Absolutely blank Midwest radar this morning, which followed a mostly dry weekend with the exception of a little rain along the IA/IL border and some precip in S-MN. Will be another dry week for the majority of the Midwest, especially the Plains and WCB. IL and points east are expected to see several shots of rain with WI/IL/IN/OH/MI all looking at 0.50-1.30” by the end of next weekend. Extended maps remain below normal on precip which should allow harvest to get wrapped up in most areas which can, however temperatures are much more split. The Plains and WCB are above normal on temps during the 6-10 and 8-14, although east of the MS-River is below normal. Dry weather is expected to dominate Argentina which is beneficial as they plant, while most of the Brazilian growing regions see tropical activity during the 6-10 day, keeping things moist. Still doesn’t appear to be any issues.
Softer markets as we begin the week, led lower by wheat which is down more than 1.0% across the three exchanges. In typical wheat fashion, the move this morning comes after a solid week last week which saw prices rally away from support, attempt to break down trend resistance and was in the process of confirming a bullish divergence. Friday’s COT data was delayed until this afternoon due to Veteran’s Day, but the large spec position is expected to decline given the drop in open interest of 28,456 contracts since 11/2. While cash markets have been firm and spreads have been rallying, many only see the plentiful global balance sheet offered by the USDA’s latest WASDE report last week. Corn and soybean charts have taken on a lot tougher appearance thanks to the late week price action with momentum down, trend line and corrective low support broken and open interest continuing to trend up as more fund positions are added. Last week’s WASDE report was the last major grain report of the year, with our space shifting focus to South America weather, cash markets, spreads and weekly demand indicators.
Much of our time since the release the WASDE has been spent looking at the corn market both inside the US and out as focus starts to shift to the 18/19 marketing year. With supply set, and attention now on demand, the 17/18 corn balance sheet is just not going to offer a lot of excitement. Deferred carries will be difficult to earn, with it being more likely deferred contracts come down to spot prices. Carryout projected at 2.484bbu will offer the largest beginning stocks buffer we’ve had since 1987/88. So how much corn do we need for next year? If one spends any time talking to the country, you get the sense corn acres will be steady at worst and up 2.0 million acres at best. Even with unchanged acres, and a 4-year average yield of 172.5bpa, production comes in at 14.335bbu, the third largest on record. Once can make the argument after this years’ weather and the record yield achieved, upside on yield is better than downside. I’ve kept feed/residual demand at this year’s record, ethanol is a new record, and exports were increased 75mbu to 2.00bbu. This gives us a carryout of 2.394bbu, barely changed from this year’s 30-yr high. One gets the sense we don’t need that many corn acres and the market should be trying to discourage farmers from planting that many, correct? At current, CZ18 corn is $3.8750, which is off recent highs at $4.00 last month. This compares with CZ17 this time a year ago at $4.00. Are prices low enough to discourage additional acres?
Were it just the United States, one could make the argument the situation isn’t as bearish as what it could be. However, a closer look at the global balance sheet tells a slightly different tale. World ending stock are forecast to decline this year from 226.583MMT in 16/17 to 203.860MMT at the end of 17/18. The majority, if not all, of that decline is from China which sees ending stocks dropping from 100.715MMT last year to 78.665MMT at the end of 17/18. This is good news as nearly half of the world’s ending stocks start to decline, but much like the wheat market argument, Chinese corn ending stocks really aren’t accessible to the global market. Down the road, if they turn into a major importer, then these declining stocks will be incredibly important. For now, stocks declining in a country which doesn’t need any corn isn’t all that supportive. In fact, if we chart world ending stocks with and without China, we get a really good sense of the two different markets. World ending stocks minus China come in at 125.195MMT, down almost nothing from last year’s 125.868MMT and right near the highest level since 1987/88. World stocks minus China represent 61.41% of the global total, the highest share since 2009/10. Again, multiple ways to look at this data, but the point is the countries who are engaged in active trade on the global corn market have a lot of corn, and the reason world ending stocks are declining is because China is whittling down supplies which are not available to the rest of the globe.
While we will get a much better read on large spec activity later this afternoon when the latest COT data is released, data put out by www.sentimentrader.com last week was rather interesting regarding the corn market. According to their data, corn was the most-hated commodity last week with their proprietary Optimism Index dropping to a value of 21 on Thursday. In looking at their historical data, there have been 143 days since 1990 when the Optix was below 22. Six months later, corn showed a positive return 90% of the time which averaged 10.6%. Given the poor fundamentals, bearish technicals and low volatility, the aforementioned might be difficult to believe, but turning markets rarely scream buy or sell me.
The crop progress report this afternoon is expected to show corn harvest at 80-85% vs. 70% last week and 92% average while soy harvest is expected at 95% complete vs. 90% last week and 97% average.
Bottom line: The last big report of the year is behind us, leaving the only volatility to come from South American weather which looks benign at the moment. The corn market has a daunting task ahead of itself as we really don’t need more corn acres next year, but is certainly pricing itself to take a few away from soybeans at the moment. Wheat markets are offering things to be optimistic about, but the major implications will be in 2018/19 which we will discuss later this week.
Good Luck Today.
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