11/29/2017 Morning Comments

Good Morning,


An interesting article from the US Energy Information Administration yesterday which said the ratio of natural gas production relative to crude oil in North Dakota has been gradually rising since 2008, but has accelerated since 2014.  Total crude oil production peaked in the Bakken at around 1.2 million bpd in December of 2014, but dropped to 1.07 million bpd as of August 2017, accounting for rougly 11% of total US crude oil production.  While oil slowed, natural gas production continued to grow, reaching a record high of 1.94 billion cubic feet per day in August, which has the energy equivalence of about 334,000 bpd of crude oil.  To be clear, North Dakota still produces more than three times as much energy from crude as it does natural gas, but finally using the excess natural gas is definitely a step in the right direction.  In previous years, around 35% of the state’s natural gas withdrawals were the result of being flared rather than marketed.  Based on recent data, it is reasonable to assume that figure has been cut by as much as 40%.

Wide open weather in the Midwest, and remaining so until mid-week next week in the central and mid-south parts of the Midwest.  The Plains and WCB will be without moisture another week.  The system midweek next week in the south should bring 0.50-1.00” totals to much of MO/S-IL/S-IN/OH/KY/TN/AR and the Northern Delta.  Temps slowly work themselves colder over the next 10-15 days with below to much below normal temps occurring in the aforementioned areas receiving moisture.  The Northern Plains will cling to above normal temps in western stretches through the end of the period.  Precip should remain below normal for the Plains states.  Still waiting on a couple fronts to work through Argentine growing regions the next 4-5 days, which was part of the soy weakness yesterday.


Mixed markets this AM with corn and wheat trying to add to small gains from yesterday, while soybeans post modest losses in follow through from their Turnaround Tuesday.  Unfortunately, because of how severe the selloffs in corn and wheat have been, it will be next to impossible to call strength in either commodity a recovery or a reversal for quite some time.  With respect to March Chicago Wheat, we need trade above the 4.33-4.35 to simply call things a correction, and would really need to see trade above 4.50 to be wading into the camp of a more serious reversal.  In March corn, there is a significant amount of resistance at the 3.55-3.58 level which should prove difficult to overcome.  Further, corn would need to trade above 3.65-3.68 before a change in trend could be established.  These technical parameters need to be kept in mind when gauging relative strength in corn and wheat.  Trends in soybeans remain up from a longer-term scale, but upside momentum has been lost and a sideways range between $9.68-10.00 has developed.  Additional open interest continued to be peeled away in corn with total O/I down 30,038 contracts yesterday as December interest continues to plummet ahead of FND.  Soybean open interest fell 3,334 contracts yesterday, SRW wheat was down 2,569 contracts and KC wheat was down 3,076 contracts.  Minneapolis wheat fell hard yesterday before recovering late with an expectation open interest dropped sharply during the session.  MGEX doesn’t release open interest data until later in the session, but the price action of late has raised odds for significant deliveries on FND when registrations go to the exchange this afternoon.

News of China buying US corn has been in the headlines for the past several sessions, and while there is more than likely some validity to it, some context is also necessary.  The rumors on newswire services suggest China may have bought 10-12 corn cargoes for 2018 arrival, amounting to around 700,000MT.  The transactions are taking place because of the price spread between domestic and imported corn which is said to be around $35-45/MT.  However, China buying corn should come as no surprise given the USDA already has China penciled in to import around 3.0MMT of corn in 2017/18, and the fact China usually imports a good portion of their annual TRQ quote which was set at 7.2MMT this past year.  In 2016/17, the US exported 807,000MT of corn to China.   If Chinese imports surprised to the upside, and they ended up importing closer to 3.0-5.0MMT of US-only corn, then that would certainly be price positive.  The USDA is currently forecasting a 17/18 corn export forecast of 1.925bbu which would be down 368mbu from last year, and a chief reason why carryout is expected to grow by 192mbu.  Finding a way to improve exports is exactly what the corn balance sheet needs, but needs to be put in context.

Deliverable stocks reports were released yesterday morning with combined HRS supplies in Duluth/Minneapolis dropping 154,000 bushels to 23.506mbu which compares to 25.233mbu a year ago.  As mentioned earlier, there is growing concern MGEX deliveries could be heavier than earlier expected.  Open interest in Minneapolis has dropped 12,018 contracts, or around 14.5%, since hitting a recent peak on November 8th.  The huge liquidation has caused the MWZ/MWH spread to blow out from a recent lows around -15.00c to a low of -19.50c this morning.  In Chicago, deliverable stocks fell 734,000 bushels to 94.127mbu vs. 95.871mbu a year ago.  Given basis strength, and where WZ/WH is trading relative to full carry, there isn’t expected to many deliveries on FND.  Adding to that sentiment, is the fact 10 registrations were canceled last night in Conant, OH.  There are only 103 outstanding registrations in SRW warehouses, or 515,000 bushels.  Not all that comforting for a 500mbu supply-sized market.  In Kansas City, total deliverable stocks fell by 1.466mbu to 117.203mbu vs. 108.548mbu a year ago.  The HRW spot floor rolled to the March yesterday, so changes to the previous day are not applicable, but based on where the board was trading, premiums looked to have picked up around 5c on the roll.

In Egypt’s GASC tender yesterday, they ended up buying two cargoes of Russian wheat vs. the nine offers they received.  The average Russian FOB price for the purchased wheat was $193.15/MT, down $1.50/MT since the last tender and the lowest purchase price on a FOB basis since early October.  One could look to the purchase price of Russian wheat over the last two months and find a large reason for the board pressure.  When the world’s largest wheat exporter continues to drop prices to attract business, other exporters who focus on quality have no chance to hit swing business.  From a delivery standpoint, Egypt has purchased exclusively Russian wheat for January, December and November with just 60,000MT of the total 470,000MT purchased in October coming from Ukraine.


Bottom Line: The USDA also released their annual long-range baseline numbers yesterday which we will dig into tomorrow.  Bottom line is they continued to see a drop in wheat acres next year, and the row crop projections point toward growing balance sheets in 2018/19.  Otherwise, the focus remains on South American weather and the pace of Chinese buying.


Good Luck Today.


Tregg Cronin

Market Analyst






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