3/6/2018 Morning Comments

Good Morning,


Blizzard conditions across the upper-Midwest continue again this morning with snow totals difficult to gauge due to the high winds experienced throughout.  Many locales across SD/ND/MN have seen totals in excess of 10-12”, and unlike previous snows, the water content in this snow is actually quite heavy.  Blizzard conditions will persist throughout the day today as high winds continue to blow the snow that has fallen around.  Expect rail logistics to be snarled worse than they already were.  The 7-day forecast shows a dry stretch for the Great Plains, while east of the MS-River still has chances for an additional 0.50-1.00” later in the week.  No relief in sight for the southern plains the next 15-days with above normal temps and below normal precip seen.  A bit better precip chances for parts of the Argentine growing region in the week-2 forecast, especially the northern half of the growing region.  Not much relief seen for Buenos Aires or other southern provinces.


Weaker markets overnight led by the winter wheat boards after a slight improvement in conditions for KS/OK/TX.  Prices are off their lows, however, which saw KC trade as much as 7.0c below yesterday’s close.  However, a couple point increase in conditions isn’t cause for alarm with the drought firmly in place and nothing in the way of relief until at least the middle of March.  Many are still counting on an uptick in rains by the end of March, which is what saved the crop last year.  At some point very soon, this winter wheat market will have to come to grips with the loss of supply vs. the loss of demand.  Not only are we losing export demand, but it can be argued we are losing domestic demand, especially with the continued collapse in the MW/KW spreads.  Otherwise, we have flagging/pennant action on almost every CBOT contract, which would seem to be setting up a date with destiny on Thursday’s WASDE report.  When prices rally into a flag or pennant, it is usually a continuation pattern with another round of higher prices expected.  However, volume has declined on the most recent rally, almost universally, so prices really seem as though they are ambivalent on the next leg.  Open interest continues to soar as money flows into grains with corn up 26,334 contracts, soybeans up 11,953 contracts, meal up 763 contracts, bean oil up 3,138 contracts, SRW wheat up 3,313 contracts and HRW wheat up 1,991 contracts.  Would appear to be a lot of Johnny-come-lately’s diving into the pool.

Yesterday’s data included weekly export inspections which were mostly supportive as wheat exports came in at 14.7mbu, even though this was below the 19.2mbu needed weekly.  Total inspections of 669.8mbu are down 6.6% from a year ago which is a bit better than the USDA forecast of a 9.0% decline.  Corn inspections slipped this week to 37.3mbu from 51.8mbu last week and were below the 46.4mbu needed weekly.  Total inspections of 744.6mbu are down 30.9% from a year ago, which need to continue making up ground.  Soybean export inspections were 36.4mbu vs. the 23.2mbu needed weekly, but continued to close the gap on a year ago.  Total inspections are now 1.424bbu, down 12.6% from a year ago vs. a 13.4% deficit two weeks ago.

Sticking with the export theme, this last weekend we took a look at the export pace for corn, soybeans and wheat to see if there was anything to glean heading into Thursday’s WASDE.  Based on the latest export data as of 2/22, total corn export commitments (shipments plus outstanding sales) total 1.544bbu.  This accounts for 75.35% of the USDA’s 2.050bbu export projection, and would actually be the highest percentage for this week going back to 2013/14.  In addition, export sales since the first of the year have averaged 62.0mbu over the last eight weeks.  This is the strongest pace of sales over that stretch since at least 2007/08, and is 31% larger than second place.  The USDA’s export projection looks perfectly placed for now, but if this sales pace is continued the next several weeks, we will need to be talking about an increase on the April WASDE.  In soybeans, we have expressed a fair amount of skepticism, especially after the net cancellations posted two weeks ago.  However, upon further review, the USDA’s export projection seems adequate right now with the right to change our opinion in a few weeks.  The average sales pace since the first of the year as of 2/22 was 21.6mbu, which was actually the largest since 2011/12.  Total commitments as of 2/22 measured 1.674bbu, which accounts for 79.73% of the USDA’s current 2.100bbu projection.  This is the lowest since 2011/12, but not all that different from 2015/16 at 80.31%.  In 2015/16, March-August export sales averaged 14.8mbu.  If we apply that average sales pace to 2017/18 for the remaining weeks, we would come up with 2.061bbu of total soy commitments, just shy of the USDA’s current projection.  For this reason, we think the soybean export projection is fine for now, especially if improved sales continue.

That brings us to wheat, which has the most red flags.  The average sales commitments since the first of the year has averaged 9.944mbu, which is the lowest since at least 2007/08.  Total commitments as of 2/22 measure 794.8mbu which accounts for 83.67% of the USDA’s current export projection.  This is the lowest total for that date since 2011/12.  If the USDA cut the export projection 25mbu to 925mbu, that percentage would rise to 85.93% which is much more in-line with the last 5-years.  It’s just very difficult to see US wheat exports rebounding to the needed level when glancing down the world FOB spreadsheet.  US 12.50% (dmb) HRW out of the Gulf is now $35-40/MT more expensive than Black Sea wheat, and $35/MT more expensive than European hard wheat.  What’s probably most telling is US-HRW off the PNW on a comparable protein basis is now $1-2/MT more expensive than Australian wheat.  Yes, the same Australia which just went through a massive drought and witnessed national average yields fall 33% from the year before to the lowest level in a decade.  We have a supply issue in the US Southern Plains, but it would appear we are so badly overshooting the needed level of rationing that fundamentals don’t really matter at the moment.

Sticking with wheat for a minute, KS, OK and TX all released updated HRW conditions yesterday afternoon, and will continue to do so on a weekly basis throughout the growing season.  KS conditions improved by 1% G/E, while P/VP also rose by 1% which pretty much offset each other.  OK conditions improved 2% G/E to 6% G/E, although at that kind of level one has to wonder what kind of an improvement that is.  TX reported conditions at 11% G/E vs. 4% G/E a year ago.  What’s also helpful is to look at these conditions vs. a year ago.  KS at 13% G/E compares with 43% G/E a year ago, OK is 6% G/E vs. 43% G/E a year ago and TX is 10% G/E vs. 34% G/E a year ago.  With warmer temperatures the next 15-days, wheat will begin greening up, and with it will probably come an improvement in conditions at least in the short-term.  Follow up moisture will be needed in a big way by the end of March but we need to continue to monitor projected supply losses against demand destruction which is undoubtedly happening.

After the close yesterday, FC Stone released their producer acreage survey which showed 88.90 million planted acres of corn and 92.0 million planted acres of soybeans.  Plugging in a trend-line yield of 172bpa, and harvested acreage of 81.69 million, this produces a crop of 14.052bbu vs. 14.604bbu last year and the record 15.146bbu from 2016/17.  Assuming ending stocks for 17/18 are correct, we see 18/19 demand rising to 14.725bbu from 14.595bbu in 17/18.  This is done with a feed/residual increase of 50mbu, ethanol up 30mbu and exports up 50mbu.  This gives us an ending stocks figure of 1.727bbu and a stocks/use ratio of 11.73%, both of which would be the lowest since 2013/14.  Having said that, we don’t think corn acreage will be that low, and instead think it will be unchanged or even up a million acres.  Nonetheless, one can see that even with a solid national yield of 172, demand continues to grow and needs bushels to be satiated.  A sub-170 national average yield makes our balance sheet tight regardless of acreage.  Plugging in Stone’s 92.0 million acreage number doesn’t look good.  This produces a record crop of 4.494bbu, and when combined with 530mbu of beginning stocks provides us the largest starting supplies by over 300mbu.  Even with record demand by 170mbu, ending stocks balloon to 619mbu if the national average yield comes in at 48.5bpa.  Our trend line calculation is actually up at 49.1bpa, but will use the 48.5 for now.  Plenty of soybeans, and arguably need more corn acres.



Bottom Line: Some back and forth ahead of the WASDE Thursday on which the South American crop estimates will be the focal point.  Here in the US, even though the spring insurance prices are set, we feel the acreage battle is still alive and well.  It is our opinion we need more corn acres than a year ago to maintain a comfortable level of ending stocks.  Demand has grown consistently thanks to abundant, cheap corn.  We could be talking about rationing than demand if yields don’t come in at a new record.  Slowly feels like winter wheat prices are coming to grips with the supply it has lost and the demand it is destroying.  We are 2-months away from the Wheat Quality Council tour hitting the fields of Kansas, and it will take a lot of dry weather maps between now and then to keep this rally going.


Good Luck Today.


Tregg Cronin

Market Analyst






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