1/26/2018 Morning Comments

Good Morning,


The beat goes on with the US Dollar Index, which is making fresh 37-month lows this morning, dipping into the 88-handle area before recovering back up 89.00.  Treasury Secretary Mnuchin’s comments in Davos the day before yesterday about the US Dollar Index aiding the US economy helped drive the greenback lower, while President Trump’s comments yesterday in front of the same conference helped it recover slightly.  As we pointed out earlier this week, there isn’t much actual price support for the USD until 84.75 area from back in 2013, and momentum indicators are showing no signs of slowing or diverging.  This will continue to support dollar-denominated commodities, the asset class which has the best performance record during a weak dollar environment.  What’s interesting about this spat of dollar-weakness is the fact Treasury yields have continued to rise while the dollar has sold off when normally, yields and the dollar move in the same direction.  Looking back over the last several decades, the USD and T-yields rarely stay disjointed for long, raising the question of which one is likely to admit defeat and head the other direction?

Dry again yesterday in Argentina, while 0.20-0.60” fell across 65% of the Brazilian growing region.  Really are no major changes in the Argentine forecast with mainly dry weather forecast the rest of the week/end and the majority of the 6-10 day.  Soaking rains look to fall in northern Argentine growing regions, but it is the other 2/3’s of the belt which is of concern.  There are some weather folks touting flooding rains in Brazil, but too much rain has rarely been a problem in South America despite numerous rally attempts in the past which failed miserably.  If the dry forecast continues to roll forward for Argentina, then the market will likely want to add back in additional premium.  Keep in mind, Argentina finished planting about a week ago, so the dry spell they are experiencing is occurring in their June, not July or August.


Firmer markets across the board as we get set to close a positive week across the grain room.  For the week, March soybeans are up 15.50c, Chicago wheat is up 14.75c and March corn is up 3.75c.  All three major commodities would be looking to close higher for the second week in a row, which would be the first time since November both row crops have closed higher in back-to-back weeks.  Another mixed bag in open interest, although money continues to flow into corn with open interest up another 7,509 contracts.  Interesting to note, the largest amount of open interest went into the July contract (5,589 contracts), while March fell 4,636 contracts.  Soybean open interest was up just 748 contracts, meal up 7,027 contracts, Chicago wheat down 2,827 contracts and HRW wheat up 3,943 contracts.  Also noteworthy, soybeans have closed unchanged or higher in 10 consecutive sessions, which is the longest streak going back quite some time.  We only closed higher seven consecutive sessions during the drought run-up in July 2017, although the price appreciation was quite a bit larger than the current rally.  It is undeniable grains are catching a bid off the plunging USD, but the question remains whether the weak currency translates into a sustained improvement in US grain exports.  If the USD doesn’t result in improved exports, then it isn’t bullish.  Today’s weekly export sales report should shed light on whether better interest is indeed the case.

Speaking of improved exports, one area which has definitely not seen an improvement at least in terms of FOB offers has been wheat.  Yesterday saw Algeria tendering for an unspecified amount of wheat which saw US wheat offered out at $230/MT C&F which compared with French at $222/MT C&F and Argentine at $220/MT C&F.  This would be around $7/MT more expensive on the US wheat than the last wheat Morocco purchased.  The combination of a lack of HRW protein, and huge calendar spreads thanks to VSR are combining to keep wheat in the hands of warehousemen and out of exporters.  The same is true for US-SRW, and as long as the VSR-regime exists, it is difficult to see US wheat clawing back huge market share.  In order to buy the wheat from the warehouse, exporters need to bid huge basis levels and essentially take the carry out of the market.  When they do that, they blow past competitor offers into major importers.  Catch-22 in its purest form.  Add in the fact we have drought conditions in much of the HRW belt, causing many to wonder how much space they will need how the 18/19 harvest, and it doesn’t look to end anytime soon.  Highlighting this point further are the 95 registrations which have been canceled out of Maumee and Conant, OH in the last two days, leaving only 124 registrations outstanding, or 620,000 bushels.  This is a far cry from the 10,000,000 bushels which were hurled at the delivery market during the December delivery period.  The domestic market is having to raid delivery warehouses to get the wheat they need, despite the fact the current stocks/use ratio on SRW is just over 78%.  Makes sense if you don’t think about it.

Other wheat news included several USDA attaché reports from various countries including Australia.  The attaché basically brought his numbers in-line with the latest official USDA forecast with production at 21.5MMT for all-wheat, and left exports at 16.0MMT which is still higher than most private analysts would subscribe to.  They also included export data for wheat by country, volume and average price from 2011-2017.  Indonesia remains the largest export destination by a wide margin, having taken 3.913MMT from Jan-Nov at an average price of $196/MT.  This would compare with 3.469MMT in all of 2016 at an average price of $210/MT, $250/MT in 2015, $280/MT in 2014 and $317/MT in 2013.  India has been the second largest destination so far in 2017 at 1.765/MT followed by the Philippines at 1.702MMT, Vietnam at 1.350MMT and China at 1.295MMT.  The attaché to Argentina also released an updated feed grain table, putting wheat production at 18.0MMT vs. USDA last at 17.5MMT.  They also increased exports to 12.0MMT vs. 11.9MMT from USDA with ending stocks at 826,000MT vs. USDA at 331,000MT.  In his corn balance sheet, corn production was cut 2MMT to 40MMT vs. USDA, but exports were maintained at 29MMT, and the cut to production falling to ending stocks at 4.267MMT vs. USDA at 6.267MMT.  Despite current drought concerns, corn production at 40MMT would be in line with 41MMT last year, while exports at 29MMT would be up sharply from 16/17’s 25.5MMT.  Even if production is trimmed further, there is plenty of room to cut exports and still maintain the same export share as last year.  The attaché to Canada also updated, but only made small rounding changes.  They did express concern about the lack of soil moisture and snow cover, which is keeping drought worries alive.

Speaking of drought area, the USDA released their updated drought statistics yesterday with 44% of US winter wheat areas experiencing some level of drought.  However, when HRW areas are isolated, the drought conditions worsen significantly as KS/OK/TX/CO have 71-100% of their winter wheat areas under some level of drought.  The 44% national figure is unchanged on the week but up sharply from 20% a year ago.  41% of the nation’s spring wheat area is experiencing some level of drought compared with 0% a year ago.  ND/SD/MT are between 55-59% of their spring wheat areas being afflicted with drought.  Not to be left out, 15% of the nation’s corn area is under drought vs. 7% a year ago, while 14% of the soybean area is under drought vs. 5% a year ago.

We took a look at Informa’s acre numbers yesterday for corn and soybeans and what different yield scenarios would do to those balance sheets.  Today we wanted to take a look at their spring wheat acre number as it looked quite a bit lower than what we have been working with.  Informa sees ‘other spring’ wheat area at 11.255 million acres vs. 11.009 million a year ago.  HRS usually accounts for around 95% of total spring wheat area, putting HRS acres at 10.69 million vs. 10.5 million in 2017/18.  If we take their number as gospel, and plug in a 46.0bpa national average yield (45.0bpa 5-yr average), we come up with production of 706mbu vs. 693mbu last year.  Holding domestic demand unchanged at 270mbu and exports up 25mbu puts carryout at 166mbu vs. 176mbu.  Even with exports unchanged on the year at 245mbu, carryout only rises to 191mbu which is below the 5-yr average of 212mbu.  Tying record yields from 2014/15 would only bump carryout to 194mbu under these demand scenarios.  Lots of moving pieces, but the bottom line is we need more HRS acres than what Informa is projecting, otherwise the Minneapolis board has no business relinquishing premium anytime soon.

Export sales later this morning expect wheat at 175-400TMT, corn sales at 850-1,200TMT, soybeans at 775-1,300TMT, meal at 175-375TMT and soy oil at 7-35TMT.


Bottom Line: When our markets are paying more attention to outside markets than fundamentals, it is difficult to ascertain where the rallies might stop.  We need to see proof of better export sales thanks to the weaker USD to continue higher.  A persistently dry Argentina will also warrant more premium, but where they are on the calendar remains important as well.  One or two good rains could alleviate any dryness concerns there.  US wheat is not competitive into major importers.


Good Luck Today.


Tregg Cronin

Market Analyst






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