6/13/2018 Morning Comments

Good Morning,


Some showers around in the S-Plains this morning, otherwise the Midwest is mainly quiet.  It’s difficult to argue the past 10-14 days’ worth of weather across the corn belt has been anything but beneficial.  The next 10-14 days might be somewhat of a different story.  Much of the WCB will see a blast of heat Thursday before cooling down into the weekend, but the latest 6-10 and 8-14 day maps are bringing above normal temps back for all of the Midwest, especially the Northern Plains.  In fact, the above normal bullseye is directly overtop North Dakota.  Fortunately for much of the Northern Plains, there is rain around this weekend before the heat.  The latest maps this morning put anywhere from 0.50-2.00” across most of E-MT/ND/N-MN/SD by early next week.  This would be well timed as the 8-14 day map from NOAA suggests below normal temps for all of the Northern Plains, Nebraska, Iowa, WI, N-MO and NW-IL.  Private forecasters continue to tout a return to heat as June ends and July begins, which NOAA maps are definitely pointing towards.  This should bring back some weather risk premium as we head into the pivotal July 4th holiday.


Lower all night across the CBOT as corn and wheat give back part of yesterday’s gains and soybeans trade the direction they probably would have had it not been for grains.  Wheat was the star of the show yesterday, rallying on the back of a larger than expected cut to Russian production and exports, as well as better forecasted demand for the US in 18/19.  However, a closer examination of the data last night, and some realistic assumptions about demand seem to take the shine off this wheat market.  In addition, the corn market responded favorably to lower than expected world carryout, lower than expected US carryout, cuts to Black Sea corn production and the fact we are still only midway through June.  As we have suggested, at $3.97 December corn, there is little to no risk premium in the market considering carryout is bring projected at a 5-year low.  Soybeans appear stuck between a rock and a hard place: old crop carryout at 500mbu+ is not bullish, while the prospect of a 350mbu new crop carryout is intriguing.  Yet, most think acres should rise on the June acreage report, and the uncertainty with where and how China will source her beans in 2018/19 still lingers.  The 2018/19 demand forecast for soybeans appears optimistic, and additional supply would take starch out of the market quickly.  Open interest changes yesterday included corn down 9,452 contracts, soybeans up 9,268 contracts, meal down 4,135, oil up 9,385 contracts, SRW down 2,374 and HRW down 287.

We are going to focus on the corn and wheat balance sheets today as well as a few global highlights, picking up the rest of the WASDE tomorrow and Friday.  On the US wheat balance sheet, exports were reduce 10mbu in the 17/18 S&D, an expected change which went straight to carryout.  Carryout rose 10mbu to a fluffy 1.080bbu, the second largest since the late 80’s.  Exports at 900mbu remain above the low-water marks of 2014/15 and 2015/16 at 775-854mbu, but are still bad.  Further, feed/residual demand of 70mbu was the lowest since 2007/08 and total demand of 1.996bbu was the second lowest since 2002/03.  When a person looks at the US balance sheet from the demand perspective, they see rather quickly why a drought in the southern plains and drought last year in the northern plains can be managed so easily,  The US has a demand problem, not a supply problem even if acres are the lowest in 100-years and production plumbs decade lows.  For 18/19, production was increased by 6mbu, and when combined with higher carry-in boosted supplies by 16mbu.  18/19 exports were increased 25mbu to 950mbu which we do not agree with at the moment.  We can see their rationale given lower Russian production and exports as well as decline in Australia.  However, there is absolutely no fundamental justification for this move at present given export commitments sit at the lowest levels for this time of year in a decade.  In order to justify an increase to exports, we have to price ourselves accordingly, which we are not anywhere close to doing at the moment.  Southern Plains elevators trying to fill up storage and acquire blending material by paying big basis levels is making this issue worse.

World changes focused on a cut of 3.5MMT to Russian wheat production which is now projected at 68.5MMT vs. 85.0MMT a year ago.  Exports were also reduced by 1.5MMT to 35.0MMT vs. 40.5MMT in 17/18, but would still be the second largest on record.  We remain cautious about reducing Russian production, and certainly don’t want to cut it any further than USDA has already as some are want to do.  Production at 68.5MMT would be the second largest on record, with the national average yield of 2.74MT/ha being the second highest ever.  Still, the 19.4% y/y decline in production would be the largest since 2012/13.  However, large swings in production are not all that uncommon for Russia with 15-30% swings occurring several times over the last 10-15 years.  Many of these big swings came before Russia was a major export powerhouse leading us to caution whether we should doubt their production potential.  USDA is certainly looking at an area decline due to the slow planting in Siberian spring wheat areas as total harvested acreage is seen at 25.0 million hectares vs. 27.343 million a year ago and would be the lowest area since 2014/15.  This is the part difficult to square for us.  If harvested area climbs to 26.0 million, production would bounce up to 70.460MMT, a much more manageable situation.  The 8.57% decline y/y in harvested acreage would be the largest since 2012/13 and top four declines of the last 15-20 years.

US corn balance sheet changes were supportive with imports dropping 5mbu and exports being raised 75mbu.  Carryout in-turn dropped 80mbu to 2.102bbu.  In 2018/19, USDA decreased feed/residual demand by 25mbu to 5.350bbu which would be a 3-yr low.  However, that was the only demand cut with ethanol use of 50mbu to 5.675bbu, a new record.  Carryout was therefore reduced from May’s 1.682bbu to 1.577bbu, the lowest since 2013/14.  In 2013/14, the average on-farm price received was $3.70 cash, much better than the $3.35-3.60 witnessed the last four years.  We continue to believe we are pricing in a better than trend yield as the market appears to be trading something closer to 178-179.  At that type of yield, and with unchanged demand, carryout would be around 1.904bbu.  Very difficult to put that kind of yield in the bag today, and that kind of complacency would be foolish on June 13th.  We feel there will be risk premium added back into the market the next 2-4 weeks with weather beyond the Fourth of July determining if that risk premium is warranted.  As we have discussed, May is not a very good candidate for putting our calendar years highs in with the market having done so only once since 1990.  This isn’t to say it can’t happen, just that it is very unlikely especially with so much weather left in front of the market.  The last three years have witnessed Dec corn highs made between June 15th and July 15th, but is this the year which breaks that cycle?

Global corn balance sheet changes focused on Russia and Brazil with the latter seeing production drop to 85MMT from 87MMT last month.  This matched CONAB’s production number from earlier in the morning but would think both firms have room to move lower in future reports.  Brazil also saw a cut to exports of 1MMT to 29MMT vs. 31.700MMT a year ago.  USDA also recognized the Black Sea dryness impacting wheat production by cutting their corn crop estimate from 19.0MMT to 15.0MMT, and cutting exports from 7.5MMT to 5.5MMT.    Yield would still be a new record at 5.55MT/ha vs. 4.89MT/ha last year, but everything about this balance sheet looks more appropriate than it did in May.  The changes have major corn exporter ending stocks down to 64.728MMT vs. 78.284MMT last year, the lowest since 2015/16.  The stocks/use ratio falls to 10.03%, the lowest since 2013/14 and over 1.0% smaller than the 10-yr average.  We feel US exports have room to grow in 2018/19 by 100-250mbu yet as lower Brazilian and possibly Russian production numbers are still to be realized.  In addition, USDA is still projecting Ukraine with the second highest corn yield on record with the production missing a record by just 900,000MT.  Exports are projected at 24MMT, a new record by 3MMT, and could easily see some downside.  If those changes occur, and the major exporter stocks/use falls further to near the 2012/13 lows, this market will need to put premium back in to appropriately price US exports.  Taking a step back to the world balance sheet, and acknowledging the Chinese stocks declines, global corn carryout is forecast to drop 19.72% this year following a 15.45% drop the year before.  This would be he largest y/y decline in global corn ending stocks since 1993/94 and second largest since 1988/89.  Global stocks/use at 12.45% would be the lowest on record, slipping below the US drought years from earlier in the decade.  This is a massive fundamental shift of the landscape, but also needs to come to fruition as well.

Otherwise we continue to be impressed by the weakness in Minneapolis wheat both on the board on in calendar spreads.  Flat price continues to make new lows for the move which are the lowest trades since early April.  Calendar spreads are also making new contract lows on a daily basis as the market looks at a growing old crop carryout and nearly ideal conditions across the Northern Plains and Canadian Prairies.  Minneapolis carries are not to the same extent as KC or Chicago, but they might be headed there as traders ponder where this massive spring wheat crop is going to find a home?  Export business will be hard fought provided Canada doesn’t stumble, and the HRW crop looks to have a better protein profile than each of the last two years.  This is a big reason for the new lows in MW/KW which is now trading at the lowest level since March 2016 on a front-month basis.  Granted, there is some heat and dryness finally being forecast in North Dakota, but without materially impacting production by mid-July, we could be looking at prices more congruent with 2016 when spot prices traded between $4.85-5.85.  HRW prices will have a lot to say about that, however.  Board prices will need to pay the farmer to store wheat if homes do not surface.  If rains continue and the protein profile of the HRS crop is lower, a lot of wheat could be headed to Duluth, which will put additional pressure on calendar spreads.


Bottom Line: Ugly trade today after the bounce yesterday.  Traders don’t appear blown away with yesterday’s “bullish” data, and corn belt weather is still the most important factor.  Major exporter balance sheets in both corn and wheat are supportive, but we are still determining supply at the moment with the entire marketing year left to ration or expand demand.  Days like today after yesterday’s strength should remain producers of why they need to be constantly updating and reviewing marketing levels and percent sold.


Good Luck Today.


Tregg Cronin

Market Analyst






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