corn belt state recorded a new state record yield, despite the average yield for the US hitting a new record.  New state records were seen in MI, PA, LA, MS, LY, TN, SC and AL.  Further underscores the “fringe area” importance, and helps shed light on how we could achieve a national yield record despite some of the adverse weather experienced in parts of the Midwest.  The USDA made necessary changes to their balance sheet to account for some of the supply with feed/residual bumping up 75mbu and exports were also increased 75mbu.  The F&R increase I can live with, but the increase to exports looks completely out of line given commitments and shipments to date.  Only thing USDA might be banking on is smaller crops in the Black Sea, which we will touch on later.  Bottom line is we have a tremendous amount of corn, and new crop prices are arguably trying to maintain current acreage which would appear to be too much.  Markets are not likely to earn their carries, which means producers need to take steps to lock them in when able.

The national soybean yield was left unchanged this month at 49.5bpa which was above the 49.3bpa average trade estimate, but still below the 52.0bpa record last year.  Total production came in at 4.425bbu, above the average trade estimate of 4.407bbu, but below the 4.431bbu last month and above the 4.296bbu last year.  So the US has a record bean crop without a record yield which isn’t difficult to believe given the 7 million more harvested acres this year than last.  Demand estimates were left totally unchanged on soybeans which some took issue with, again given the pace of export sales and shipments to-date.  It is still fairly early in the marketing year, but until or unless South America has a weather issue, China will be able to remain hand-to-mouth on their buying and isn’t likely to help us alleviate our supply challenge.  Despite the record crop, however, soybeans don’t feel as though they are going to give up the ghost just yet, needing to maintain risk premium for a SAM weather stumble.  A correction down to the previous corrective lows at 9.70-9.80 would not be unreasonable, but the highs at 10.08-10.13 feel safe for now.

Not a big month for wheat changes, at least not in the US anyway, as the only change USDA made was a 25mbu increase to wheat exports which went completely to HRW.  This change was justified last month in our opinion, but definitely after the HRW business to Iraq last week, of which there could be more.  Second half exports were always going to be the US’s chance to pick up extra-ordinary business, and that remains the case today.  Despite a tightening US balance sheet, we were mostly overshadowed by increases elsewhere in the globe as has been the case this entire marketing year.  Russia’s production was increased again by 1.0MMT to 83MMT with exports also increased 500,000MT to 33MMT.  EU production was increased 450,000MT to 151.49MMT, while Australia and Argentina were left unchanged.  USDA did increase Argy exports to 11.7MMT from 11.5MMT last month, while Australia was cut 500TMT to 17.5MMT which is still 2-3MMT too high according to sources on the ground.  India saw imports reduced 500,000MT to 3.0MMT as they doubled their wheat import duty.  The various changes did help carryout for 17/18 drop from last month by 600,000MT but remains 12.1MMT above last year which will be the headline.  As we’ve been writing about for some time, the world’s wheat stocks are tied up in four countries: Russia, China, India and the United States.  When these four are isolated, world wheat stocks continue their multi-year decline.  The wheat story is turning more supportive by the month, but the real story looks to be in 2018/19.  We will be expounding on this next week.

Export sales were also released yesterday before the report with solid numbers across the board with the exception of soybeans.  Wheat sales totaled 28.7mbu which was above expectations and the 12.9mbu needed weekly to hit the USDA forecast.  16.5mbu was owed to the Iraq business from last week which was already known, but there was also 2.2mbu of HRS done to China which continues to bring demand to our shores most thought would be lost.  Total commitments of 598.6mbu are down 5% from this time last year, which is exactly in-line with the USDA’s latest export forecast.  Corn sales were huge at 93.1mbu which is well above the 25.1mbu needed weekly, but was also larger than the trade was expecting despite large known sales to Mexico.  Total commitments of 763.5mbu are down 25% from a year ago with the USDA now forecasting a 16.0% decline y/y.  Soybean sales totaled 42.6mbu which was above the 26.0mbu needed weekly, but below market expectations.  Total commitments of 1.156bbu are down 15% from a year ago while the USDA is forecasting a 3.4% increase y/y.  This why the soybean market is really in “prove it” mode the next couple months ahead of South American harvest.

Other tidbits worth noting from yesterday included another 20 HRW receipts being canceled out of Wichita which takes the one week total to around 208 if our count is correct.  End users are buying old delivery receipts as deliverable supplies become the cheapest source of 11.0% protein wheat in the country.  The spot floor saw 11.20% trade up another 10c to +125/140Z while 11.0% was indicated at +102/120Z vs. +75/90Z a week ago.  12.0% is called +195/210Z vs. +175/195Z a week ago.  The entire wheat complex did not want to trade lower in sympathy with row crops as cash markets remain very firm and calendar spreads are tightening.  Producers would do well to take note of current flat price levels in relation to recent price action as the market cannot buy wheat at current levels, and should serve as an indicator for futures as we move into the winter months.  GASC is also tendering this morning, the second day in a row they’ve issued tenders.  The latest business went exclusively to Russia as most of the recent tenders have, and the one this morning should be no different.

One more note on the corn market, as I think producers need to take a long look at current line items from the USDA both for 17/18 expectations and possibly 18/19 acreage ramifications.  Production declined 570mbu from last year, but total supplies are essentially unchanged at 16.922bbu this year vs. 16.942bbu last.  USDA increased demand from last month, but it is still down from last year at 14.435bbu vs. 14.647bbu.  This helps carryout rise to 2.487bbu vs. 2.295bbu last year, and the largest ending stocks in 30-years.  We have a substantial buffer against any unforeseen demand, which we would gladly take, and will have a substantial buffer against yield adversity heading into next year’s growing season.  Record yields being achieved in three of the last four years is starting to catch up with the market, and producers need to temper their expectations accordingly.  As we have discussed in recent weeks, what is more likely to occur: December or March corn at $3.40-3.54 rallies to where May, July and September are at 3.63-3.78, or are May, July and September going to end up down at 3.41-3.54 as the year grinds along?  If you believe the latter, there are still 13-30c worth of carry to lock in.


Bottom Line: Soybeans could see some additional sell pressure once volumes pick up later this morning as traders remain skeptical of the USDA demand estimates, and as long as there remains no weather threat in South America.  Corn set new contract lows throughout the curve, so technically there is really no support directly under this market.  That said, funds are large net shorts and it comes down to a game of chicken between under-sold farmers and over-sold funds.  Farmers usually have the better staying power, especially with the last 1/3 of harvest slow to come in.  We need demand.  Lots and lots of demand to clean up these piles of grain.


Good Luck Today.

Tregg Cronin

Market Analyst






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