9/17/2018 Morning Comments

Good Morning,


Some scattered showers around the Northern Plains, otherwise quiet across the Midwest.  The run of dry weather across the corn belt and Plains appears to be coming to an end, especially by mid-week.  This morning’s GFS model shows heavy rainfall accumulatios by the weekend across the southern plains and central/eastern corn belt.  Projections now are putting many 1.50-3.00” totals across the corn belt which will impact early harvest efforts.  The wet pattern carries into the 6-10 and 8-14 for the Midwest with widespread above normal precip expected.  Nearly every part of the corn belt and Great Plains are under the above normal bubble.  Temperatures are seen mostly above normal except for the far northern plains.  This pattern could slow down what looked to be an incredibly quick harvest.


Mixed markets this morning with weaker row crops and firmer wheat boards.  Wheat is adding to late week gains on news out of Australia over the weekend of frost in both W.A. and NSW.  Western Australia was the bright spot in an otherwise tough year for Aussie wheat producers, but some of the pictures out of that territory this morning are brutal.  Analysts believe it will be difficult to clear 18MMT now, which we discuss below.  Row crops continue to languish, holding recent lows but all indications are those levels could be in jeopardy once harvest gets rolling.  Weekend headlines out of Washington and Beijing are negative and do not suggest trade resolution anytime soon.  In fact, headlines from the Wall Street Journal suggested China was willing to ramp up the trade war even more by suspending the shipment of some goods to the United States.  Were this to happen, it could impact global supply chains in a significant way, possibly the most since the financial crisis when exporters/importers didn’t know who they could do business.  For all parties, let’s hope it doesn’t come to that.  Either way, farmers will probably be seeing the second round of Trump payments at the end of the year.  Lucky us.  Open interest changes from Friday’s session shows corn up 7,604 contracts, soybeans up 10,843 contracts, SRW up 7,503 and HRW up 2,347 contracts.

The USDA issues their latest production estimates last week, pegging Australia at 20.0MMT with exports of 14.0MMT.  Based on the long-term regression analysis of Aussie wheat supplies vs. marketing year exports, this looks about right to possibly a touch light.  This would leave ending stocks essentially tied for the lowest levels in a decade.  If the weekend frost and continued dryness across Victoria continue, however, production could swing down to 17-18MMT.  Using 18MMT, total Aussie Wheat supplies would be 23.5MMT and imply exports around 13MMT according to the regression.  Unfortunately, if exports are allowed at that level, ending stocks fall to 2.948MMT, the lowest since 1998/99.  It is unlikely domestic end users of wheat for both industrial and feed uses will allow exports to get that high as inter-territory wheat trade could be record high this year to satisfy livestock feeders.  Ultimately, this should ensure more second half demand pull for the United States, but more demand we can pencil in which hasn’t actually occurred isn’t what the US balance sheet needs right now.

The other major exporter constantly in the news is Russia, so we decided to build the same chart for them as well.  USDA updated Russian production to 71MMT, up 3MMT from last month and totally catching the trade off guard.  The increase in production allowed them to keep their wheat export forecast at 35MMT, a number which looked completely improbable in relation to crop size.  Even with the bump in production, it still looks high.  Using USDA’s numbers, it would imply export demand accounting for 42.4% of total supplies which is down from last year’s 43.01% but the second highest on record.  However, looking at the regression analysis since 2000 of exports to total supplies, the USDA’s export numbers are well above the trendline.  Based on the trendline, exports would be implied at 31MMT, which is much more congruent with current trade ideas.  Would actually call 31MMT a bit high based on some of the export restrictions being discussed if exports grow above 25MMT.  31MMT of exports would put the export/supply ratio at 37.59% which is just a hair above the 36.64% 5-year average.  Ending stocks would be 13.4MMT which would seem to imply more exports could be done than just 31MMT.  The trouble with historical regression analysis is it relies to heavily on years in which Russia was not the major exporter it is today.

Soybeans continue to hold pre-WASDE lows, although it looks like a matter of time before those are taken out.  More and more discussion on the 2019 balance sheet and potential acreage changes.  This has us looking at the SX8/SX9 calendar spread which hit new contract lows overnight of -62.00c. This ties the lowest trade for this date on the calendar with 2006/07 and is just barely above the lowest ever trade for a SX/SX spread in September of 2006.  The soybean market is incentivizing farmers to store soybeans as far as the eye can see, but one has to wonder if the right message is being sent for the 2019 marketing year with $8.80 beans and $3.85-3.90 corn?  The ratio is favoring corn without a doubt, but we question whether the current price spread is wide enough to encourage the shift of 4-6 million acres away from soybeans?  Winter wheat acres increasing this fall will help some of this shift but cannot take the entire share.  If all of those bean acres switch to corn, December ’19 is probably overpriced.  If they don’t switch to corn, soybeans need to be $0.80-1.00 lower.  Neither scenario makes one feel especially bullish toward new crop prices.

US wheat could have been competitive in this weekend’s Saudi tender.  Their tender process does not always lend itself to cut and dried results, however, so it could be several weeks before we know the true results.


Bottom Line: Wet weather will slow the harvest process but we still have too many bushels coming at the market in too short of time.  The complete lack of a PNW soybean program will be seen and felt in a big way when bean harvest kicks into gear across the Northern Plains the next 10-days.  Piles will be huge, storage charges will be high and producers will find it difficult to store their way out of these prices.  Big soybean yields being harvested in S-MN and Iowa this weekend according to anecdotal reports.  Very big.


Good Luck Today.

Tregg Cronin

Market Analyst






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