2/8/2018 Morning Comments

Good Morning,


China released January import/export data last night, with both beating trade expectations.  Imports surged 36.9% y/y vs. expectations of a +9.2% gain, while exports were up +11.1% y/y vs. +10.2% expected.  The trade surplus came in at +$20.43 billion vs. estimates of $56.4 billion thanks to the much larger imports.  Some of the import highlights included iron ore imports of 100.34MMT, up 9.1% y/y, copper and copper product imports were up 17% at 443,000MT, crude oil imports were 40.64MMT which were up 19% y/y and soybeans were 8.48MMT which were up 11% on the year.

No major changes to the South American forecast with fairly widespread, soaking rains into most of the Argentine growing regions this weekend.  Totals are still expected to be in the 0.50-1.50” on 75-80% of the growing areas.  However, follow up rains are absent until next weekend with warm temps until this weekend, then a cool down following the rains.  There will be temps warming into the 90’s for the second half of next week making the rains 10-days out critical.  Brazil appears to be on pace to continue receiving beneficial rains with temps running close to average in most cases the next 7-10 days.


Some consolidative trade overnight, especially in wheat which is trying to digest its 2-day, 20-cent move in Chicago and 19.0c gain in KC.  Both KC and Chicago made new highs overnight before turning lower, and would very much like to turn things around during the day session to keep a potential reversal candle off their charts.  Otherwise, both winter wheat charts still look good from an intermediate and long-term stand point.  Corn charts also look strong after this week’s trade, stringing together three winning sessions in a row for a 6.0c gain.  Importantly, corn charts are not as yet showing hints of a bearish divergence in momentum, while wheat charts appear to have made new highs on declining momentum.  Any set back in wheat charts below a minor corrective high like $4.52 basis Chicago or $4.70 basis KC would be a warning signal.  Soybeans remain torn between the current upsurge being a corrective high ahead of new lows below $9.67, or whether the entire move down from late-Jan highs is corrective ahead of new highs above $10.04.  Based on momentum and spread trade, would lean toward the former.  This morning’s WASDE report will grab headlines, but in all honesty, it should be a fairly quiet report in terms of market moving data.  The USDA almost never comes clean on South American production in February, preferring to wait until more data is available in March or April.  In addition, US changes should be light, and if anything should be negative via export cuts to soybeans and wheat.

As important as the USDA later today was CONAB earlier this morning releasing their most recent estimates of Brazilian production.  The group raised their soybean estimate to 111.6MMT from 110.4MMT last month, but would remain below the 114.1MMT produced last season.  As recently as yesterday, boots-on-the-ground are pegging the Brazilian soybean crop as high as 116-118MMT thanks to incredible early yield reports in the country’s largest soybean state, Mato Grosso.  As interesting, however, was CONAB reducing their estimate of Brazilian corn production to 88MMT from 92.3MMT last month and a record 97.8MMT a year ago.  The group cited reduced yields and smaller planted area as to their reasoning behind a smaller corn crop.  Between the Brazilian cut, and Argentine weather, if there is a US export story to be made one way or another, it is likely to be corn from June into new crop as opposed to soybeans.  The world has plenty of soybeans to meet Chinese demand, but cheap and readily available corn supplies can be best met by the US.

Speaking of US soybean imports, markets were probably rattled yesterday when reports hit newswires that China was considering trade measures on soybeans in addition to their review of anti-dumping legislation on US sorghum.  These two measures continue the tit-for-tat between China and the US which was ramped up by President Trump when he slapped tariffs on imported solar panels and washing machines.  If this were even 2-3 years ago, China would most likely not have put soybeans on the table, but now that they import a larger percentage of their beans from Brazil than they do the US, at a time in which both countries have copious amounts of soybeans, the move puts China in much less jeopardy.  However, any snag in Brazilian weather or logistics which compromises those imports would likely see the measures taken right back off the table.  China knows better than anyone how important food security is, and what a short-sighted move that would be with a commodity they are so heavily import-dependent.  Nonetheless, the entire narrative is likely to keep the soybean market on edge the next several weeks.

We’ve been talking at length recently about wheat charts looking positive, but at the same time US FOB offers becoming increasingly uncompetitive.  Another measure which illustrates this rather well is the spread between Chicago/Paris futures and KC/Paris futures.  The spread between PM/W is trading at $27.88/MT this morning which is the lowest since Thanksgiving, and below the 50/100/200-day moving averages by quite a margin.  Even more impressive is the PM/KW spread which is trading at $20.01/MT this morning, the lowest print since July 20th.  Looking at a much longer weekly time scale, the 200-period moving average comes in at $15.82/MT, so the current price is still above a very long-term look, but the correction in these two prices is undeniable.  Considering we have yet to break dormancy, and considering the US balance sheet is still carrying a huge supply buffer, albeit of lower than desirable protein, the timing of this surge is still suspect.  In addition, as we pointed out last week, February is the worst month of the calendar year in terms of 30-yr average seasonal returns, again making the timing of this rally look questionable.  Producers should review marketing levels often.

Other data yesterday included weekly ethanol production which was up 17,000bbls/day to 1.057 million bbls day and about unchanged from the same week a year ago.  This is below the roughly 1.1% gain ethanol production needs to run on average above year ago levels each week through the end of August.  Weekly stocks surged along with production, up 444,000bbls to 23.489 million bbls, which is the third highest level on record.  This is interesting considering the surge in exports witnessed the month of December.  It could have implications about exports during the month of January, especially if Brazil does not make as big of splash as they did at the end of 2017, and if China doesn’t make their imports from December a consistent feature.  Worth noting, the spot month RBOB/Ethanol spread has corrected rather sharply in recent days, down to 34.6c/gln from a high around 55.0c/gln just 10-sessions ago.  Back months are still close to 50.0c/gln, but this is off from highs close to 70.0c at the end of January.  Almost all of this correction has been because of the RBOB selloff while ethanol prices have remained relatively static.


Bottom Line: USDA headlines will carry the day later this morning, but more important to us were the CONAB numbers from this morning, and the weekend rainfall event in Argentina.  If the rains underwhelm, the soy market could be in for a sharply higher open Sunday. If the rains over-perform, the opposite could be true.  Spring wheat hasn’t had anything to rally about lately given the story started with US winter wheat conditions and carried on because of the heavy fund shorts in those two markets.  Minneapolis won’t be grabbing headlines until the February insurance pricing is over or producers begin to head to the fields.  Having said that, I wouldn’t sleep on Minneapolis given the relatively tight balance sheet projections even with an acre increase and normal yields.  In addition, inter-market spreads between MW/W and MW/KW have been a one-way street with funds covering winter wheat shorts and dumping spring wheat longs.  If the focus shifts to spring wheat, it will be apparent which direction those spreads will trend.


Good Luck Today.

Tregg Cronin

Market Analyst






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