2/28/2018 Morning Comments

Good Morning,


The USD Index is back over the 90-handle level this morning for the second time this month, trading at the highest level since February 12th.  In addition, the USD is knocking up against the 50-day moving average which rests at 90.7109 this morning.  Momentum is up and showing no signs of divergence, suggesting the next stop for the index could be the 92.64 level which is the corrective high from January 9th.  March is a fairly strong month from a seasonal perspective for the USD Index, and while sentiment towards the greenback has recovered, it is by no means in “overbought” territory.  Commercial hedgers remain bullish on the USD with a net position of just -1,158 contracts, just below the one standard deviation high of the 3-yr average.  The 50-period moving average position for commercial hedgers is -13,789 contracts.

Weather remains the focus in both the US and South America with flooding wreaking havoc on the inland waterways of the United States while drought is firmly in place in Argentina.  As of last night, NOAA said there are 22 gauges on the various rivers of the US at major flooding stage including the upper-Mississippi, the IL-River, the Mid-Miss, The OH-River and the lower-Mississippi.  The CME Group has announced force majeure on the IL-River, OH-River and lower-MS.  This will cease loading operations at CME warehouses until lifted.  Another 1.00-4.00” are expected to fall on the lower and mid-Miss rivers the next 7-days, making flooding conditions worse and leaving no place for excessive rains falling in crop fields to go.  This flooding will need to be monitored into March as early planting attempts to get rolling in parts of the Delta and Mid-South.  No change to South America with tropical rainfall expected in Brazil, while limited rainfall still seen over Argentina the next 10-days.  The only meaningful rains will drop in far western growing areas, providing little to no relief to the heart of the Argentine growing region.


Sharply higher once again overnight led by soymeal and KC wheat which are up between 1.9-2.2% as of this writing.  Despite being a rather negative month from a seasonal perspective, the wheat boards have turned in a particularly impressive performance during February.  For the month of February, including today’s gains, corn is up 10.50c, KC wheat is up 31.25c, soybeans are up 50.25c and soymeal is up an astonishing $59.80/ton.  There is nothing in the way of resistance for spot month soymeal between current prices and the $432.50 highs from June of 2016.  Open interest changes during yesterday’s sessions saw corn up 3,579 contracts, soybeans down 17,369 contracts, meal down 9,318 contracts, oil down 19,173 contracts, SRW wheat down 10,505 contracts and 3,490 contracts.  Some of the drop could still be related to option expiration, but most is probably positions being pared ahead of first notice day.  Tickets went to the delivery warehouses last night which we will discuss below.

Some very interesting chart points are coming into focus for many of the CBOT contracts with overnight’s price strength.  In KC wheat, from an active-continuation basis, overnight gains have put the contract right at the 61.8% retracement of the 5.77-4.10 selloff at $5.13.  At the same time, total volume at the KCBT has been declining since peaking at the end of January, while open interest has been in a general declining pattern as well.  Chicago wheat has just pushed through the 38.2% retracement of the entire 5.74-4.11 selloff at 4.73.  The 50% retracement is just ahead at 4.9275.  May corn has the 200-day moving average resting just above at 3.8025 vs. overnight highs of 3.80.  In addition, the 100% Fib progression of the 3.5375-3.7050 rally snapped on to the corrective low from 2/6 at 3.6425 runs across at 3.81.  These could be important resistance points, especially considering the run corn has been on.  In soybeans, the active-continuation chart shows the 50% retracement of the 12.07-9.03 selloff lining up at 10.55 vs. the overnight high of 10.48.  Importantly, the SN/SX made new highs for the move overnight at 33.25c, the highest trade since July 31st.  FWIW, March is the second strongest month of the year from a seasonal perspective, averaging a 2.893% return over the last 30-years.  March is also the second strongest month from a seasonal standpoint for soybeans, averaging a 1.960% return over the last 30-years.  Much like Jan and Feb, March is a negative month for wheat prices seasonally, averaging a -0.375% return over the last 30-years.  It needs to be pointed out, however, that Feb and Jan are the two most negative months of the calendar year, both of which turned in strong performances.  This is why seasonals are only as good as the season one happens to be in.

The rally continues to be led by soymeal, allowing board crush to make new highs for the move, and new record highs for the time of year.  Spot month board crush traded to 179.60/bu overnight, the highest print since December 12th, 2014.  The highest trade ever according to our records for spot month board crush was $2.68/bu in September of 2014 when it looked like we might run out of soybeans before getting to new crop.  However, some distortion with contracts in delivery was likely during that time frame.  Regardless, the incentive to crush at max capacity is certainly available, and arguably needed considering the amount of demand which might need to be pushed to Brazil, China and the United State to make up for Argentina.  Oilshare also made new lows for the move overnight, trading down to 29.0%, the lowest trade since July 14th, 2016.  As we wrote about last week, oilshare does not spend a lot of time below 30%, and especially not below 28-29%.  These levels need to be monitored closely in coming days, as a rebound in oilshare could be a signal the larger soymeal move is running out of steam.  For now, oilshare says meal rolls on.

Tickets went to the delivery warehouse last night, with the only real changes of note being 6 registrations being canceled in NW-OH, leaving 54 outstanding.  There were no deliveries of Chicago wheat overnight, supporting the H/K overnight.  There were only 134 deliveries in KC wheat despite there being 450 registrations outstanding.  Doesn’t look like strong commercial participation on either side.  There were also zero Minneapolis wheat deliveries despite there being 1,281 registrations outstanding.  Soybean deliveries tallied 101 with no major commercial participation on either side.  Soymeal saw nine deliveries, while soy oil saw 1,786 deliveries with around 1700 fresh registrations last night by Bunge and AGP.  Corn deliveries totaled 25 registrations out of a possible 724 with little major commercial participation.  Would characterize the entire first notice day as lighter than expected in terms of the number of deliveries relative to what was expected as recently as yesterday.

Obviously the focus has been on South America and the oilseed complex, but outside of the US and the strength in KC wheat, global wheat prices are also appreciating.  The Platts Black Sea Wheat settled contract rallied as high as $204.00/MT on Monday before setting back to $200.75/MT yesterday.  This compares with $187.00/MT on January 2nd, a rally of 46c/bu, which compares with 56c/bu for March KC wheat over the same time frame.  The Platts Australian Wheat FOB contract closed yesterday at $239.25/MT vs. $229.75/MT on Jan 2, a rally of 25c/bu.  Paris Milling Wheat basis the May contract is trading at €166/MT this morning vs. €162.75/MT on Jan 2, but the contract sold all the way off to €157.75/MT on Jan 16.  This has been a rally of 27c from the lows.

While still on wheat, obviously the declining conditions in most HRW states has analysts chopping yields and harvested acreage.  Conditions and yields enjoyed an impressive rebound last year with late March and April rains, but both are starting from a lower bar this year it seems.  We had been using a harvested acreage percentage in our balance sheet of 77%, which was mostly just a 5-7 year average.  Last night, we dropped this percentage to 72%, which would still be above 2013/14 at 68.7%, a year which many are comparing 18/19 to.  In addition, we also lowered our HRW yield to 37bpa from 38bpa, which would be a decline of 10.8% from last year.  Once again, this is not extreme when compared to some of the declines witnessed in recent history.  The drop from 2016/17’s record to 2017/18 was 16.1%, while the drop from 2010/11 to 2011/12 was 13.61%.  This produces a total HRW crop of 614mbu, which we would call a worst case scenario at present.  Our bias is much higher if the weather outlook changes in March.  Even with total supplies dropping 230mbu from the year before, one can make the argument large demand cuts are needed.  We have exports down 70mbu to 325mbu, while total domestic demand of 430mbu would be down 27mbu.  This leaves carryout at 359mbu vs. 494mbu this year, but not a whole lot lower than the 5-yr average of 401mbu.  It would remain well above the 237-295mbu witnessed in 2013/14-2014/15.


Bottom Line: The path of least resistance is up, and there isn’t much use in fighting the trend at the moment.  Having said that, today is month end, and markets have obviously priced in something with respect to South American soybean crops and US-HRW crops.  One needs to ask themselves if these rallies can be maintained from now until the key growing weather in the United States which is still 4-5 months away.  A correction is more than likely, it is just a matter of timing.  With $4.00 December corn, $10.30 November soybeans and $5.30 July HRW, producers need to be looking hard at risk management in one form or another.  There are many, many ways to reward the rally, protect downside and retain the ability to participate without taking on undue risk.


Good Luck Today.

Tregg Cronin

Market Analyst






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