3/2/2018 Morning Comments

Good Morning,


Difficult to find more pressing news in the financial markets than the tariffs imposed by the Trump Administration yesterday, which is being blamed for the soft close in equities yesterday.  President Trump said he would sign an order implementing a 25% tariff on steel imports and a 10% tariff on aluminum imports.  There were three options on the table including a global tariff, tariffs targeted at China and other countries and finally a universal quota.  The Administration opted for the global tariff, placing penalties on all exporting countries.  The concern is China retaliates with import tariffs of its own, possibly on something especially sensitive to the Ag industry like soybeans.  In addition, as many sources have reported, the tariffs are unlikely to hit China as hard as they are other countries.  The largest source of steel and aluminum imports for the US is Canada with large imports also coming from Germany.

Another dry day across Argentina yesterday, and forecasts call for limited rains across most of Argentina for the next 7-8 days.  There are potential changes coming in day 9 and 10 of current models, which would be next weekend.  Those rains are currently calling for 0.40-1.00” on about 75-80% of the growing belt.  Some 1”+ totals are also expected, but it is obviously difficult to have a ton of confidence in rains that far out.  Both major models, the GFS and European, are showing the rain potential, however.  Ample rains are seen in Brazil the next 7-10 days, although Parana continues to run a bit dry.


Overnight gains in row crops led by soymeal, while wheat sees a mild correction after another surge into the close yesterday.  The gains Wednesday were impressive in KC wheat, but only until Thursday’s 21.25c gain added to the incredible 2018 performance.  Most physical wheat traders are in awe of the move given the date on the calendar, price spreads against major exporters and the quantity of wheat the USDA says the US is currently carrying.  The trade has become technical in nature with chart points being crossed, positions being blown out and emotion driving decisions.  At some point, trade will revert back to fundamentals, which still point toward ample supplies in the US and globally.  That day is not today, however.  Better rains could be on the way for Argentina, although 10-days out is a long way to have confidence, and the days leading up to the rain event will be stressful.  As we have been stating for a couple weeks now, it is not too late to aid the soybean crop in Argentina, with more damage likely being done to the corn crop which is ready to be harvested this month.  Soybean harvest stretches out into April and May.  Lastly, spring insurance guarantee prices have been set with corn closing exactly unchanged from a year ago at $3.96/bu, while soybeans are down 3c at $10.16/bu and spring wheat up $0.66 at $6.31/bu.  Importantly, volatility factors are down several percent from last year on corn and soybeans, which should make per acre premiums a bit cheaper.

Data yesterday included export sales which probably illustrate the current state of our markets better than anything.  All wheat sales totaled 7.0mbu, the lowest total in 6-weeks, and below the 9.6mbu needed weekly to hit the USDA’s export sales forecast.  Total sales of 795mbu are down 12% from a year ago, consistent with the last 3-weeks’ worth of sales.  With the surge in winter wheat prices of late, it would not be surprising to see the deficit grow, especially as HRS saw net cancellations in the last week.  We have blown past all applicable export offers from other countries, a situation which cannot be maintained in the long-term.  Corn sales were solid for the seventh week in a row at 69.0mbu, well above the 18.4mbu needed weekly.  Total commitments of 1.547bbu are down 9% from a year ago, but have closed the gap from a 14% deficit two weeks ago.  If this sort of sales pace is maintained for another few weeks, we will be talking about upping the US export forecast further.  Soybeans also tallied a nice week with 31.5mbu of sales vs. the 16.7mbu needed weekly.  Oddly enough, this was the highest sales week 6-weeks and followed net cancellations last week.  In addition, old crop soy cargoes have been logged in the USDA’s daily sales reporting system the last couple of days.  This trend could continue considering May forward slots show US soybeans competitive with Brazil.

While most have focused on the flat price rally in wheat, lots of inter-market relationships are making new highs and lows as well.  The MWK/KWK hit new lows for the move overnight at +85.50c, the lowest trade for the contract since May 31st, and compares with the highs made last summer over +200.00c.  This spread between the two hard wheat contracts tends to trend in very long, drawn out fashion with a general decline from 2011 to 2014 followed by a general rally from 2014 to the 2017 highs.  Over that 6-year time frame, we saw a range from +200.00c in 2011 down to the lows in 2014 of -50.00c, and back up to +200.00c.  With that said, it is difficult to say what a “normal” level for this spread is.  Some cash analysts suggest +60-80c is around fair value in the long-term, and that could be where we are headed.  New crop contracts (Sept/Dec) are already trading at +62-73c/bu, which could be where May/July is headed.  KC has also added a ton of premium over corn, trading at +160.00c overnight vs. the lows of +70.00c witnessed in December.  On weight-adjusted basis, KC wheat is trading at 133% of the price of corn, much higher than the roughly 100% it takes to get into feed rations in the southern plains.  Feed demand for HRW and all wheat in general should be getting reduced for both 17/18 and 18/19, helping offset any production losses which might arise.

Oilshare also made new lows for the move overnight, trading down to 28.9%, the lowest since July 14th.  We wrote earlier this week about this area as long-term support for oilshare and soybean oil in general.  Since the mid-80’s, oilshare has only dipped below 28.0% three times on a weekly basis.  This occurred in 2000 and 2016, and V-shaped recoveries followed each time.  In fact, V-shaped recoveries were noted almost every time oilshare dipped below 29.0%.  In our opinion, we are most likely looking at a similar situation this go around, especially considering the level of commitment to the long side of the soymeal market by the managed funds.  If forecasts begin to turn wetter for the event late next week, profit taking could be present in this spread and soymeal in general.  Bullish sentiment for soymeal on this afternoon’s COT report could be close to 100%.

Delivery activity overnight included 98 soymeal deliveries, 1,049 soybean oil, 25 corn, 76 HRW and 89 soybeans.  Delivery activity continues to be light, supporting bullspreads.  There has been zero SRW wheat delivered this cycle, a sharp contrast to the 2,000 contracts which were flopped on the market during the December cycle, blowing spreads out toward 100% of full carry.


Bottom Line: Our markets are sitting on big gains for the week, and don’t appear to want to relinquish much premium into the weekend.  A technician would say our markets need some consolidation/correction before making new highs to ensure a healthy uptrend.  The people doing the buying don’t seem to care about that sentiment right now.  The rallies come down to one simple question for us: can we maintain this strength through March, through April, through May, through June and into July for the US weather market?  If the answer is no, then one needs to look at current prices with a risk management lens and be ready for the ensuing correction, regardless of the reason why.  Plenty to remain supportive about, but pushing away from the marketing table to simply sit and watch isn’t a prudent decision.


Good Luck Today.


Tregg Cronin

Market Analyst






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