7/6/2018 Morning Comments

Good Morning,

 

A mostly clear Midwest radar this morning, although a few scattered showers across KS and OK are present.  The feature today and through the weekend will be heat, especially across the Plains and WCB where high temps tomorrow will be near 100* in South Dakota, S-North Dakota and W-Nebraska while most other areas will be above 90* west of the MS-River.  The bulk of the corn belt will only see temps up to 90* through Monday, although many areas in the WCB will see sporadic highs up to 92-93*.  The concern for most in the actual corn belt will be overnight lows which are expected to remain right at or just above 70* in IA, IL, MO, IN while the Plains and WCB should dip below 70* most nights.  Fortunately, the areas which are expected to be hottest, both during the day and night, in the Plains are not as far advanced as their corn belt brethren, so should not be going through critical pollination phases.  Unfortunately, not much around for rain during this hot snap, with little to no precip seen the next 7-days across the corn belt.  Extended maps keep temps above normal and precip below normal through the 14-day outlook which gets us out to July 19th when the corn belt should be full-swing pollination.

 

Mixed markets overnight with slightly easier grains and a tick higher oilseed complex as the tariff deadline came and went last night at midnight.  It certainly feels like the corn market would be trading a good deal higher if it were not for the trepidation over the 25% tariff being implemented on US soybeans.  Weather will certainly be warm as the corn belt heads into pollination this week and next, although the key difference is how wet soils will be going into the key developmental phases.  There is scarcely an area in the corn belt which is not over 100% of normal precip the last two weeks.  The overnight-low-dooms-dayers are out in full force, and this year may be the best test of that theory.  Row crop markets aside, there is little doubt where the strength has been as of late with wheat markets rebounding nicely off their lows on fears of lower production totals out of the Black Sea and Europe.  Since Friday, lower crop estimates have come out for France and Germany with others adjusting both Ukraine and Russia lower as well.  Add in current estimates below USDA for Australia, and signs are beginning to point up for US wheat demand later in the marketing year.  Even though the US has been relegated to the reserve supplier to the world the last 18-months, US hard wheat could be in high demand in a few short months.  Open interest changes yesterday included corn down 1,078 contracts, soybeans up 8,814 contracts, SRW up 5,493 contracts and HRW up 5,266 contracts.

Data yesterday included weekly ethanol production which ticked lower, but maintained recent advances for the most part.  Weekly production was down 5,000bbls/day to 1.067 million bbls/day but up a solid 5.2% from a year ago.  Production continues to run much stronger than the “needed” level to hit the USDA estimate, which could prompt an upward adjustment in ethanol demand for corn on the July WASDE.  Ethanol stocks also pushed higher by 301,000bbls to 21.975 million bbls, which are back above year ago levels for the first time in almost four months.  Fortunately, gasoline demand continues to run stronger than year ago levels, despite prices being 50-60c/gln higher than a year ago.  Ethanol prices have maintained a substantial discount to RBOB gasoline futures, which will continue to promote higher discretionary blending provided overall gasoline demand doesn’t dip.  Higher crude oil, and therefore gasoline, prices remains one concern point for the Trump Administration as the benefits of their tax cuts could be largely eliminated if national average retail prices inch over $3.00/gln.

As noted above, cuts to EU-member wheat production has been supporting the wheat complex this week with a German cooperative association cutting their estimate of the crop to 20.5MMT from 24.1MMT a year ago due to warm temps and dry conditions in northern growing areas.  Last Friday, Strategie Grains cut their estimate of the French wheat crop by 4.5MMT to 33.2MMT, although a private estimate put the state at 37MMT this week.  Along with cuts to Denmark, Italy, the Baltic States, Poland and the United Kingdom, Strategie Grains put their estimate of EU soft wheat at 130MMT vs. 141.7MMT.  Adding in the roughly 9MMT of durum wheat USDA also includes in their EU estimate, this would put the overall EU wheat crop around 140-141MMT vs. 149.4MMT in June.  If USDA maintains their current demand ideas, which they won’t, it would put carryout at an untenable 1.474MMT.  If we adjust Australia down 2MMT from USDA, as well as take Russia to 70MMT and Ukraine to 23MMT, while maintaining current USDA demand we see Major Exporter Wheat ending stocks drop to 44.802MMT which would be the lowest since 2007/08.  It would also imply a stocks/use ratio of 11.01% which would be the lowest on record.  Demand will not remain unchanged, but we simply want to look at how much rationing might need to take place if crop estimates do in fact come in at those sort of levels.  Lots of grass between the ball and the hole, but Black Sea/EU production estimates moving lower at this point on the calendar likely means estimates could keep moving lower, adding further support to the wheat market.

There are two schools of thought with major exporter demand with one being EU/Black Sea exporters will maintain aggressive FOB offers to retain market share at the expense of drawing down stocks.  The other school of thought is EU/Black Sea demand will have to shift to the United States earlier than expected to preserve adequate stocks.  FOB offers tell the tale best with US-HRW 12.50% protein now exactly on par with German 12.50% pro offers as of last night.  Baltic States are still sitting at a $3 discount to US.  Obviously freight spreads remain in the EU camp’s favor, but the trend is in the right direction.  11.0% protein HRW has also closed to gap with French offers, but remains $2/MT premium to French.  Russian FOB offers continue to provide the floor with their offers still $30/MT below equivalent US-HRW offers out of the Gulf.  Still, one cannot deny the Paris/UK led price strength as MATIF futures hit the highest level yesterday since July 2015 on a closing basis, while UK London Feed Wheat prices hit the highest spot prices since June of 2013.  Black Sea futures prices are within a few dollars of contract and all-time highs.  FOB spreads should continue to tell the tale.

Calendar spreads have also been especially supportive to wheat board gains with the WN/WU inverting yesterday and the WU/WZ trading up to -13.25c, the highest spot trade since July of 2017.  The WU/WZ VSR-period doesn’t begin until mid-month, but current prices are indicating 35.5% of full financial carry, a strong enough spread to drop variable storage rates from 11c/mo to 8c/mo.  Chicago wheat hasn’t really been anywhere close to decreasing storage rates the last year or so, supporting the narrative the worm has turned in wheat.  KWU/KWZ has also been firm, trading up to -20.25c on 7/2, but maintaining overall uptrends this week to trade to -21.25c this morning.  This is still 54% of full financial carry, so not enough to drop storage rates, but trending in the right direction.  Despite the huge board collapse, soybean calendar spreads not implying a bottom is in sight.  Soy spreads remain lackluster and within spitting distance of contract lows.  Corn spreads are no better, remaining at or just off of contract lows.

Export sales are due out later this morning after being delayed from the July 4th holiday.  Estimates put wheat sales at 250-700TMT, corn and 800-1,250TMT, beans at 400-900TMT, meal at 100-400TMT and oil at 15-50TMT.

 

Bottom Line: Remains to be seen whether the tariff implementation will lead to further losses in the oilseed complex or whether it will be a sell the rumor, buy the fact scenario.  Weather would seem to command more of a premium than it is at the moment, a testament to how hard momentum traders are pushing the tariff talk.  Wheat markets have to deal with expanding northern hemisphere harvest, but the bulk of US-HRW harvest is behind us, and competitor production estimates are getting smaller.  US FOB offers would do well to not run away from the demand we so desperately need.

 

Good Luck Today.

Tregg Cronin

Market Analyst

Tregg.Cronin@halocommodities.com

www.halocommodities.com

@5thWave_tcronin

 

 

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