1/3/2017 Morning Comments

Good Morning,


Light snow showers around the Great Lakes, otherwise the Midwest is quiet and will remain so most of the next week.  Next best chance for moisture will be Saturday/Sunday and into early next week for the ECB and Mid-South.  Totals for the 7-day outlook this morning look between 0.50-1.60” for S-IL/IN/OH and the rest of the Mid-South.  If this moisture falls as snow, some impressive totals could come with.  Temperatures gradually warm toward the weekend before slipping back towards below normal in the 6-10 and 8-14 day.  Precip will be solidly above normal the entire 6-10 and 8-14 day outlook for the entire Midwest.  Given the time of year, we could be looking at some serious snowfall totals if things verify.  In South America, dry weather was present in Argentina while decent rains fell in Brazil yesterday.  Light rains will fall in Argy Thur/Fri of this week before dry weather takes hold the next 5-days.  The 6-10 is also dry with rains of less than 0.50” seen on 65% coverage.  By the end of the 10-day, dryness concerns will most likely surface once again.  Brazil remains in excellent shape for weather received and weather forecast.


Firmer markets again this morning as all of our markets look to add to the New Year gains from yesterday.  Definitely fresh money flowing into row crops at least with corn open interest up 6,446 contracts on the day, while soybean futures were up 5,738 contracts.  Managed funds are short both corn and soybeans, so an open interest increase may have come from commercial buying.  SRW futures fell 2,756 contracts while HRW futures were up 7 contracts.  Unfortunately, volume remains somewhat depressed as desks are probably still not fully staffed from the holiday hangover.  A bit more volume on these up days would be encouraging, although wheat and corn OBV is starting to trend higher.  Soybean on-balance-volume is down and headed lower with that running total the lowest since April.  Bears still firmly in control despite the three days of higher closes.  Unfortunately for soybeans, calendar spreads have done nothing on the flat price rally with the SH/SK at -11.25c, just 0.25c off contract lows, while SN/SX set a new contract low of +3.50c yesterday.  Certainly no concern about a tightening US soybean carryout just yet with the prospect for a cut to exports next week.

Speaking of exports, inspections data was released yesterday morning with mostly disappointing results due to the holiday shortened week.  Wheat inspections totaled 10.1mbu vs. the 19.0mbu needed weekly with the total the lowest in 6-weeks.  Total inspections measure 533.9mbu vs. 570.9mbu a year ago, a 6.5% deficit vs. the USDA calling for a 7.2% decline.  Corn inspections remains slow at 26.9mbu vs. the 41.6mbu needed weekly.  Corn inspections have not met the level needed the entire marketing year, placing great importance on the second half of the marketing year.  Total inspections of 414.8mbu compare with 671.2mbu, a 38.2% deficit.  Soybean inspections continued to slow seasonally at 41.9mbu vs. the 32.7mbu needed, but were the lowest inspections since September.  Total inspections of 1.040bbu are down 14.2% from a year ago while the USDA is still forecasting a 3% increase y/y.

Other data out yesterday included the USDA Oilseed and Grain Crushings Report which showed US wide soybean crush at 173.3mbu which was a bit below the average trade guess of 174.1mbu.  This total was also down from October’s 175.9mbu, but was up 1.5% from November 2016, and was also a new record for the month.  The first quarter of the marketing year posted a US-wide crush of 495mbu vs. 485mbu a year ago.  Soybean oil production in November totaled 1.977 billion pounds vs. 2.017 billion pounds in October and 1.961 billion pounds in November 2016.  The average oil yield measured 11.40lbs/bu, which was down from 11.47 in October and 11.49 in November 2016.  The USDA has been assuming a marketing year average oil yield of 11.60lbs/bu, which will notably tighten the soybean oil balance sheet when the new average is calculated.  The November Grain Crushings report showed 476mbu of corn being used for ethanol production in November vs. 470mbu in October and 452mbu a year ago.  Total corn for ethanol production of Sep-Nov totaled 1.391 billion bushels vs. 1.343 billion a year ago, with that margin set to widen even more during December thanks to record crushing.

Something else we’ve been tracking of late has been the amount of grain under marketing assistance loan with the USDA-FSA offices.  The total has slowly, but surely, worked its way up to the highest levels since 2008 for corn and soybeans, while wheat is the lowest since 2014.  Total outstanding loans for all crop years on corn now stands at 797.3mbu, 790.9mbu of which is in the 2017 marketing year.  This is the largest total since at least 2008, the last year USDA data is searchable on their website.  Soybean loans outstanding total 123.7mbu, 123.0mbu of which is in the 2017 marketing year.  This is the largest total since the 2008 marketing year.  The rise in popularity of MAL’s is not all that unusual given the low price environment we are in, and the 1.625% interest rate on the 9-month product, which is almost assuredly cheaper than the rate on a revolving line of credit with a financial institution.  What is interesting, however, is the likelihood of it speaking to the larger issue of how much grain is left on farms and unpriced.  This could hold big implications for basis as we move through the marketing year, especially if the outstanding total doesn’t begin its seasonal decline soon.  This will be a data set we will be watching closely in coming weeks to help gauge the movement of grain from the farm we move through 2018.

One other note worth mentioning has been the continued weakening of the MW/W and MW/KW inter-market spreads of late with the focus on winter-kill in the southern plains.  MW/W made a new low for the move at+182.75c, the lowest trade since 10/25, while MW/KW hit +182.50c, the lowest trade since 10/24.  With funds heavily short both KW and W, the order flow into those contracts amid the winter kill headlines is not at all unreasonable.  However, the HRS market absolutely needs acres for the 2018/19 marketing year, and the amount it has already bought with $6.20-6.30 futures is highly debatable.  As we get closer to the February insurance pricing period, we believe spring wheat will need to make a more concerted effort to secure additional acres for this spring.  If order flow continues to head into winter wheat contracts the next several sessions, there could be some good ownership opportunities on the spring wheat side.  KC new crop calendar spreads have been firming well before the recent winter kill scare, meaning there was concern about acres to begin with.  We will get confirmation of the lack of acres next week from the USDA.  Keep an eye on Minneapolis calendar spreads, which have gone dormant of late, for signs spring wheat is ready to reassert some premium.


Bottom Line: Firmer prices as managed and index funds rebalance a little during the new year.  There is still plenty of grain left for sale above the market, which should help cap any serious rally threat.  In addition, South American weather seems better than the weather terrorists would lead one to believe, so would caution against thinking Argentine is fire and brimstone at the moment.  Volumes have still been light, which should be a signal there isn’t a ton of participation behind these rally efforts to date.  Refresh marketing targets for both old and new crop often.


Good Luck Today.


Tregg Cronin

Market Analyst






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