1/29/2018 Morning Comments

Good Morning,


The USD Index was the story last week, but it is recovering a bit this morning after setting fresh 37-month lows Friday.  The move has commodities stepping back this morning, including crude oil which opened higher last night, but is trading 0.50% lower this morning.  Speaking of crude oil, Friday’s COT data revealed new records in several positions for the energy market.  Managed funds are now net long 496,111 contracts, easily a new record in terms of sheer contracts, but not a new record in terms of percent of open interest which is 14.7% vs. the record of 16.3%.  In addition, swap dealers are net short the crude oil market -772,653 contracts, or -22.8% of total open interest, both of which are new all-time records.  Quite the statement when managed funds are record long and commercial/swap dealers are record short, especially at the highest levels in 3-years.

Another mainly dry week ahead for the corn belt and Great Plains, especially so for the southern plains in which no real measureable precip is seen in the heart of the HRW belt.  Extended maps from NOAA don’t look any better with below normal precip expected across the southern plains during the 6-10, 8-14 and week 3-4 time frames.  Temperatures for the entire Midwest look to be below normal for the next 3-4 weeks, which could limit evaporation and moisture needs in some of the wheat areas, but bottom line is maps don’t look good for a trend change.  Also dry in Argentina the next 2-weeks with net drying forecast by the 8th of February.  Widespread rains continue for Brazil, and to the point of too much rain in the North where early soybean harvest is underway.  This is seen impacting logistics for moving early beans as well as getting second crop corn area planted.  It feels like we are getting our first real weather threat for SAM of the season, and this will bear watching over the next two weeks.  Production estimates will likely begin to fall in Argentina further without a change in the weather pattern by the end of the week.  Rarely does too much rain negatively affect Brazil but it is grabbing headlines.


Higher out of the gate last night and following through with additional strength this morning led on a percentage basis by the three wheat exchanges.  From a nominal basis, soybeans are the leaders, sporting 10-12c gains at the highs as the weather concerns come home to roost at the CBOT.  The weaker dollar index last week was giving off the “buy commodities” as an asset signal last week, and our space benefitted from that mindset to be sure.  In addition, it is no secret funds barreled into the short side of the market across our space following the January 12th reports, nearing a record net short position in aggregate before last week.  While Jan/Feb is usually a slow time of year for commodity news, the supportive macro environment, coupled with a bit of weather uncertainty from South America seems to be all the catalyst we needed for some short-covering.  What needs to be monitored is how the rallies influence planting decisions this spring with the February insurance pricing period beginning Thursday.  The SX18/CZ18 ratio is sitting at 2.58 this morning which is just below last year’s level of 2.63, but well above 2014-2016’s 2.27-2.46.  At the moment, the market seems to be bidding for soybeans.

Export sales are the reason the USD is a big talker in grains, which put a big focus on the export sales report Friday.  Wheat sales bounced back with 15.7mbu of commitments, above the 13.0mbu needed weekly to hit the USDA estimate.  Total commitments are now 739.3mbu vs. 824.4mbu a year ago. Interestingly, the sales included 201,800MT to unknown which made some scratch their head given the relatively slow week of export activity and the lack of basis appreciation.  HRS sales continue to struggle on a by-class basis.  Corn sales were solid at 56.9mbu vs. the 22.6mbu needed weekly.  Total commitments are now 1.196bbu vs. 1.538bbu a year ago, a 22% deficit but up from a 25% deficit 2-weeks ago.  Soybean sales were a little weaker than expected at 22.6mbu vs. the 18.6mbu needed weekly.  Total commitments were 1.588bbu vs. 1.831bbu a year ago, a 13% deficit vs. the USDA calling for a 1% decline y/y.  Soybean sales need to make up additional ground to prevent another cut to the export estimate.  Meal sales were solid at 223,100MT vs. the 120,100MT needed weekly to hit the USDA mark.

Last week, we talked about the heavy amount of corn sold from the farm on the rally, and that was definitely evident in export premiums as the week moved along.  PNW export bids for spot corn shuttles closed the week at +90/92H on the bid side vs. +93H the day before and +99/100H a week before.  BNSF spot equipment was a little firmer during the week, which would have made FOB basis even worse.  Some shuttle loaders bought several trains worth of corn last week on the rally, so some basis weakness was to be expected.  The pattern of first basis, then spreads, then futures was definitely alive and well on this most recent run.  The same weakness was not seen at the US Gulf, however, with bids going home Friday around +45H vs. +40H a week earlier, an encouraging sign.  Part of this is likely due to firm bids from ethanol plants, keeping barge loaders honest as they compete for bushels.  Wheat basis Friday was steady better on the spot floors with 13.0-14.0% protein HRW up 5c, while the MGEX spot floor was unchanged.

With the dryness in Argentina, the soy meal market is obviously the contract with the most scrutiny given their place as the world’s largest exporter.  When looking at the soymeal chart, an impressive pattern emerges.  Going back to June/July of 2016, soymeal has watched four rally attempts stall at the $350 mark almost exactly.  So far, our current rally has stalled at that level as well with highs at $348.50 logged on January 25th before setting back to $334.00 the next day.  Trends are still up in the soymeal market, and the spot month contract continues to trade sharply above the 50/100/200-day moving averages.  Volume was strong on the up-move, and open interest rose on the rally with new money flowing in.  Momentum indicators have stalled out, however, with a potential bearish divergence in momentum starting to form without a new run at the highs.  A somewhat ominous sign, the daily volume on the reversal day of January 25th ,in which the highest price since July 11th was set, totaled 210,067 contracts.  This was the highest daily volume April 13th on the same day meal logged a “key reversal.”  Almost all would consider this a negative technical indicator.

The commitments of traders data released Friday featured a little short-covering, although the full extent of the buying later in the week was obviously not covered.  In corn, funds bought 10,043 contracts but still remain heavily short at -248,041 contracts.  More impressive, the gross commercial long in corn moved to 619,699 contracts, the largest since November 21st, and among the top three positions on record.  In soybeans, funds bought 19,269 contracts to leave them net short -117,023 contracts, which is still 93% of the largest net short ever.  As the chart below shows, the commercial trader remains heavily long this market relative to open interest, even if it is trending down slightly.  For this time of year, commercials have never held a larger gross long.  Funds sold 4,747 contracts of KC wheat to leave them short -23,205 contracts of HRW in total.  In Chicago funds sold 2,480 contracts to put their net short at -166,064 contracts.  Funds bought 25,047 contracts of meal to put them net long 33,121 contracts.  The buying was one of the five largest weeks of buying on record.  Funds are net short -541,735 contracts of corn, soybeans, CGO wheat, KC wheat, MGEX wheat, soy oil and soy meal in total.  As one will notice from all of these markets, even though additional short covering most likely took place Wed-Fri, plenty of ammunition still exists to fuel a further rally.


Bottom Line: Producers are enjoying their seasonal rally, and being given a golden opportunity to catch up on sales, for which most still remain undersold on corn.  In addition, new crop prices are getting back to profitable levels for many, and the reality of more corn and soybean acres needs to be kept in context.  If corn and soybeans buy acres together, and both see planted acres around 91 million, the surpluses of both could be huge with normal weather.  Makes sales based on Return-On-Investment targets as opposed to price per bushel to help add objectivity to a marketing plan.


Good Luck Today.

Tregg Cronin

Market Analyst






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