8/10/2018 Morning Comments

Good Morning,


Scattered showers across E-IA, IL, IN, KY and TN this morning, but the WCB and Northern Plains continue dry.  The heat and dryness of the past couple weeks combined with a forecast for another 5-7 days of no moisture is causing a fair amount of concern in the upper-Midwest.  The two-week percent of normal precip map below shows the deficits building across ND/SD/MN as well as S-IA/N-IL.  These are likely to get worse before the next chance of rain shows up midweek next week, although for the majority of that area, the chance doesn’t look like more than a tenth.  Unfortunately, no real relief for the Northern Plains in the 6-10 or 8-14 day with above normal temps and below normal precip seen through August 23rd.  Without measurable precip by the 20th of August, soybean crops in the WCB will have faced irreparable damage.


Slightly easier markets this morning as we await the USDA’s first objective yield estimates on the 2018 corn and soybean crops.  They will also be updating their hard red spring wheat production estimate, along with supply and demand estimates for all crops and countries.  There will be a ton of data released today, but the trade will definitely focus on the two yield estimates first.  The concern from the trade of late has been the speed at which the crop developed, and what that might mean for kernel depth and ear weight.  Both of those factors will not be incorporated in USDA yield estimates until October, so expecting a smoking gun on this report will leave one empty handed.  As alluded to in the weather comments above, there is also a lot of concern about the soybean crop in SD/ND/MN/IA with widespread reports of soybeans “graying.”  This will increase by next week, and without a major pattern change by September will cut soybean production severely.  This makes the USDA’s plight even more difficult as soybean prospects look so strong in other parts of the corn belt.  Wheat seeing a little follow through selling from yesterday’s weakness with the Russian Ruble off another 0.437% after yesterday’s 2.2% plunge and Wednesday’s 2.5% drop.  The currency weakness in response to additional sanctions imposed by the US causes Russian wheat to be cheaper in local terms and into major importers.  Traders are anxious to get updated crop estimates on the EU and Australian wheat crops.  Corn open interest was down 8,891 contracts yesterday and is off 60,509 contracts this week.  Since July 24th, corn open interest is down 173,260 contracts.  Soybean open interest was down 2,386 contracts yesterday, SRW wheat was down 7,067 contracts and HRW was down 3,231 contracts.

In our opinion, it is going to be difficult to get a bearish yield estimate from the USDA today, unless it comes in sharply higher than trade expectations.  The average trade estimate for corn is 176bpa, up from 174bpa in July.  This adds about 160mbu to total supplies, and bumps carryout to 1.719bbu without any demand changes.  However, that is why we aren’t real concerned with a yield estimate of 176 as one can easily increase export demand by 100-150mbu alone, not to mention inching feed/residual demand higher on the larger crop.  100mbu of additional exports and 25mbu of extra feed demand keeps carryout at 1.595bbu vs. 1.552bbu last month.  Anything that remains under 1.600bbu, or 1.700bbu for that matter, doesn’t require a big set back in price in our opinion.  Even if some of the alarmists are correct, which we doubt highly based on the last several weeks of weather, and the USDA posts a 178bpa number today, carryout would only rise to 1.883bbu with last month’s demand.  With the 125mbu of additional demand we discussed, carryout only moves up to 1.758bbu which isn’t a reason to rally but certainly isn’t a reason to selloff.  If the USDA surprises the trade to the downside, and leaves the yield unchanged at 174bpa, we believe this is bullish and should be bought.  With the expected changes to the EU wheat balance sheet, and the prospect for more corn exports, an unchanged yield estimate will prove difficult to square with a growing demand base.  174-175 is supportive in our mind.

In soybeans, the trade is looking for a national average soybean yield of 49.6bpa vs. last month’s trend yield of 48.5bpa.  This bumps total production to 4.409bbu, a new record by 10-12mbu.  Without any demand changes, carryout would scoot higher to 681mbu vs. 580mbu last month.  Unfortunately, soybeans aren’t making the strong argument for an increase in demand the way corn is.  Export demand could probably be upped a bit based on sales exceeding last year’s level to this point, although at some point the real weight of no Chinese export program will be felt.  Crush demand is projected at a new record by 15mbu over last year, so again, difficult to increase this to a further record before the marketing year even begins in September.  With conditions well above last year, it would not be a huge surprise to see the USDA print a 50+ number today, even if that estimate gets smaller in subsequent reports due to the dry finish in the upper-Midwest.  A 50.0bpa national average yield would push carryout to 717mbu with current demand, and carryout increases of this magnitude will likely have to be sold by the trade, especially after the recent run up in price.  A trade resolution with China remains about the only thing which can add lasting strength to the soybean market unless analysts begin cutting estimates by the end of the month due to dryness.

Paris futures are a bit better this morning after two days of lower closes.  There remain gaps to the downside which arguably need to be filled, and if the USDA doesn’t provide the trade with the bullish data it wants, those gaps could be in play.  USDA’s last estimate of the EU wheat crop put the all-wheat crop at 145MMT, although Strategie Grains in their last estimate has the crop at 139MMT.  If USDA came in that aggressive, it would likely result in 3-4MMT worth of demand being cut from exports and needing to be made up elsewhere.  Wheat feed/residual for the EU is the most likely candidate to also cut demand, especially with wheat/corn spreads trading at the premiums they are around the globe.  That said, the EU’s corn crop estimate is also in jeopardy with USDA’s estimate last month of 61.5MMT at risk of slipping below 60MMT.  Carryout was already projected at a 6-year low, and lower production would likely require more imports.  USDA currently has the EU importing 16.0MMT of corn but would likely need 19MMT or more worth of imports to keep carryout steady with 17/18.  The EU will not turn to the US to fill their corn import needs, but they will exhaust Ukrainian supplies meaning the US will have to fill additional holes elsewhere.  Australian crop estimates and any further changes to Russia will also be a focus but the EU crops are probably the most important outside of the US.

Export sales were released yesterday and continued recent trends of solid row crops and poor wheat sales.  All wheat sales totaled 11.7mbu vs. the 16.2mbu needed weekly to hit the USDA forecast.  This marks the fifth week in a row in which sales failed to hit the needed level.  Total commitments of 276.1mbu are down 29% from a year ago while the USDA is currently expecting an 8.2% increase.  Corn sales totaled 21.8mbu vs. the -7.5mbu needed weekly to hit the USDA forecast.  Current commitments of 2.359bbu are up 6% from a year ago and will require a bump in estimates from the USDA today.  There are however 304mbu a outstanding sales waiting to be shipped which could see a fair amount rolled into 18/19.  Soybean sales were 15.5mbu vs. the -0.4mbu needed to hit the forecast.  Total sales of 2.151bbu are down 3% from a year ago with 190mbu of outstanding sales waiting to be shipped.  Should have no issue hitting the USDA mark and might even come in a tick ahead.  New crop corn commitments of 317.6mbu are well ahead of 17/18’s 199.5mbu and soybean commitments of 400.7mbu are well ahead of the 258.4mbu on this same date a year ago.  At some point, that sales total will likely fall behind 17/18, but the longer it remains ahead of last year, the more comical the crowd screaming this is all about tariffs becomes.



Bottom Line: We will all be smarter at 11:01am, so let’s pick it up from there.  Based on early harvest results from South Dakota and North Dakota, feel the HRS production estimate has more downside than upside.  Demand is still the much more important component, especially as cash basis gets hit each and every day.


Good Luck Today.

Tregg Cronin

Market Analyst






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