3/9/2018 Morning Comments

Good Morning,


Later this morning will see the February employment situation report released with expectations for a 200,000 job increase in non-farm payrolls.  The unemployment rate is expected to fall -0.1 to a new 17-year low of 4.0%, and if true, would be below the Fed’s forecast of 4.1% for 2018-19 and well below the Fed’s long-term natural unemployment rate of 4.6%.  Also of interest will be the average hourly earnings which is expected to be up +2.8% y/y, off from January’s +2.9% growth which was the highest in almost 9-years.  Both of these statistics could have an influence on The Federal Reserve at their policy meeting on March 20-21, where markets see a 100% chance they will raise the Fed Funds rate by 25bp to 1.50-2.00%.  The USD was up sharply yesterday, and is seeing a bit of follow through strength again this morning.

Only change of note in weather would be a much wetter bias for Argentina in the 6-10 day.  The GFS model especially is showing soaking rains for most of the Argentine growing regions next Friday/Saturday, which admittedly are a ways out to have a great deal of confidence in, but would be the best chance of rain for that region in weeks.  As of this morning the model is calling for a widespread 0.50-1.00” with isolated 1.00”+ on a widespread area.  This will make for an interesting Sunday night open to see if weekend models confirm the incoming event.


Softer markets across the board led by soybeans, meal and KC wheat which are all down a little over 1.0%.  Despite an impressive showing yesterday following the USDA report, markets haven’t been able to maintain that strength overnight, which could produce additional losses before the weekend.  The big news was the USDA report and the bullish tilt USDA gave corn balance sheets, especially for the 18/19 marketing year.  The USDA will not issue their first estimate of the 18/19 corn and soybean balance sheet until May, but that did not stop analysts from all walks of like throwing out their best guesses yesterday.  The cuts to South American crops were more than the market was expecting, but improved rainfall chances for Argentina and the buildup of fund length appear to be a bit much to overcome this morning.  At the close yesterday, more than one market pundit noted markets which cannot go down on bearish news (soybeans/wheat) are not bearish.  It was not clarified whether losses the next day count or not?  Money flowed into commodities yesterday, especially corn with open interest up 34,580 contracts, soybeans up 14,556 contracts, meal up 712, bean oil up 2,292 contracts, SRW wheat up 1,616 contracts and KC wheat down 441 contracts.

Will not be going through the entire WASDE report, but instead highlighting some of the finer points.  In South America, USDA cut the Argentine soybean crop by 7MMT from 54MMT to 47MMT, which was a bit more than the pre-report estimate of 48.1MMT.  Very few thought USDA would actually cut their estimate that much in one-month, even though some private estimates are now at 42-45MMT.  The Buenos Aires Grain Exchange sees the soy crop at 42MMT.  The rat race of private analysts to be the first to the bottom or the top is alive and well in Argentina, and if the forecasted rainfall does fall next weekend, I’m sure we see estimates start to creep back higher.  The Argentina corn crop was cut to 36.0MMT vs. 39MMT last month and the average trade estimate of 36.3MMT.  BAGE said the crop is 34MMT yesterday.  Brazil’ corn crop was seen at 94.5MMT vs. 95.0MMT last month and 91.4MMT estimated by traders.  Oddly enough, CONAB was out early yesterday morning and said the Brazilian corn crop was at 87.3MMT.  This is a huge spread between USDA and Brazil’s official crop forecaster, and the fact USDA upped US corn exports as much as they did but didn’t cut Brazil is a bit of a head scratcher.  USDA saw the Brazilian soy crop at 113.0MMT vs. 112MMT last month and the average trade estimate of 114MMT.  CONAB said the crop is also 113MMT, which is below the trade consensus of 114-115 and some private estimates of 116-118MMT.

Pivoting to the US, the star of the show yesterday was the corn balance sheet, on which the USDA increased 17/18 ethanol demand by 50mbu to 5.575bbu.  Analysts are split over this move with some saying the increase was justified and some saying it was not based on weekly production figures.  The big talker was the 175mbu increase to corn exports, following the 125mbu increase last month, combining for a 300mbu increase since the first of the year.  Exports are now seen at 2.225bbu vs. 2.293bbu a year ago.  The combined increase in demand pushed demand to 14.800bbu vs. 14.649bbu last year, and dropped carryout to 2.127bbu vs. 2.352bbu last month.  Carryout is still over 2.0bbu, and remains ample, but the implications for 18/19 cannot be overstated.  To USDA’s credit, they did cut Brazilian/Argentine corn exports by 4.5MMT in response to the 4.5MMT increase in US exports.  As we noted earlier this week, the focus now shifts to the 18/19 balance sheet and securing enough acres to keep the balance sheet comfortable.  By our tally, with 91.0 million acres (1.0 million more than USDA Outlook Forum), and a trendline yield of 172bpa, production would come in at 14.384bbu.  Combined with beginning stocks that would be 16.559bbu.  For demand, we even have total demand down 95mbu for 18/19 at 14.725bbu which yields a carryout of 1.834bbu and a stocks/use of 12.46%.  This would be the tightest since 2013/14 when the average corn price received by farmers was $3.70.

Speaking to corn exports, before the USDA report yesterday morning, export sales for the week ended March 1st were also released.  Corn sales came in at 73.1mbu, blowing away the 16.3mbu needed before the USDA updated their export forecast later in the morning.  This brings total commitments to 1.616bbu vs. 1.735bbu a year ago.  This is just 7% below last year at this time vs. a 12% deficit two weeks ago, and the USDA calling for a 2.9% cut after yesterday’s WASDE report.  With 1.616bbu worth of commitments, current obligations now account for 72.64% of the USDA’s objective.  The 10-yr average for the first week of March is 73.30%, so fairly close, but looking at the last year South American corn crops were short and the US saw a strong second half pull, 2015/16 had just 59.65% of the USDA’s export objective achieved as of March 1st that year.  The average sales pace since January 1st is 63.2mbu which blows away anything of the last 11-years.  The focus moving forward will definitely be the pace of shipments which will have to be impressive, especially considering some of the logistical issues on waterways and rail.

In the US soybean balance sheet, USDA increased crush demand by 10mbu to 1.960bbu, a necessary increase considering the solid crush margins and big meal export pull.  Soybean exports were cut 35mbu to 2.065bbu which some took issue with considering the larger than expected cut to Argentina and the small than expected increase to Brazilian soy.  The changes prompted a net increase to carryout of 25mbu to 555mbu.  Oddly enough, soybean export sales were massive yesterday at 92.2mbu, the second largest of the entire marketing year as China came back to the US in a huge way.  The 92.2mbu compared to the 13.9mbu needed weekly before the USDA cut their whole year export forecast.  Total soybean commitments of 1.763bbu now account for 85.41% of the full-year forecast which is still below the 5-yr average of 92.66%.  However, the average sales pace since the first of the year at 29.5mbu is easily the largest of the last 10-years, which again could be indicating a stronger than normal second half of the marketing year.

The US wheat balance sheet saw a 25mbu cut to exports, dropping the full year forecast to 925mbu from 950mbu, and increasing carryout to 1.034bbu.  Some thought the USDA might punt this month on touching exports with sales and shipment paces close enough to the level needed, but the price increase of US FOB offers is hard to dismiss.  1.034bbu is the second largest carryout since 1987/88, behind only 1.181bbu last year.  Wheat export sales of 14.4mbu yesterday were better than the 9.3mbu needed before the USDA cut to the whole year forecast.  Total commitments of 809.3mbu are down 12% from a year ago which is almost exactly the 12.3% the USDA is forecasting.  The average sales pace since the first of the year at 10.4mbu is the lowest since at least 2005.  Commitments of 809.2mbu account for 87.49% of the USDA’s forecast which is the highest percentage since 2014/15.  The USDA forecast looks justified for the time being, but if sales continue to muddle along, this pace will need to be monitored closely.  It is just difficult to dismiss US asking prices for wheat against our major competitors which remain way out of line.


Bottom Line: Our markets have digested yesterday’s USDA reports, and appear more interested in trading potential rain in Argentina and Kansas.  We must not forget the massive build up in fund length most of our markets have witnessed over the last 6-8 weeks to get us to this point.  In addition, some contracts haven’t witnessed much of any correction during the entire run-up, something which makes us even more technically susceptible to a setback.  One day of lower prices does not mean the uptrends are over, but if selling picks up during the session it will serve as a good reminder to producers that blinders cannot be applied at any part of the calendar year regardless of what one forecaster says.


Good Luck Today.


Tregg Cronin

Market Analyst






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