9/13/2018 Morning Comments

Good Morning,


Financial markets yesterday and overnight focused on the prospect of renewed trade talks between the U.S. and China which could stave off the next round of tariffs being implemented on both sides.  The next round of tariffs on the U.S. side would have amounted to another 25% on all Chinese goods, or about $200 billion with another $267 billion in the ready.  Should both of those be implemented, there would be tariffs on every dollar of Chinese goods imported into the United States.  The encouraging sign is the new trade talks are being led by Treasury Secretary Mnuchin, not by the trade hawks like USTR Lighthizer or trade advisor Navarro.  Nothing set in stone, but there must be a first step.


Mixed markets this morning with corn firmer but beans and wheat lower as the trade continues to digest the USDA reports from yesterday.  Most analysts were left flabbergasted at the national average corn yield put forth by NASS as the average trade estimate was looking for a smaller crop m/m.  It has caused quite a little introspection by analysts of all shapes and sizes as no method proved accurate this year from satellite firms to crop tours to weather modeling services.  While it has been said many times in recent years, it would appear everyone continues to underestimate the potential of these hybrids and the genetic packages inside them when weather conditions are conducive to growing corn.  In addition, the last two years especially has witnessed localized problems in different spots of the corn belt weigh on analyst opinions about national yields.  Last year it was poor emergence in E-IL, IN and OH.  This year it was flooding in N-IA/S-MN.  Crop tours exacerbated this problem as did the constant barrage of drone pictures and crop insurance adjuster horror stories.  The fact is, the weather was pretty darn good in 95% of the corn belt, and even in the flooded area, there was enough crop benefitting from the increased rainfall than was being impacted by localized flooding.  In other words, the trade should now consider just how extreme of a weather event is needed to materially impact the national average corn yield enough to drop things well below trend.  This isn’t to say bank on a 180 yield in May next year but going into a year expecting a crop problem to rally prices is a tough sell after three record yields in a row and four records out of the last five years.  Open interest changes were mostly higher with corn up 5,812 contracts, soybeans up 9,243, SRW up 5,962 and HRW up 1,343 contracts.

While the 181.3bpa national average yield stole the show, the demand picture was equally as impressive as record demand allowed carryout for 18/19 to only move up 90mbu which is astonishing with that kind of headline print.  The good news is these demand figures are not just inflated place holders which will be cut in futures reports.  Export demand is strong and will remain so well into 2019.  Ethanol margins have slipped recently due to ethanol prices being under pressure, but production continues to run at levels above the threshold to hit the USDA estimates.  Margin improvement will be needed in coming weeks to prevent a slowdown, obviously.  Barring a major wipeout in the Carolinas this weekend, animal numbers continue to grow with depressed grain prices rallying feeding margins yesterday.  The stocks/use ratio of 11.7% is still the lowest since 2013/14 and December corn somehow managed to avoid setting new contract lows during yesterday’s session.  While new lows might be difficult to defend against with 14.0bbu of corn coming at the market the next few weeks, price should find good demand on set backs by end users armed with ample margin.

Had the focus not been all on the corn market, and if the Trump Administration would not have announced plans for more trade talks in coming weeks, soybeans might have found themselves much lower.  About an hour before the WASDE report, the Trump Administration announced plans for renewed trade talks between China and the US, rallying soybeans 12c off its new contract lows made that morning.  This allowed prices to shrug off the supply jumps in the soybean market which could get worse in coming reports.  Production came in at a new record of 4.693bbu with a new record yield of 52.8bpa.  Total supplies are now over 5.0bbu for the first time in history.  Old crop demand was increased by 35mbu, dropping 18/19 carry-in by a like amount, otherwise the new balance sheet would have looked even worse.  18/19 crush was increased by 10mbu but USDA has basically already said they can’t increase exports until something happens with trade.  Carryout therefore was put at 845mbu which was close to trade estimates, but avoided the 900mbu+ numbers some had suggested.  I would say the 900+ numbers aren’t dead yet as soybean yields have increased from September to Final in five of the last six years, and a 1.0bpa increase in national average yield would add 90mbu, pushing carryout over 900mbu.  Chinese soybean imports were cut 1MMT each for 17/18 and 18/19 which was not as much as feared.  Unfortunately, China’s official soybean import forecast sits down at 84MMT vs. USDA’s latest at 94MMT.  Even if imports are only down half of what China is projecting, that’s still another 5MMT of global soybean import demand lost which heads right to the carryout of the major global exporters.  Read the United States.

Wheat market changes were quiet for the US balance sheet with both marketing years completely unchanged.  The trade instead focused on the surprise increases in production to Russia and India and the lack of production cuts in Canada and Australia.  Russian wheat production was increased 3MMT to 71MMT after USDA spent most of the summer cutting production along with most other analysts.  In their commentary report, USDA said the increase to production was based on two factors: 1) a 2 percent increase in harvested area for total wheat and 2) a 3 percent increase in winter wheat yield.  However, we would note the USDA also said spring wheat production prospects remain “highly favorable” in the Siberian and Ural districts.  This is in stark contrast to the reports we’ve read online in recent weeks suggesting some of that area is already under snow and quality issues will be a major factor for the bushels harvested.  It is always difficult to get an accurate read on production in area the size of the Russian wheat belt, but this year seems especially suspect.  Bottom line, however, is Russian wheat offers continue to be well under the market and until the exportable surplus is exhausted and values move above US-HRW, there is little reason for a big, sustainable rally.  The production numbers aside, most analysts took more issue with USDA refusing to cut their 35MMT Russian export forecast.  Most in the trade are around 30MMT, but again, FOB offers should tell us exactly when the surplus has been reduced.  Australian production was reduced to 20MMT vs. 19MMT expected and being used by most in the trade.  Exports were also reduced to 14MMT from 16MMT last month but are still 2MMT too high.  Canadian production was cut to 31.5MMT from 32.5MMT last month, but here again, is probably 2MMT too high.  Exports were reduced 0.5MMT to 24.5MMT but would be 2MMT above last year.  Little to cheer about in the wheat market until US exports pick up.  The selloff yesterday has US-HRW trading a $15/MT discount to EU offers up front and is back to level money with Russian wheat for December.  HRW should probably move further below these offers to account for the freight disadvantage.


Bottom Line: Yesterday’s reports confirmed big crops, and at this stage of the game, there just isn’t going to be a supply side shock.  Any price appreciation from this point forward needs to be demand led, and even that is going to be limited in scope once the crop is harvested and bushels can be thrown at a rally.  Producers need to be looking hard at 19/20 already even though this crop is not yet in the bin, because yesterday’s report has implications for next year.  Without a trade resolution and soybean price appreciation, one has to ponder how long CZ9 can maintain $3.90+ futures when the inevitable switch in acres happens next spring?  Even with a drop in soybean acreage, carryout will be difficult to whittle down much below 600mbu which is still too many beans.  Maybe the Trump Administration will deliver us a Christmas Miracle in regards to trade?  A guy can dream…


Good Luck Today.

Tregg Cronin

Market Analyst






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