2/7/2018 Morning Comments

Good Morning,


We picked a heck of 3-day stretch to be off markets with respect to financial markets.  The epic roller coaster in the stock market appears to have somewhat quieted down with E-mini S&P’s down just 9.50 points as of this writing, but the 349 points we dropped from the highs on the 29th to the lows on the 6th is nothing short of remarkable.  Most would be quick to point out that on a percentage basis, the drop wasn’t anywhere near the largest ever, it was still something to witness.  Many have been quick to point the blame at various volatility products, especially the XIV, or the VelocityShares Daily Inverse VIX Short-term exchange-traded note.  Say that three times fast.  This product is designed to be a bet on calm markets, hence the short-volatility premise, and is supposed to trade opposite the VIX, or volatility index of the CBOE.  The XIV fell roughly 85% during the malaise, but as most are quick to point out, would not have caused the broader market selloff.  It should be noted the S&P 500 traded right down to the 200-day moving average, but bounced off of that measure sharply, keeping stocks in bull-market territory for 2018.

The weather focus is squarely on Argentina this morning with dry weather having dominated all of Argy and the southern 2/3’s of Brazil yesterday.  There are no major changes to the Argentine forecast this morning with limited rains expected tomorrow, but fairly soaking rains expected for Friday and into the weekend.  The forecast this morning is calling for 0.50-1.50” with isolated totals over 1.50” on around 75-80% of the growing region.  Following that system, dry weather is then expected to return for most of the next week.  Some are calling these rains “make or break” for the Argentine crop, which should make for a very interesting Sunday night open.  Brazil continues to see healthy rains the next 10-days, which could cause some slight soybean harvest delays.


Follow through buying in wheat and corn with a little overnight set back in soybeans so far this morning.  Interestingly, soybeans opened a good deal higher last night, trading up as much as 5.0c before giving up gains to trade 1-2c lower this morning.  Some of this weakness is probably just consolidation from yesterday’s strong gains, and also traders wanting to take a wait-and-see approach on this weekend’s rain forecast.  There is the February WASDE report tomorrow, but it is highly unlikely the USDA will adopt any of the more aggressive analyst estimates out there for Argentina or Brazil.  Helping yesterday’s strength were comments from the Buenos Aires Grain Exchange which said without these rains in the forecast, the Argentine soybean crop could drop to 40MMT from their current estimate of 51MMT and the USDA’s current 56.0MMT.  In wheat, there is no real fundamental drivers of the price action, which likely means strength is coming from technical buying after KC wheat was able to make new highs for the move.  Most KC contracts are hitting the highest levels since late September, despite US FOB offers moving further and further away from working into major destinations.  Our space saw pretty large short-covering yesterday in everything except corn.  Corn open interest rose 13,578 contracts, soybeans fell 10,803 contracts, meal was up 1,867 contracts, Chicago wheat was down 7,040 contracts and KC wheat was down 6,305 contracts.  Corn open interest is back to within 15,000 contracts of the highest level since February of 2011.

As impressive as the technical action in wheat right now are the US FOB offer comparisons with other major origins.  Going home last night, US 12.50% pro HRW was indicated around $224/225/MT FOB (DMB) which compares with $222/MT FOB a week ago.  Contrast this with 12.50% pro-Russian offers at $198/MT FOB and German at $209/MT FOB.  11.0% pro HRW offers are enjoying a similar premium to similar offers with US at $209/MT FOB vs. Argentine 11.50% pro at $185/MT FOB and 11.0% pro French at $209/MT FOB.  It goes without saying most of these origins enjoy freight advantages to US wheat in addition to the FOB price discount.  With  tomorrow’s export sales report including most of the recent run up in price, it will be very interesting to see what effect it had on importer buying decisions.  Based on Gulf basis changes, it could be an ugly report.

Sticking with wheat data for a minute, weekly deliverable stocks reports showed continued draws at the KCBT and CBOT and a build at the MGEX.  HRS stocks in Minneapolis and Duluth rose a combined 482,000 bushels in the week ended 2/4, with stocks now at 22.019mbu vs. 21.895mbu a year ago.  At the CBOT, combined wheat stocks totaled 81.638mbu, down 1.358mbu on the week and 4.030mbu below a year ago.  Non-deliverable grades continue to run below year ago levels as well at 5.911mbu vs. 6.392mbu.  KCBT stocks fell 1.372mbu on the week to 109.015mbu, but are 5.320mbu above year ago levels.  A big show down could occur this year in KCBT deliverable warehouses should the crop prove shorter than normal and therefore have a higher protein content than the last two years.  KCBT warehouses are chock-full of sub-11.0% protein wheat, and a big majority of probably below 10.5%.  This has kept calendar spreads wide and the best home for southern plains wheat being storage.  If higher protein wheat is achieved, and this low protein wheat can be blended, it could create better demand for the low-pro wheat, helping tighten calendar spreads just as we move into the VSR-era.

Other noteworthy data yesterday included December monthly import and export data from the US Census Bureau on ethanol and DDGs.  The month was a very strong one for ethanol exports, coming in at 173.3 million gallons, the largest single month total since December 2010 and the second largest month on record.  This helped propel 2017 calendar year ethanol exports to 1.367 billion gallons, beating last year by 197 million gallons and beating the previous calendar year record of 2010 by 173 million gallons.  The massive total was aided by Brazil who took 48.5 million gallons, the largest monthly total since May, and helping them tally 445 million gallons in 2017, blowing their previous record of 386 million in 2010 out of the water.  Also noteworthy was China coming in for 22.1 million gallons, their largest total since November 2016, and after having taking essentially nothing for the entire 2017 calendar year.  India was also strong at 20.0 million gallons, their largest monthly total since March 2017, and Canada took their workmanlike 23.1 million gallons.  It will be interesting to see if Brazil is back in January with solid imports, or whether they were just filling their duty-free import total and will now exit the market.  DDGs exports totaled 968,700MT which was up from last month’s 875,302MT and up from last year’s 844,209MT.  2017 calendar year exports were 11.077MMT, down from 2016’s 11.314MMT and the lowest calendar year total since 2013.  China took 21,699MT, the largest total since April.

KC wheat isn’t the only chart which looks strong as corn pushed to new highs both yesterday and overnight, trading to the best levels on a front-month basis since August 22nd.  In the process, spot month corn is now above the 200-day moving average for the first time since August as well, and has the 38.2% retracement of the 4.17-3.36 selloff at $3.67 in its crosshairs.  Momentum indicators still look solid, not showing any signs of a bearish divergence in momentum, funds are most likely still carrying some level of net short position, and calendar spread trade has been very impressive on the rally as well.  The CH/CK spread hit -7.25c overnight, the highest trade since 9/8 while the CN/CZ hit -14.75c, tying the best levels since 9/8.  In addition, after weakness last week, cash markets have stabilized with the PNW firmer than late week totals, and CIF barges absorbing the higher market as well.  Other than the realization of how much corn remains for sale between $3.65-3.70 basis spot month corn, there isn’t a great deal of bearishness to be thrown at this market.  However, once the fund short is covered, we need to ask ourselves who is going to buy this market to take us higher than the $3.70ish area?  Lastly, as we’ve been discussing here a lot lately, CZ18 corn hit $3.94 ¼ overnight, within spitting distance of last year’s $3.96 February crop insurance average.  Anything close to $4.00 CZ18 futures should ensure steady or higher corn acres in 2018.


Bottom Line: Charts look good, and forecasts for Argentina remain a concern.  With soybeans especially, we still aren’t back to levels from late January, so expecting another round of selling from farmers who already had the chance to sell these levels isn’t likely.  Producers are being given a great opportunity to catch up on old crop sales, and take a look at hedging/protecting the uncovered portion of their production which isn’t protected by revenue insurance.  The trend is your friend, and right now trends are up.


Good Luck Today.

Tregg Cronin

Market Analyst






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