1/5/2018 Morning Comments

Good Morning,

The Bloomberg Commodity Index closed higher for the 14th session in a row yesterday, the longest run of daily price rises on record, and now trading at the highest level since February 14th, 2017.  The index has been propelled higher by stronger energy and metal markets, although that record run could come to a close today with crude oil down over 1.0%.  Many hedge fund managers and market observers alike have noted how 2018 could be kind to commodities as equity valuations continue to soar, making the physical assets look more attractive or “cheap.”  The S&P 500/BCI ratio sits at 30.86 this morning, which is off the record highs of 31.90 in mid-December, but still incredibly high historically.  Energy inventories have been coming down for some time, with US supplies now under the 3-yr average.  Industrial metal stocks have been drawn down with the rise in electrical vehicles, and 2018 will see several major grain commodities begin to draw down their global supply surpluses.  While incredible strength might not be in the offing, a major bottom in commodities could very well have been set in the latter stages of 2017.


Mostly better markets to end the week, which are being led higher by soy meal, trading up just shy of 1.0% as of this writing.  There doesn’t appear to be any major changes in the Argentine forecast which would be prompting the meal move, with most overnight models actually agreeing on better odds for rains in major Argy growing areas in the 6-10 day.  What has been flying under the radar, however, has been the effect of the cold temps on soy crushers in the central and eastern corn belt.  Cold temps have caused issues with several plants, not to mention the difficulty moving meal amid cold and heavier snow totals.  Cash meal offers were firmer by $3-5/ton both domestically and in the export channels.  Firming meal prices have aided board crush which is now over $1.00/bu through September ’18, providing great opportunity to lock in solid paper margins on the board into new crop.  Volumes were finally decent in what felt like the first day since the holidays, and open interest mainly rose.  Corn open interest rose 4,272 contracts, soybeans were up 948 contracts, meal down 566 contracts, soy oil down 2,693 caks, SRW wheat up 701 contracts and KC wheat down 1,900 contracts.

Data released yesterday included weekly ethanol production which fell sharply amid the holiday slowdown, dropping 58,000bbls/day to 1.032 million bbls/day.  This was the lowest average ethanol production of the last 11-weeks, and was actually lower than the same week a year ago, which is the first time in four months.  The 1.032 million bbls/day was below the roughly 1.045 million bbls/day needed to hit the USDA’s 5.525bbu ethanol for corn target.  Similar to the meal market mentioned above, there was more than likely operation issues attributing to the slowdown in production with cold temps slowing inbound corn as well as outbound ethanol and DDGs.  Throw in a couple days in which plants weren’t receiving or moving either due to holidays, and efficiencies can certainly decline.  Adding further evidence to this idea is the fact ethanol stocks ballooned by 588,000bbls to 22.619 million bbls, rising to the highest level since May.  Ethanol stocks are now up 21% on the same week a year ago, a truly gigantic supply rise.  After rallying out of the basement, ethanol futures posted a nasty reversal yesterday trading above the previous two sessions highs and above the 50-day moving average before closing below the previous three days entire range.  Ethanol and DDGs export data for the month of November will be available later today, and will be of great interest to traders in gauging export demand to close 2017.  We must maintain solid export business for both to prevent ethanol grind from slowing.

Argentina crop progress was released yesterday afternoon with corn planting progress advancing to 78% complete from 70% last week and 83% on the same week a year ago.  Planting progress continues to be delaying in northern areas which are too dry to plant.  According to BAGE estimates, there are around 1.2 million ha left to plant, with what has been planted being rated 3% excellent, 30% good, 34% normal, 21% fair and 11% poor.  Too bad the USDA doesn’t add a “normal” category to bring even more clarity to our crop condition situation.  😉 Argentine wheat harvest progress was pegged at 91.6% complete, up 10.4% on the week.  BAGE has maintained their production estimate of 17.0MMT vs. USDA at 17.3MMT.  This should have a downward bias.  Soybean planting in the country advanced to 87.5% complete vs. 81.9% last week and 92.5% a year ago.  First crop planting is 91% complete with 41% of the second crop also planted.  There are still 2.3 million ha left to plant with around 1.7 million of that total awaiting rain.  Crop ratings for their soybeans are 53% good, 38% fair and 9% poor/very poor.

Still not exactly sure what got into Minneapolis calendar spreads yesterday, causing the front-month spread to rally by 31%.  The MWH/MWK jumped 2.25c to close to -5.00c, but at the highs was up 37%.  The MWK/MWN was also firm, but it was the MWN/MWU which also showed a strong performance, jumping 5.75c on the day, or 191% on the day.  Volume rocketed higher for both spreads with the MWH/MWK trading 2,370 contracts vs. 511 the previous day, while the MWN/MWU posted volume of 141 contracts vs. 17 the day previous.  Given the time of year, and the fact there didn’t appear to be any major cash trade, it is quite possible index funds were rolling out of the March and further out the curve, which they are sometimes want to do unpredictably.  As we wrote about recently, the spring wheat market needs to maintain some semblance of premium to ensure enough planted acres go in the ground this spring.  Without a 15-20% increase in planted acres, the hard red spring wheat balance sheet will not see a rising carryout and could actually see a modest decline even with average yields and static demand.  Add in the fact large portions of the western spring wheat belt have not had soil profiles recharged fully since last summer’s drought and there is plenty of room for anxiety.  Granted, Canada is likely to see a rise in planted acreage next spring, but as we’ve seen in the HRW market this year, bushels and quality bushels are often two different calculations.

Worth noting, the active-continuation chart of soybeans posted an impressive doji yesterday, which is when a market opens and closes at the same price.  It is noteworthy because of the way March soybeans opened at $9.5925, fell all the way to $9.5025, and then rallied back to $9.5925 by the close.  This signals there wasn’t enough selling interest below the open to keep price under pressure.  Whenever a doji is posted, it signals indecision by a market, and when the doji has a long tail below the market, the indecision is very likely about trading lower.  When a doji is posted after an extended move, similar to the downtrend in soybeans from 12/5 to 12/28, a turning point could be aloof.  Adding to the signal is the fact overnight price action also managed to push through the 200-day moving average, a major MA to trend following funds.  With trade above the 12/27 corrective highs, soybeans have also confirmed a bullish divergence in momentum.  The 100-day moving average rests just overhead at $9.67 and the 50-day sits at $9.76.  ATM option volatility settled above week ago values for the Feb and March contracts yesterday, and should continue that rise with today’s settlements.


Bottom Line: Gearing up for next week’s reports as well as preparing for another Sunday night weather model debate for Argentina.  In general, weather forecasts in the US look much more favorable for grain movement, and freight logistics.  Any short-term strength in basis will probably be fleeting, with plenty of grain left on farm to be thrown at any sustained rally attempt.  Continued USD dollar weakness would be a supportive influence, and US tax law changes should be a real benefit to producers, especially the revised Section 199 provisions for business done with coops.


Good Luck Today.


Tregg Cronin

Market Analyst






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