11/17/2017 Morning Comments

Good Morning,


WTI crude oil is looking to close higher for the first time in four sessions, up 1.63% this morning as buyers reemerge.  The spread between Brent and WTI has been narrowing, and is continuing to do so this morning with the premium held by Brent at $6.02/bbl, the tightest since the end of October.  The spread has also dropped right down to the 50-day moving average, an indicator this spread hasn’t traded below since July.  Equities continue to maintain their premium over commodities as the S&P 500 is trading at a ratio of 30.14 to the Bloomberg Commodity Index.  This is just off highs set in October at 30.36 and the all-time record high of 30.67 set in June.  Prior to 2013, the ratio had never been over 11.00, and since February the ratio hasn’t been under 27.00.  Not difficult to see where the money flow has gone.

Some wintry mix is moving across the Dakotas this morning, predominantly in South Dakota, and isn’t expected to amount to more than 0.10” of moisture.  NE and IA will also see some moisture in the next 24-48 hours, but the heaviest precip will be in the ECB once again, complicating the tail end of harvest.  Over the next week, IL/IN/MI/OH are expected to receive 0.50-2.00” of moisture in one form or another.  Still plenty of corn harvest left to bring in for those states.  Otherwise, the Plains and WCB will be mainly dry in the next 7-days before chances late week next week.  Above normal temps for the 6-15 day period, and below normal precip for most until the Northern Plains turn above normal in the 8-14.  The latest forecast from the International Research Institute for Climate and Society at Columbia University kicked out their latest climate forecast which now puts odds of La Nina formation at 76% during Nov/Dec/Jan.  This would mean cool and wet for the Northern United States, but it is the impact on South American weather everyone will take most interest in.  La Nina can mean warmer and dryer in the main production areas of Brazil.


Firmer markets this morning led by wheat as we once again try to claw back some of wheat Wednesday took away in value.  It is now clear, several days removed, the downtrend channels are still very much intact in Chicago and to a lesser extent KC.  Nothing much has changed in wheat: cash markets still very firm, managed fund short positions have likely continued to grow, spreads are still flirting with a VSR segment removal (although less likely today), and winter wheat acres look set to decline for the sixth year in a row.  Yet it’s the threat of Russian exports taking even more US demand than they already have which seems to have fund sellers emboldened in their positions.  Wheat saw some short-covering yesterday, but the open interest train rolled higher in row crops.  Corn open interest rose 16,114 contracts to 1,727,716 contracts, the largest since 2/18/11, and just 17,542 contracts from the all-time record set on 2/17/11.  The open interest rise came as most corn contracts hit fresh contract lows throughout the curve.  Former support-turned-resistance at the 3.42-3.44 level will be a major focal point on an rally attempt as a fair amount of open interest has been added below that level.  Still, most managed fund positions have plenty of equity in them.  Soybean open interest rose 7,082 contracts with price down 4.25c as O/I continues to claw back the November option expiration related drop.  Chicago open interest fell 3,709 contracts while KC wheat was down 59 contracts.

Data yesterday included weekly export sales which were ho-hum for grains and a bit disappointing relative to expectations in soybeans.  Wheat sales totaled 18.0mbu which was above the 13.6mbu needed weekly to hit the USDA export forecast.  Total commitments of 616.6mbu are down 5% from last year at this time, which is right in line with the USDA forecast.  By-class sales were led by HRW at 8.8mbu, followed by HRS at 4.9mbu, both of which are above the needed pace.  Corn sales totaled 37.4mbu which is above the 26.9mbu needed weekly, but still a bit slow seasonally.  Total sales of 800.8mbu are down 26% from a year ago.  Soybean sales measured 40.6mbu vs. the 25.7mbu needed weekly, but compares with same week sales of 51.7mbu a year ago.  Total commitments of 1.197bbu are down 15% from a year ago while the USDA continues to call for a 3.4% increase y/y.  This remains the most troubling export forecast of all from the USDA given how seasonal the soybean export season is compared to corn and wheat.  Unless South American production runs into issues, this forecast may have more downside than upside, breaking a well-established trend for USDA underestimating demand.

Soybean calendar spreads remained weak yesterday and overnight with several tying contract lows.  The SF/SH continues to bounce off contract lows at -11.25c, accounting for 68.0% of full financial carry (LIBOR+300bp).  The SH/SK continues to sit at contract lows as well at -9.75c, 58.7% of full financial carry.  While soybean cash and spreads remain weak, corn has definitely turned the corner with CZ/CH trading at the highest level since 9/12/17 this morning.  In addition, PNW corn bids have been firmer nearly every day this week without a corresponding rise in BNSF rail freight.  Last part November bids were called +80Z last night while FH-Dec was +78Z and Jan was called +82/83H.  Compare these with +60Z, +75Z and +70/72H a week ago.  Until elevators finish storage programs or switch the focus from filling ground storage to loading trains, however, the basis appreciation in the country could be a bit slow.

Analytics firm Informa Economics released their latest acreage ideas yesterday during the session.  Would have to call most of their estimates in-line with trade ideas, but not really anything the market is going to focus on at the moment.  They see 2018/19 corn acreage at 91.415 million acres vs. last year at 90.429 million, and the second largest since 2013/14.  If that kind of acreage number is used, with a 4-yr average yield of 172.35, production is 14.491bbu vs. 14.576bbu this year, but total supplies balloon to 17.025bbu, the largest on record.  Carryout for 18/19 assuming record feed/residual demand, record ethanol demand and a 75mbu increase in exports would come in at a staggering 2.525bbu.  Really need those extra corn acres don’t we?  Soybean acres are estimated at 89.627 million, down from 90.207 million this year as the record soybean acres in the Northern Plains and WCB see a bit of rotation.  The soybean balance sheet looks a lot like the corn balance sheet with an acreage number like that.  Total supplies would be 4.895bbu with a yield of 50.0bpa vs. 4.755bbu this year.  We have a hard time increasing exports in 2018/19 when this year’s forecast looks difficult to achieve.  If exports are unchanged at a record 2.250bbu, carryout would come in at 560.54bbu vs. 429.5mbu this year.

Informa pegged all-wheat acreage at 45.625 million, down from 46.012 million this year.  Within all-wheat, winter wheat acreage is seen dropping from 32.696 million to 31.923 million, while other spring wheat is up to 11.335 million from 11.009 million.  First blush would be a few less winter wheat acres and probably a few more spring wheat acres, but plenty of time to sort that out.  Using their acres with a yield of 48.0bpa and harvested acreage of 86.0%, production hits 1.885bbu vs. 1.740bbu this year.  Assuming unchanged demand at this point gives us a carryout of 798mbu, a 3-yr low and continuing to move in the right direction.  The all-wheat balance sheet doesn’t jump off the page at a person, but there are plenty of reasons to be encouraged in the by-class balance sheet.  HRS will remain tight in 18/19 unless farmers increase acres more than 20%.  HRW has the potential to lose more acres than most are counting right now, and the fall emergence and moisture situation is far from ideal.  SRW acres are a big question mark given the delayed corn harvest in the ECB.


Bottom Line: Lots of interest in this afternoon’s COT data to see if managed funds now hold a record short position in corn, and are nearing a record net short in Chicago wheat.  Even if those two are confirmed, one has to remember the equity the funds have in these positions and how much it would take to force them to liquidate.  Record net shorts held by the managed funds aren’t as concerning as the most likely record long held by an undersold US farmer.  That will hang over the market on rallies, which could also limit basis appreciation further.  Volume should decline into the Thanksgiving holiday.


Good Luck Today.

Tregg Cronin

Market Analyst






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