2/9/2018 Morning Comments

Good Morning,


While the focus has been on the equity market selloff as of late, crude oil has quietly sunk to the lowest levels of 2018, dropping below its 50-day moving average for the first time since October during yesterday’s session.  The correlation between a growing economy, strong stock market and higher energy markets is not a newfound idea, but the spotlight has been off the bull crude oil market thanks to the turbulence in stocks.  Unfortunately, crude doesn’t have much for support until the $58.00/bbl area if the 60-handle gives way.  Some correction in the Brent/WTI spread also looks likely as it had dropped to near $3.00/bbl, the tightest spread since August as managed funds built a record net long position in WTI.

A good round of snow fall blanketed the upper-Midwest in the last 24-hours, providing the best snowfall of the year in many locations as evidenced by the map below.  This has provided a good layer of insulation to the winter wheat in South Dakota and Nebraska which had been lacking for much of the last two months.  There isn’t much snow cover across KS, and nothing in CO/OK/TX, but that isn’t an uncommon phenomenon either.  The southern plains do have a couple of chances for moisture during the 7-day outlook with a combined 0.10-0.50” possible between the two shots.  The ECB stays wet with another 0.50-1.25” possible of water-equivalent moisture.  The southern plains should make these two chances count as both the 6-10 and 8-14 day outlooks show below normal precip for the region.  Temps start out normal for the Midwest before shifting to below normal in the 8-14.  South America still hinges on the weekend rains for Argentina and the follow up rains next weekend.  Sunday night’s open should be an indicator of rainfall received.


Easier markets this morning as we continue to digest yesterday’s WASDE report, but also the CONAB numbers from Brazil which are arguably more important for future price direction than what WASDE provided.  Money flowed out of commodities in a big way yesterday with corn and soybeans closing higher and wheat lower.  Corn open interest dropped 31,178 contracts after what had been a one-way train higher for most of the last 2-months.  Soybean open interest fell 18,269 contracts, meal was up 10,067 contracts, SRW wheat was down 5,347 contracts and KC wheat was down 1,960 contracts.  This afternoon’s COT data will be rather interesting for the trade to figure out what kind and what size of positions the managed funds are holding given the higher trending markets as of late.  The risk for the current up-moves in our space is once the managed positions have been covered, both the funds and the farmer will be long, potentially leaving a void of buyers.  Having said that, corn demand remains robust for exports, ethanol and feed with basis holding together rather well for the uptrend.  Crush demand remains solid in soybeans, but export demand still leaves plenty to be desired.  Wheat demand is tepid at best with export interest nil and domestic demand ho-hum.

The corn market provided the most fodder for analysts yesterday, and that’s what I’d like to focus on today.  CONAB put their corn production number at 88MMT yesterday, well below what the trade was looking for, and a full 7MMT below the USDA’s unchanged Feb WASDE number.  The fact USDA opted to leave their number unchanged is a real head scratcher, and makes a person wonder if they bothered even analyzing Brazilian corn conditions this month?  Nonetheless, this bolsters US corn export ideas for both 17/18, but especially 18/19, and in our opinion fully justifies the USDA’s decision to bump the 17/18 export estimate by 125mbu.  This prompted us to take a closer look at the 18/19 balance sheet and a few acreage implications which will obviously change a good deal over the next 3-months.  Our balance sheet below shows the 17/18 updates from USDA, and also plugs in a 172bpa trend line yield against four different acreage scenarios.  90.2 million would be unchanged from this year, while two scenarios show larger acres and one smaller.  We are using 14.800bbu worth of demand which assumes a small increase to ethanol demand, a 50mbu increase to feed demand and a further 150mbu increase to exports which would still be below the 16/17 export estimate.  One could argue this demand estimate is too high for this early in the year, but even though y/y demand change has been volatile, the 10-yr average is 2.80%.  Our 14.80bbu demand number would be a 1.15% increase from 17/18.  Growth at 2.80% would imply at 15.003bbu.  We don’t think you can get to 15.00bbu type demand numbers without another bumper crop and plenty of supply to keep prices subdued.

Moving on, one can see with unchanged acres, carryout would fall to 1.857bbu, which would be the lowest since 2015/16, and the last time the average corn price received was above $3.50/bu.  If acres were to fall a million from this year, even with a trend yield of 172bpa, carryout would drop to 1.668bbu, the smallest since 2013/14 when corn price received average $3.70.  Even with a two million acre increase to planted acres, and keeping demand at 14.800bbu, carryout still drops to 2.142bbu vs. 2.350bbu this year.  It would take a national average yield on par with the last two years near 175.0bpa to give us a carryout of 2.395bbu, or about unchanged from 17/18.  This isn’t to say we can’t do 175bpa, because we’ve done it the last two years with less than optimal growing conditions for most of the WCB last year, but the burden of proof would appear to be on bears at the moment provided demand holds up.

The only other thing we wanted to touch on would be the correction in wheat, both on the futures board and cash market.  KC wheat posted a rather ugly reversal yesterday, putting in fresh highs for the move, but also trading below the previous day’s low.  Fortunately, we didn’t close below the previous session’s low, but the follow through selling today is obviously a yellow flag.  Momentum indicators have understandably turned lower, and possibly have put in a bearish divergence in momentum.  However, only trade below $4.54 ½ would be able to confirm that, and in-turn solidify the current up move is over.  Making matters worse was the cash floor trade on the KCBT spot which saw every protein class except ORD’s trade lower by 5-40c.  High protein was hit the hardest, down 40c with 13.0% protein now indicated at +185/200H vs. +225/240H a week ago.  12.0% pro was seen at +160/175H vs. +165/180H a week earlier.  TX-Gulf bids and offers were also down 5c for most slots.  The basis response highlights the fact wheat still needs demand at these higher futures levels, something which is very tough to argue at the moment.


Bottom Line: The USD Index has corrected higher, equities remain volatile and energy markets are well off 2018 highs.  Lots of positives in grains from dry southern plains weather to improved export demand in corn.  Yet, there remains plenty of old crop corn for sale above the market, soybean export demand still has issues hitting the USDA’s revised estimate, and the focus to spring planting and acreage is over a month away.  Some consolidation of the recent move is probably warranted while the trade continues to assess South American weather.


Good Luck Today.

Tregg Cronin

Market Analyst






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