1/30/2018 Morning Comments

Good Morning,


Nothing on the Midwest radar this morning, and should be quiet for most of the week.  Toward the weekend, some lighter chances of moisture move across the corn belt, but the southern plains should remain dry the next 7-days at least.  The 6-10 and 8-14 day precip maps from NOAA are also keeping things below normal for the southern plains, which puts us out to February 12th without any meaningful chance of moisture.   No major changes to South America with limited rains expected across Argentina the next 7-10 days.  Southern Brazil will also be on the drier side the next 10-days, while tropical rainfall will continue falling in Northern Brazil and impacting harvest.  The dryness in Argentina is a big enough concern, but it also looks like the heat is going to be turned up with mid-90’s the next 5-days, and some 100’s seen by the 10th of February.  Soybeans in Argentina will be flowering most of February and filling pods beginning in March.  Corn is silking right now, and will be filling in February according to the USDA.


The dog with fleas is having its day in the sun.  While most were busy trying to figure out how to add KC wheat to their quote screens yesterday, the contract hit the highest level since September 29th, and is adding another 11c overnight.  Back-to-back gap-opens on the overnight is price action more commonly associated with the growing season as opposed to a still dormant crop.  Nonetheless, the worse than expected crop conditions released by several key HRW producing states after the close helped to gas prices overnight.  Many fundamental traders have been quick to point out crop conditions at the end of January are hardly a good indicator of final yield potential, but when added to the weak-dollar environment and the heavy fund short position, the combination is enough to spur short-covering.  The question now becomes how far can wheat run given it is only January 30th, and given US wheat prices have already been pushed out of export grids by most major importers?  For producers looking for some sort of a derived level, the 38.2% retracement of the $5.77-4.10 selloff comes in at $4.74.  Price action in wheat was undoubtedly short-covering with KC wheat open interest dropping 5,232 contracts, Chicago down 4,367 contracts, soybeans down 953 contracts, but corn was up 16,049 contracts.  The big jump in corn open interest with funds short and price up is a bit of a head scratcher, especially with export basis mostly weaker this week.

Getting to the real impetus of the overnight strength, several HRW states released crop condition reports yesterday afternoon with the focus on Kansas.  The USDA called Kansas wheat 14% G/E which compares with 37% at the end of December and 44% at the end of January 2017.  The Kansas condition index score of 261 is sharply below anything from the last four years on this date, and would be well below anything from the last 12-years in January of February.  We will be taking a closer look at historical crop conditions this week and seeing if there is any relationship to harvested acreage given yield is too much of a wild card at this stage.  Other states of note included OK at just 4% G/E vs. 15% at the end of December and 33% in January 2017.  CO was 36% G/E vs. 40% in December and 40% a year ago.  NE was 48% G/E vs. 64% in December and 44% in January 2017.  SD was 24% G/E vs. 20% at the end of December but down from 62% a year ago.  Finally MT was 66% G/E vs. 40% in December but down from 70% a year ago.  The crop condition scores are a bit troubling, but one must remember these are subjective ratings, not objective ones.  In my opinion, some objectivity is needed when viewing these subjective ratings.  Dormant wheat which hasn’t had any rain in a month is going to look poor, but is there still yield potential to be gained in this wheat?  I don’t think there is any doubt.

Jumping off of that yield potential idea, I also think it is worth taking a look at seasonality to see how this rally fits into the normal progression of price throughout a marketing year.  Using Chicago wheat, the contract is up 27.75c for the month of January so far.  According to www.sentimentrader.com, over the last 30-years, January is the second worst month in terms of average performance for the entire calendar.  Over the last 30-years, January has averaged a -1.287% loss.  Even more interesting, February is the worst month from a seasonality perspective over the last 30-years, averaging a -1.525% loss.  What this tells me is the current rally in winter wheat is a little bit of a “duck-out-of-water.”  There is a reason we usually don’t get major seasonal advances during this time of year, because the crop is almost always dormant, providing precious few clues about the ultimate yield potential.  It should make us question how much of this rally is really about production potential, and how much is about the favorable macro environment.  With that in mind, is this a rally to ride or take advantage of, given it is January 30th?

Transitioning back to the export idea, one thing helping wheat continue its rally has been the appreciation in Russian FOB offers along with other global suppliers.  At the close last night, Russian spot offers were called $197/MT FOB with March at $198/MT.  This compares with $196/197/MT a week ago.  Unfortunately, US-HRW prices are running well past this with FOB offers called $214//MT for Feb/Mar vs. $207/MT a week ago.  French offers were seen at $202/MT FOB vs. $195/196/MT a week ago.  After a decent week of export sales last week, it would appear we are running the risk of blowing right through competitor origins and dragging sales back to seasonal lows.  Inspection data released yesterday was supportive with wheat at 21.3mbu vs. 20.3mbu needed weekly, and were the largest inspections in five weeks.  Total inspections of 595.0mbu are down 3.7% from a year ago, which is better than the needed level.  Corn inspections were 39.1mbu, the largest of the marketing year, and well better than the 42.2mbu needed weekly.  Total inspections of 540.8mbu are still down 34.2% from a year ago, however.  Soybean inspections of 40.6mbu were better than the 28.9mbu needed weekly, but were the smallest since September.  Total inspections of 1.226bbu are down 14.0% from a year ago while the USDA is still calling for a 1% decline y/y.

A couple South American crop progress tidbits to point out.  Brazilian soybean harvest as of 1/26 was reported yesterday, coming in at 4% complete vs. 1% last week, 5% in 2017 and 4% average.  Mato Grosso made a big jump to 12% complete from 3% last week and would compare with 9% average.  Brazilian soybean harvest is likely to drift behind average over the next 7-10 days given the rainfall forecast.  Argentine corn planting progress was estimated at 89% complete vs. 86% last week, 96% last year and 94% on the 5-yr average.  Soybean planting was seen at 97% complete vs. 95% last week, 99% last year and 98% average.  The concern with Argentine would be A) that all of the intended acreage gets planted instead of left fallow due to dryness, and B) how late harvest could be if delays persist.  With only a few percent of the crop left to plant, those fears should be minor.


Bottom Line: Wheat volatility has spike from week ago levels, and should take another leap higher with today’s overnight price action.  This is going to pump option premiums up as many race to buy calls and get in on the action.  As would be expected, the put/call skew is heavily in favor of calls with 470 calls at 25.0% volatility and 450 puts at 22.5%.  Keep this in mind when making the decision about re-owning bushels vs. protecting new crop bushels.  Where is the money better spent?  We will be taking a closer look at the HRW balance sheet this week to get a few different scenarios for 18/19.  Don’t lose sight of the opportunity the market is providing across the entire grain market spectrum for both old and new crop.


Good Luck Today.

Tregg Cronin

Market Analyst






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