1/25/2018 Morning Comments

Good Morning,


It’s all about the Dollar.  The USD Index made fresh 37-month lows, but did so in violent fashion yesterday as it fell 0.8% at the close against many of our major trading partners.  In response, the Brazilian Real hit the highest level since October 4th, 2017, the Russian Ruble hit the highest level since June 1st, 2017 and the Euro hit the highest level since December 15th, 2014.  The Dollar weakness spilled over into many other asset classes as equities hit a new all-time record high, gold is at the highest level since August of 2016, Crude Oil hit the highest level since December 2014 and 10-yr Treasuries hit the lowest level since June 27th, 2011.  Much of the aforementioned helped the Bloomberg Commodity Index jump to the highest level since October 2015.  Adding to the strength in the Brazilian Real was the high court decision in in that country to charge former President Lula with corruption.  Just across the border, however, the Argentine Peso hit fresh record lows, mitigating the USD weakness.  All of the above is raising discussion on whether commodities (read Ag commodities) are finally enjoying the tailwind many other asset classes have been enjoying for several months.  With the USD trading as weak as it is, this will undoubtedly help grain exports, and will in-turn pay global farmers less for their bushels in their respective countries.  Will this be enough to pare global acreage expansion?  That remains to be seen, but it is certainly a step in the right direction.  To be perfectly honest, there isn’t much in the way of actual support levels on the USD until the 82-84 handle area, which could keep this cross-correlation trade alive and well in the near-term.

No major changes to Argentina or Brazil in the next 7-10 days.  Argentine dryness continues to be a concern for all but the northern 20% of the growing region which will be experiencing heavy rainfall.  Temperatures will be seasonal in both countries the next 10-days.


Some light follow through strength this morning on the heels of yesterday’s impressive rally, thanks in large part to the USD weakness.  It has been quite some time since the grain room has been able to look exclusively at the USD index for strength or weakness, much the way we did from 2009-2014.  It would appear the USD/grain trade is coming back to a certain extent, and with funds impressively short the CBOT, the path of least resistance is up at the moment.  Having said that, it remains to be seen if grains can shake truly negative fundamentals to trade higher on just currency correlations.  Volatility did rise on the rally yesterday, but can’t really be considered a spike just yet.  March ATM corn vol settled yesterday at 11.33% vs. 10.20% a week ago.  The other thing traders are waiting to see is if the buying all commodities route becomes popular again the way it was in 2009-2014, instead of funds buying individual commodities with solid fundamentals as they appear to have been doing much of the last couple years.  If buying everything which isn’t nailed down becomes the norm once again, then grains could see rallies extended.  Important to notice, open interest mainly declined on yesterday’s rally with corn O/I down 2,768 contracts, soybeans up 1,994 contracts, meal up 8,703 contracts, SRW wheat down 5,753 contracts and HRW wheat down 3,004 contracts.

Earlier this week, analytics firm Informa Economics released their updated ideas on 2018/19 planted acreage.  We decided to take these numbers and plug them into a preliminary 2018/19 balance sheet to get a sense of what different yield scenarios look like based on these acres.  The two charts below show different corn and soybean yields based on planted corn acreage of 89.18 million (81.95 harvested) and soybean acreage of 91.197 million (90.376 harvested).  For demand, we bumped 18/19 corn demand up to a 14.600bbu vs. 14.470bbu in 2017/18, but would still be slightly below 16/17’s record demand of 14.649bbu.  This would include record feed demand of 5.600bbu, record ethanol demand of 5.55bbu and a 50mbu increase to corn exports from the current year.  If the USD weakness continues and corn exports improve rapidly over the second half of the marketing year, we would be forced to increase both marketing year export figures.  The resulting chart gives a pretty good indicator of where yield would need to fall to support higher corn prices.  Trend line yield should be something around 172bpa vs. this year’s record of 176.6bpa.  As one will notice, even with trend, we can nose carryout below 2.0bbu, but it would probably take a yield of 168-170bpa to get carryout between 1.650-1.800bbu, which is probably what is needed for prices to sustain $4.00 or above.  On soybeans, the range is much wider on carryout for an even narrower range on yield.  We are assuming record demand of 4.360bbu vs. 17/18’s current record of 4.249bbu.  We are a little leery of projecting record exports of 2.250bbu vs. this year’s 2.160bbu, and also another 25mbu bump in crush to a new record, although this is likely what USDA is going to use at the February Outlook conference.  Trend line yield should be something around 49.3bpa, which would give us carryout of around 550mbu, and should keep prices under pressure.  A 2-3bpa drop from trend is probably needed in order to put carryout around 300mbu which would be congruent with $10.00+ futures on average.

Data yesterday included weekly ethanol production which came in 1,000bbls/day better than the previous week at 1.062 million bbls/day.  This was around 1.0% above last year’s same week production, and in-line with the needed level to hit the current USDA ethanol production forecast of 5.525bbu.  Ethanol production has been running below the needed level over the previous four weeks, but that is somewhat expected given the holiday shortened weeks as well as difficult weather in the central and eastern corn belt.  Ethanol stocks surged to a new all-time record of 23.800 million bbls, up 1.057 million bbls on the week.  The surge in ethanol stocks is a clear indicator production is vastly outpacing demand, and would certainly lead one to believe slower production is in the offing.  Ethanol exports remain solid, but obviously not solid enough to mop up the excess the domestic market is not accounting for.  Calendar spreads remain wide, incentivizing producers to store as much as possible, but this only works as long as storage exists.  Higher ethanol blends at the pump should be encouraging consumers to pump as much as possible.

A pick up in farm gate movement this week was noticed as grain markets rallied, but cash markets had mixed results.  CIF corn held in well on the rally with spot bids mainly unchanged this week with +45H available for Jan/Feb.  PNW shuttle markets did take a breather, however, with spot shuttles off 5c in the spot months, while deferred slots were unchanged on the way up and down.  KCBT spot floor fell hard yesterday, dropping 10-20c/bu from ORD’s to 14.0%, as volume picked up and mills seem content for the time being.


Bottom Line: Short-term trends are up, and as long as the USD continues to work lower, it will be difficult to call for grains to tip down.  At the same time, producers should not dismiss the fact fundamentals have not changed to any large degree, unless exports pick up mightily.  The market is once again offering $3.90+ CZ18 corn futures and $10.00+ SX18 soybean futures, prices producers were clamoring for following the January WASDE.  Bottom lines and marketing percentages need to be kept front and center on this rally.

Good Luck Today.

Tregg Cronin

Market Analyst






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