2/2/2018 Morning Comments

Good Morning,


While much of the focus in wheat markets lately has been the impressive rally in KC Wheat, what has also been noteworthy is the spread between US wheat futures and Paris Wheat futures.  Paris wheat didn’t rally nearly as hard as KC to begin with, advancing the equivalent of around 24c/bu, but has corrected since January 30th, to only be a net 7c/bu higher than the nearly two-year lows from mid-January.  This has corrected the KW/PM spread to just $25.42/MT premium Paris compared with the $36.00/MT premium on January 23rd.  What’s further, this spread is now trading below its 200-day moving average for the first time since July.  The W/PM spread is still trading at $31.22/MT, just above its 200-day moving average as the strength has been much more pronounced in KC.  This will be a spread to watch as US-HRW had already blown past most major competitors on a FOB basis.

Dry weather dominated most of Argentina yesterday, while light rains fell on 85% of the Brazilian growing region.  Limited rains are still seen the next 5-6 days in Argentina, carrying over to the 6-10 for much of the region.  Lots of waffling for the end of the 6-10 and beginning of the 11-15 day with better rains seen for most of Argentina by that period, but it is still a long ways out at best.  In addition, the changes were subtle compared with previous model runs, so a widespread/soaking event still doesn’t look guaranteed.  Model changes on Sunday night will be important for next week’s expectations.  Still doesn’t seem to be anything out of the ordinary with Brazil.


Easier markets as we get set to close the first trading week of February.  For the week, soybeans are down 5.50c, KC wheat is up 21.75c and corn is up 5.25c, with wheat and corn working on their third consecutive higher weekly close.  Kansas City wheat has stalled out a bit the last three sessions, making new highs Wednesday, but failing to close at new highs.  Nonetheless, despite sizable intra-day selloffs, KC futures have managed to rally back almost every day to close high range.  Continuous charts remain just below the 38.2% retracement of the 5.77-4.10 selloff at $4.74, a level which will probably remain as solid resistance.  Money mainly flowed into the CBOT during yesterday’s session with a sharply lower oilseed complex, struggling wheat contracts and a two-sided corn market.  Corn open interest was up 15,789 contracts, soybeans were up 7,519 contracts, meal up 6,716 contracts, Chicago wheat up 2,949 contracts and KC wheat up 3,921 contracts.  Active-continuation charts of corn show price at $3.6175 just below the 200-day moving average of $3.6225, a level if traded above could prompt another round of short-covering.  Copious amounts of cash corn should be for sale overhead, also.

Export sales were probably the largest talked yesterday, for many reasons.  Corn sales were impressively large at 72.9mbu, the largest since November and well above the 20.9mbu needed weekly to hit the USDA’s export estimate.  It is somewhat comical the way the analyst community is so quick to alter export estimates based on a couple weeks’ worth of sales.  Some are ratcheting up corn export sales, which probably can be argued given the improved sales pace should continue for the foreseeable future with South America focused on soybeans and Ukraine finding a smaller crop than originally expected.  Total commitments of 1.269bbu are still down 20% from a year ago vs. the USDA calling for a 16.0% decline y/y.  Wheat sales were not as positive at 10.6mbu vs. the 13.1mbu needed weekly, and given the sales report didn’t cover most of the recent rally, it is expected future sales reports could be even worse.  Total commitments of 750.0mbu are down 11% from a year ago vs. the USDA calling for a 7% decline.  Soybean sales were the real show-stopper at just 13.2mbu, coming in below expectations and well below the 18.8mbu needed weekly to hit the USDA estimate.  The 7-month low in soybean export sales is thought to be partially quality-related with the more stringent foreign material discounts implemented on US-only beans as well as concerns over a lower protein crop compared with South American stem.  Total commitments are down 13% from a year ago vs. USDA calling for a 1% y/y decline.

Other big news yesterday was the Buenos Aires Grain Exchange cutting their estimate of Argentine soybean production to 51MMT from 54MMT last month and vs. USDA’s last at 56MMT.  This was somewhat of a surprise considering the Argentine crop is just starting to flower on the earliest planted soybeans, while the last few percent of soybean acreage is still being planted.  Nonetheless, it is always helpful to take a closer look at the breakdown of a production estimate in terms of yield and acres as opposed to just flopping whole numbers out.  If acreage is set at 18.700 million hectares, then a yield of 2.72MT/ha would be needed to produce production of 51MMT.  To put this in perspective, that would be 13.4% below last year (which was not a record), and would be the lowest national average soybean yield since 2012/13.  Importantly, even with a production number which would be considered low by the trade, ending stocks on a Sep/Aug marketing year, would still be 31.170MMT vs. the 5-yr average of 29.460MMT.  This is due in large part to the fact Argentina is carrying in record old crop supplies which will help buffer any yield short-fall.  To be clear, we are not subscribing to this low of an estimate at this time as we feel we are too early in the crop development stage to make that sort of a low ball estimate.  Even with an estimate that low, the larger beginning stocks will help buffer Argentine supplies to the point demand probably isn’t affected.  Couple that with still growing Brazilian crop estimates, and combined South American supply and demand should still be on pace if not growing.  These ideas need to be kept in context when headline flashes of production estimates are released.

A few wheat notes of interest, the KC spot floor saw a swift drop for 13.0-14.0% protein with bids and offers down 25c/bu.  13.0% protein is now indicated at +225/240H vs. +245/260H a week ago.  HRW offers at the Gulf were also weaker, which should be a huge surprise given the big premium the US is carrying vs. other origins.  Some are still making the claim the HRW balance sheet needs to be rationing exports given the declining crop prospects.  Again, not sure if we can subscribe to that theory this early in the game, especially considering old crop exports have work to do just to meet the USDA’s estimate or risk bumping carryout higher.  Garnering as much focus has been inter-market spreads which saw new highs posted overnight for KW/W.  With expectations for a short crop with a higher protein profile, the thinking is Kansas should reassert a more traditional 20-40c premium over Chicago, although doing so on February 2nd might be a bit hasty.  The same thinking carries over to MW/KW which is trading at the lowest levels since June and well below the 200-day moving average.  With normal protein, Minneapolis should only carry something around a 60-100c premium over KC.  That is a long way away, especially considering as much of the Northern Plains is covered in drought conditions as the Southern Plains.  For what it’s worth, new crop KC calendar spreads rallied sharply in late January, but have been setting back the last two days.  These should provide clues about the market’s new crop ideas and expectations.


Bottom Line: Midday model runs from South America may be key about how we finish today, but still an impressive week for grains provided we don’t give it all back today.  Both the South American weather issue and the US Southern Plains weather issue seem premature to me, and it feels like the market is realizing that with the late week trade.  This isn’t to say we don’t have issues which need to be monitored, but simply killing both crops on February 2nd is inherently difficult to do.  All three of our markets have work to do on their export estimates to ensure USDA doesn’t make any additional cuts with corn looking the best for adding to its export estimate.  Producers should not get lulled into a false sense of security with the rallies this week, on either old crop or new crop.  As always, stress test your marketing plan against your biggest risk, not your biggest reward.


Good Luck Today.


Tregg Cronin

Market Analyst






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