2/1/2018 Morning Comments

Good Morning,


Nothing doing on the Midwest radar this morning.  Updated 7-day forecast shows a heavy band of moisture to impact the ECB and Mid-South midweek next week, bringing with it 0.50-1.50” of water-equivalent moisture for the ECB and up to 2.00-3.00” for the US-SE.  The 7-day shows very little chance for measureable precip in the US-HRW belt.  Extended maps show little for relief either with both the 6-10 and 8-14 day well below normal precip for the southern half of the US.  The week 1 and 2 forecasts for Argentina aren’t much better with both maps showing a net drying effect over their respective time frames relative to normal.  Looking back over the last 30-days on multiple time frames, moisture deficits are not especially severe yet, but by the end of the week-2 forecast, things will be getting worse.  Temps will be warming over that period as well, exacerbating moisture needs.  Despite some wetness concerns, Brazil still doesn’t look to have anything in the forecast which would materially impact production.  Areas outside of heavy rain potential are still adding yield.


A new month and lower prices.  January was a pretty solid month for CBOT prices with soybeans closing up 44.0c, KC Wheat up 40.0c and corn up 10.75c.  The wheat strength was particularly impressive considering January is typically a rather negative month for wheat prices seasonally.  The only worse month seasonally than January is February, which brings our current rally into the spotlight given the odd timing of a production-scare type rally.  The overnight price weakness could be a sign of that to some degree as traders weigh historically poor crop conditions against US FOB offers which aren’t competitive into almost any origin.  Add that to the fact the 17/18 marketing year still has plenty of work left to do in order to ensure no additional cuts to the USDA export forecast take place.  Would appear to have been additional short-covering by the managed fund community during yesterday’s session where corn O/I fell 7,345 contracts, soybeans were down 2,115 contracts, SRW wheat was down 2,027 contracts and KC wheat was down a rather large 10,792 contracts.  Since the KC wheat rally began, open interest is down 26,996 contracts, or 7.8%.

A fair amount of data yesterday including weekly ethanol production which fell 22,000bbls/day to 1.040 million bbls/day, which was also 2.0% below the same-week production from a year ago.  Unfortunately, this was the third week out of the last five which was below year ago levels, creating more of a focus on production rebounding moving forward.  Weekly ethanol production needs to average about a 1.0% increase over year ago levels each week through the end of August.  Weekly ethanol stocks fell sharply, down 755,000 bbls to 23.045 million, but remain rather large from a seasonal standpoint.  At that level, they are the second largest since last May.  Fortunately for ethanol producers, ethanol has been enjoying in the energy complex rally, albeit to a lesser extent, rallying from decade lows in mid-December around $1.25/gln to $1.41 this morning.  Recent trade has pushed the contract above its 50 and 100-day moving averages with a serious of higher-highs and higher-lows.  Calendar spreads have also rallied, but the RBOB/Ethanol spreads from spot through August remain at huge premiums for RBOB.  The 6-month strip calculates at 59.6c/gln this morning, which should be encouraging large amounts of discretionary blending.

Also released yesterday was the bi-annual cattle inventory report which came in slightly below expectations.  All cattle and calves as of 1/1/18 totaled 94.399 million head which was 100.7% of the inventory on 1/1/17.  This was slightly below the average trade guess of 101.3% of year ago levels, but the overall number is still the largest cattle inventory since 2009, and is over 6 million head larger than the record low set in 2014.  The annual calf crop came in at 35.808 million head which was up 102.0% from a year ago, slightly larger than the 101.5% pre-report estimate.  Total cattle on feed for all feedlots as of 1/1/18 totaled 14.0 million head, which is up 7% from a year ago.  Based on the data, the US cattle herd looks set for another year of expansion, which will keep support underneath current feed estimates for corn, wheat and to a lesser extent soy meal.  Coupled with record large hog and pig numbers as well as record poultry numbers, there should be doubting actual feed demand, even if the residual category continues to be a mystery.  It should be noted, feed demand was larger about a decade ago, but feed efficiencies, especially in hogs and poultry continues to climb.

Other than the winterkill/HRW discussion here in the US, the big topic in the analyst community has been the rising Brazilian production estimates and the falling Argentine estimates.  Some private analysts have been cutting Argentine production for a week or two now, even though it is the equivalent of late June there.  Nonetheless, we have seen some estimates down around 52-53MMT vs. the USDA’s latest at 56.0MMT and 57.8MMT last year.  Keep in mind, private analysts were busy cutting Argentina to sub-50MMT a year ago at this time before they bounced back in a big way.  Nonetheless, if we take Argentina at 52-53MMT, where does that leave us with Brazil?  The USDA is currently at 110.0MMT vs. 114MMT, but almost no one with any contacts in Brazil thinks this crop is any smaller than a year ago.  If we leave it at that and walk away, combined Braz/Argy soy production would be 166-167MMT vs. 171.8MMT a year ago.  However, as recently as yesterday, some impressively large Brazilian production numbers have begun floating around as harvest advances toward 15-20% in Mato Gross and yields are above last year.  If Brazilian production gets close to last year’s record yields of 3.37MT/ha with say a 3.30MT/ha, on this year’s larger acres, production bumps to 115.5MMT.  Combined production would then be at 167.5-168.0MMT.  With the near-perfect weather experienced in Brazil this year, are record yields out of the question?  If record yields of 3.40MT/ha are achieved, production would move to 119MMT, with combined production at 171-172MMT, tying last year with Argentina’s yields falling to the lowest since 2013/14 and 11.7% below last year.  As one can see, the South American soybean situation is by no means a train-wreck, even assuming some pretty serious yield cuts to Argentina which are arguably to severe given the current development stage of the crop.  South America has shown a fair amount of resilience the last couple of growing seasons, so counting on a disaster in Argentina to continue to support prices might be getting ahead of ourselves.

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


Bottom Line: A new month bringing some weakness early with funds still probably toting decent sized short positions in most of our markets.  Tomorrow’s COT data isn’t likely to show the full extent of the short-covering which occurred this week, especially in KC Wheat, which could be nearly covered by now.  With that in mind, and given the date on the calendar, and given the current spread in FOB prices among major competitors, producers should be taking a hard look at both old and new crop HRW offerings.


Good Luck Today.


Tregg Cronin

Market Analyst






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