8/3/2018 Morning Comments

Good Morning,


The July employment situation report is due out later this morning and is expected to sow another solid gain in jobs added of +190,000 vs. the very strong +213,000 jobs added in June.  The 12-month trended average is +198,000, so this month’s gains would be down slightly, but the unemployment rate is expected to fall 0.1 point to 3.9%.  If realized, this unemployment rate would be just 0.1 point above May’s 3.8% which was the lowest in 48-years.  The Federal Reserve is still forecasting the unemployment rate will fall to 3.6% by the end of 2018 and down to 3.5% in 2019-2020.  The labor force participation rate remains at a relatively low 62.9%, which is just above the 40-year low of 62.3% in September 2015 and is well below the 66% witnessed pre-2008.  Average hourly earnings are expected to be unchanged from June at +2.7% y/y.

Some scattered precip in the Midwest this morning, but no organized rain systems.  This morning’s GFS is putting a fair amount of rain in the northern ½ of IA, most of MN, all of WI and most of NE which will be welcomed considering the longer-term maps continuing to suggest dryness.  The northern plains, outside of MN, will continue to be mainly dry which will push small grain crops to maturity, although fall crops could use one more drink in August to finish off.  Temps from the CPC continue to suggest normal to slightly above normal temps for much of the central/western belt while the ECB is normal/below.  Precip is mainly below normal for the WCB and Northern Plains while again the ECB is more normal/above on precip.  If the extended maps verify, deficits would start to surface across the WCB/Northern Plains as temps are generally in the mid-80’s for the next 10-days.


Stable, dare we say quiet markets overnight after yesterday’s wild ride, especially in wheat.  After following yesterday’s early morning strength from Paris wheat, US futures were off to the races following a misunderstanding about Ukrainian wheat exports which led to buying in a vacuum.  Once the clarification was issued, markets sold off hard, barely managing positive closes and leaving particularly nasty exhaustion candles on almost every daily chart.  Wheat still managed a positive close at all three exchanges, and the two winter wheat boards would be trying to close higher for the fifth consecutive day while spring wheat is trying to end in the green for the eighth day in a row.  Corn mainly followed the strength in wheat, and finds itself higher to finish the week, working on its third higher weekly close and up 6.50c since Monday.  December corn is now up 32c from the lows posted in early July.  Soybeans setting back for the third day in a row, finding it difficult to muster any lasting strength now that prices are near $9.00.  Crop ideas are large, demand ideas are not large enough, and the rhetoric surrounding a trade-deal with the European Union sounds like just that: rhetoric.  Open interest continues to decline in row crops with corn down another 19,874 contracts and off 51,782 contracts on the week.  Soybean open interest fell 2,050 contracts, meal was down 4,141 contracts and soy oil was up 3,798 contracts.  SRW O/I was down 6,105 contracts on the short-covering while HRW was up 9,520 contracts.

Yesterday’s confusion about Ukraine limiting wheat exports was prompted by the Ukrainian Ag Minister posting on Facebook of all places about the general agreement between the government and exporters which has been commonplace the last several seasons.  Essentially, the government and exporters have a gentlemen’s agreement about not exhausting grain supplies via the export channel, and in return, the government issues no hard rule on export caps.  Yesterday’s post was simply reiterating this agreement, but social media and traders misunderstood the post and took it as the first in what could be several moves to limit wheat exports by major exporters.  On the news, KW and W rallied to near limit up on relatively light volume before closing 30c off those highs.  Producer selling of winter and spring wheat was incredibly heavy which we will touch on below.  Chicago spreads made new lows on the rally while KC spreads tied contract lows as commercials smiled.

KC spot floor closes were not available this morning, but there were another 130 cars including four trains on the Minneapolis spot floor yesterday.  This brings the week-to-date total of cars on the spot floor to 515, which is roughly five shuttle trains worth.  The producer selling remained heavy yesterday as folks take advantage of the rally to price old crop sitting on DP and get caught up on doing zero marketing since planting concluded.  President Trump announced a $12 billion bailout package for US farmers in response to Chinese trade tariffs, but the rally in Minneapolis as we go into harvest is a much bigger bailout.  14’s closed down 15-20c at +70/75U vs. +115/120U a week ago while 15’s closed down 10-15c at +85/95U vs. +150U a week ago.  The absolute collapse in protein premiums in Minneapolis has followed the trend set by KC in June, although this has been much more severe with 14’s bid more yesterday than 14.5’s and only a 15c premium from 14’s to 15’s.  We don’t have any indication of North Dakota protein, but it should be lower than last year’s drought-heightened levels.  South Dakota has seen high protein across the board so far and could carry into North Dakota.  Yield ideas out of South Dakota continue to be mostly lower than expected with producers owing the lower yields to the 20-30 days less growing season.  It is difficult to make up the entire month of April and some of May in terms of development and what that does when fill periods are condensed.  Southern North Dakota is probably 7-days away from spring wheat harvest beginning.

Data yesterday included weekly export sales which were mainly positive for row crops and slightly disappointing for wheat, continuing recent trends.  All-wheat sales totaled 14.1mbu, unchanged from a week ago but slightly lower than the 16.1mbu needed on a weekly basis to hit the USDA’s increased wheat export forecast.  Total commitments of 264.4mbu remain down 29% from a year ago despite the USDA looking for an increase of 74mbu in full year exports.  Total commitments (accumulated exports plus outstanding sales) as of the fourth week in July stand at 7.196MMT, the lowest total since 2009.  Corn sales totaled 11.5mbu, well above the net cancellations of 1.7mbu needed to reach the USDA forecast meaning we have already sold well more than the level needed.  Corn commitments of 2.337bbu are up 5% a year ago with 338.7mbu left outstanding with a month left to ship.  New crop corn sales totaled 38.8mbu, with total new crop commitments at 281.7mbu vs. 174.7mbu a year ago.  Soybean sales totaled 3.4mbu vs. the -0.2mbu needed weekly.  Total commitments of 2.136bbu are down 4% from a year ago but right on track to hit the USDA mark.  There are 211.8mbu of outstanding sales, and there were 20.0mbu of new crop sales which brings the total to 381.2mbu vs. 234.9mbu a year ago on this date.  The increase over a year ago remains impressive, especially in light of China not buying during their normal US slots.

HRS crop ideas remain a moving target with the general consensus moving below USDA’s July estimate of 584mbu.  Some of the ideas being floated are too drastic for us, especially considering nary a wheel has been turned in North Dakota.  If yields are reduced slightly, to possibly the previous record set in 2016/17 and 2014/15 of 46.3bpa, production would be reduced only 8mbu while some of the ideas out there are the crop could be 50-75mbu smaller.  To put that in perspective, to get a total production number of 520mbu, national average yields would need to be around 42bpa which would only be up 2bpa from last year’s devastating drought.  Granted, in E-ND last year, spring wheat crops were a record, but in spots like W-ND, production should be double what it was a year ago.  It is just difficult for us to believe, regardless of how much top end yield is off, that spring wheat yields are only up 5% from a year ago.  Demand remains the larger concern with projected exports up only 40mbu from a year ago and still 50mbu smaller than 2016/17.  Interesting to note the bounce back in HRS production relative to HRW production, however.  HRS production as a percentage of HRW production would be a new record 88.8% this year, eclipsing the previous record of 83.05% set in 1996/97 and vs. 51.33% a year ago.  HRS ending stocks as a percentage of HRW ending stocks will also bounce back this year to 68.04% from an all-time record low of 32.9% last year.  Inter-market spreads will be an interesting trade this year, but in general, HRS should continue to command much less premium than a year ago, especially with protein premiums collapsing and a relatively high pro HRW crop this year.


Bottom Line: We remain skeptical of this wheat rally given the collapse in basis, weak spreads and what is undoubtedly a growing long position held by managed funds.  As export sales showed us yesterday, global importers are not yet turning to the US for their wheat needs, and each week which passes gets us closer to the Q2/Q3 window in which the US should be doing this swing business.  Even in the Iraq tender earlier this week, they took Aussie wheat instead of US wheat despite US being lower priced.  Continue to take direction from EU and Black Sea markets, which are firm, but could be in their irrational phase as analysts race to the bottom with production estimates.  Soybeans appear tired after their short-covering bout and could be susceptible to set back.  Wheat/Corn benefits corn in the near-term.


Good Luck Today.

Tregg Cronin

Market Analyst






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