7/11/2018 Morning Comments

Good Morning,


Another round of proposed tariffs from the Trump Administration was announced last night, totaling another $200 billion worth of Chinese goods which would be subject to penalties if imported into the United States.  According to the Financial Times, the list targets large companies who rely on sourcing materials from China such as automotive parts, food ingredients and construction.  These $200 billion, if implemented, would be combined with the already $34 billion worth of tariffs implemented last Friday.  At last check, the US exports around $133 billion worth of goods to China while importing $521 billion worth of goods from China for a net trade deficit of $388 billion.  If all of the proposed tariffs are enacted, we would then be placing import penalties on 44% of what we import from China.  Most would agree, however, China would appear to be suffering worse than the United States as their main equity index the Shanghai Composite slipped to a 2-1/4 year low last Friday while the S&P 500 is still up 4.5% for 2018.  It would not appear either side is ready to back down anytime soon.

A few scattered showers across the Northern Plains, otherwise mostly quiet across the Midwest with one more day of intense heat before cooling takes over.  Widespread 90’s will be the feature again today with temps across the Plains nearing 100* from South Dakota to Texas.  This is day 3-4 of intense heat across the WCB/Plains, although temps begin to ease tomorrow slightly across the Northern Plains.  90’s will still be prevalent across the corn belt into the weekend.  Many areas of the corn belt in IA/S-MN/W-IL/MO will not see overnight low temps below 70* through the weekend with a huge majority tasseled and silking.  If the literature about corn pollination is correct, even with well-watered soils, this should have a negative impact on yield potential.  We shall see.  Fortunately, the areas of most concern will see multiple rounds of rain during the next 7-days with IA/NE/SE-SD/MN/WI looking at 1.00-2.00” amounts, while the ECB looks at a broad 0.50-1.25”.  Temps also move to below normal in the 6-10 and 8-14 day in addition to the week 3 and 4 outlooks, which would appear to be well-timed for the later developing corn.  Plenty of balls in the air.


Lower overnight and adding to yesterday’s losses as the announcement of another $200 billion in tariffs continues to rattle markets.  It is difficult to ascertain at this juncture how much of the selling is based on tariff fears, how much is based on increasing yield ideas and how much is purely technical/momentum.  Algorithmic/momentum traders are locked in a self-fulfilling trade right now as weakness begets more weakness until red lines begin to cross blue lines in the other direction.  Only price strength can produce more strength right now, and at the moment, there is no buyer willing to defend these prices.  That said, fundamental traders continue to look at the cash spread between US and Brazilian soybeans to see if the weight of the 25% Chinese tariff on US soybeans has been completely offset by the price decline.  As of last night, the cash FOB spread between the two countries was still around 14.5-15.0%, which does not fully offset the 25% import tariff.  However, reports continue to point out US soybeans would not be subject to the 25% import tariff if purchased into state reserves by COFCO.  The tariffs would only be implemented on beans purchased by private companies, although COFCO has not made any substantial purchases anyway.  Export sales and shipments will continue to tell the tale, but the closer we get to fall harvest without a meaningful export book for Northern rail shippers, the more concerning the situation will become.  The weakness is not exclusive to soybeans as corn hit new contract lows yesterday and again overnight while wheat contracts have given up half of last week’s gains.  The macro concerns are allowing managed funds to sell anything that isn’t nailed down which is even remotely connected to Ag and Chinese imports.

Unfortunately, the weakness hasn’t been confined to flat price with corn and soybean spreads equally as weak.  Looking a little further out the curve, the CZ8/CZ9 corn spread is trading at -30.75c this morning, which is off about 7c since the beginning of the month, and would be among the weakest spreads for this date of the last 20-years.  Most years, especially in years with record yields, we see additional weakness throughout the summer and into the fall.  Almost every record yielding year since 2000 saw the CZ/CZ spread trading to -40.00c, and several even made the move toward -50.00c.  It should be noted, however, 2010/11 which is a year which continues to be brought up due to the late summer heat affecting yields, saw weakness through July before bottoming on 7/26 at -36.50c.  This spread then began to rally all through August and into September, hitting a pre-harvest peak of +36.50c before easing to +5.00c in early October and then rallying to +56.50c by mid-October.  Similar setup in SX8/SX9 with that spread trading down to -31.25c overnight, which is the third lowest trade for this date going back to 2000.  Only 2000/01 and 2006/07 saw wider spreads on this date with most contracts remaining above -25.00c until delivery.  The soybean spread weakness makes a bit more sense than the corn, but regardless, both spreads showing this amount of weakness does nothing to build confidence for higher futures prices.

We made a quick road trip to southern Saskatchewan the last two days, traveling through a big part of North Dakota we hadn’t yet been through.  After returning home, and combined with our previous trips to eastern ND, WC-MN and much of South Dakota, this HRS crop is everything it is advertised to be and more.  There is little doubt in our minds this year’s HRS crop should challenge 2014/15’s record yield of 46.3bpa, it not set a new record altogether.  Very few years feature such solid growing conditions across all four of the big spring wheat states, MN/MT/ND/SD.  Whether one wants to use percent of normal precip maps, crop conditions, anecdotal reports from the country or inter-market spreads, all point toward a whopped of a HRS crop coming on.  We began playing around with higher yield ideas in our HRS balance sheet using both a record tying yield of 46.3bpa as well as a new record of 48bpa.  The former would yield 567mbu on 12.25 million harvested acres, which would be the largest HRS crop since 2015/16 and the second largest since 1996/97.  If we set a new record of 48bpa, total production would come in at 588mbu and easily be the largest since 1996/97.  Should that scenario play out, we would go from the smallest HRS crop last year since 2002/03 to the largest since 1996/97.  Quite the contrast.  We have a much more aggressive demand component than most, relying on HRS getting competitive against Canadian offers later this fall which they currently are not.  Even with 20mbu additional domestic demand and 75mbu more exports vs. last year, carryout would still be 251mbu, the second largest since the early 90’s.  We need demand in a big way.  With these ideas, it is difficult to see how cash wheat will get stronger in the next 60-days and is something growers need to be paying attention to if wheat needs to be sold at harvest or before soybean harvest which will follow HRS very quickly based on how far advanced the North Dakota crop is.

One more wheat note from the Commitments of Traders data released Monday we though worth sharing.  Managed funds have been pounding the Minneapolis wheat market as of late amassing a new record net short position of -10,664 contracts.  This eclipses the old record of -9,322 contracts set in September of 2015.  This position accounts for 18.6% of total open interest which is also much higher than the previous record of 14.5%.  Bullish sentiment (percentage of fund longs vs. total positions) currently stands at 21.05%, which is still above the record low of 15.60%.  Bullish sentiment, or lack thereof, is not a reason in and of itself to turn a market.  Rather, bullish sentiment merely greases the skids for a move the opposite direction if funds are forced to begin covering.  At the moment, the funds are in great position with positions well in the money and fundamental data supporting those bearish bets.  At some point, however, this market will run out of sellers and these positions could prove vulnerable.  More something to monitor as opposed to something which requires action today.


Bottom Line: In a perfect functioning market, lower prices should spur increased demand, but that equilibrium has not yet been achieved.  The sell momentum is vastly outweighing any price strength which can be mustered.  USDA will release their updated WASDE tables tomorrow, incorporating the June 29th stocks and acreage data.  There isn’t likely to be anything in this report to stem the sell tide as yield estimates are almost never changed on the July WASDE with the exception of a truly anomalous year like 2012.  We haven’t made either the corn nor the soybean crop, but that doesn’t feel like it matters today.  Farmers and Ag make up a disproportionately smaller percentage of the American populous, and until proven otherwise, will shoulder a disproportionately larger burden from the proposed tariffs.  Like it or not, that is reality.


Good Luck Today.

Tregg Cronin

Market Analyst






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