10/9/2018 Morning Comments

Good Morning,


The USD Dollar Index is back over the 96-handle this morning, supported by continued weakness in US government debt.  The 10-yr Treasury yield hit a fresh 7-year low during yesterday’s session, despite expectations for Federal Reserve rate hikes declining slightly this week.  The market is still discounting slightly over three 25bp rate hikes through the end of 2019 which is above the two rate hikes expected at the end of August.  Rising expectations for rate hikes hinge on the string of strong economic news, a more hawkish Fed Chair and rising inflation expectations.  Inflation hasn’t been much of a talker since before the financial crisis more than a decade ago.  Investors continue to struggle with a strong US economy buttressed against a trade war with China and a generally slow-growth emerging market sector.  Not much for dollar-resistance until the 97-handle area.

Weather remains the focal point in agriculture markets with rain splashed all over the radar again this morning.  The southern plains are witnessing their second day in a row of heavy rain with almost 100% of the core HRW belt under rain clouds this morning.  Rains are also extending into NE and IA with snow working across ND.  More snowfall is expected across the Dakotas late tonight with winter weather advisories popping up as the snow comes with gusting winds.  Since the 1st of October, a large swath of ground from N-TX to WI is running 400-600% of normal precip with records for rainfall being shattered left and right.  The silver lining is of course that the corn belt and HRW belt will be going into winter with a full soil profile for next year.  Most of the WCB works out of the wet pattern by tomorrow evening, although another round of moisture hits the southern plains and mid-south region Friday-Monday.  Extended maps continue to suggest a warmer and drier trend by the end of the 6-10 day which will be a welcome sight.


Weaker markets this morning, following through on weakness from yesterday’s reversal.  Weakness in wheat was tied to midsession rumors about Russia auctioning off state reserve supplies but confirmation was lacking as was timing.  The lack of harvest progress is still the largest driver in corn and soybeans as traders await updated WASDE tables Thursday.  Average trade estimates are looking for slightly larger national average yield projections for both corn and soybeans, although there is a growing minority who believe the national corn yield could prove sub-180 by the final report in January.  Between higher abandonment from the weather and anecdotal yield reports suggesting the yield just isn’t there the way it was a year ago, bulls seem set in their convictions.  These sort of theories do little to support prices today, and nether cash nor spreads are suggesting some large bullish surprise.  President Trump is expected to announce year-round E15 at a speech in Iowa later today, but as we discuss below, this isn’t likely to be the wave of demand some are touting.  Open interest changes yesterday included corn down 7,859 contracts, soybeans up 3,545, SRW up 2,945 and HRW up 1,776 contracts.

Later today at a speech in Iowa, President Trump is expected to deliver on a long-awaited campaign promise to lift a federal ban on summer sales of higher-ethanol blends.  The EPA currently prohibits summer sales of gasoline blended with 15% ethanol (E15) due to smog concerns.  The move would be a victory for renewable fuels groups in exchange for the President adjusting rules around the trading of RINs.  Renewable Fuels groups are touting the move as a huge win, although only around 400 million gallons of the roughly 142 billion gallon US gasoline market were sold last year.  In addition, only around 1400 gas stations out of a total of 115,000-120,000 stations currently sell E15.  That means infrastructure will need to be updated before the new fuel can even be sold.  Further, E15 will not be mandated, so consumers will need to make the conscience effort to buy E15 provided the price incentive makes sense.  More availability is a good thing, but expecting this move to be a shot in the arm of either ethanol plants or corn growers needs to be tempered a bit in our opinion.

Speaking of ethanol, the US Census Bureau released official export data for the month of August last Friday.  Ethanol exports rebounded smartly to 452.4 million liters, up from last month’s 395.0 million liters and sharply above last year’s 363.0 million liters.  In fact, the August total was an all-time record for the month, getting exports back on track after a weak showing in May and July.  Exports to Brazil were the lowest in almost three years after the country was the largest importer this past spring.  Larger exports to several Middle East countries helped soften the blow.  China continues to take next to nothing.  Exports are still the clearest path to sustainable growth in our opinion if the current trade war were not in the way.  DDGs exports were also strong at 1.155MMT vs. 1.107MMT last month and 761,295MT a year ago.  This was the largest monthly total since August 2015.  Final exports of corn and soybeans were also tabulated for the 2017/18 marketing year.  USDA’s World Board already had this information on the last WASDE, so no real surprises, but interesting to note the strong export haul nonetheless.  Corn exports finished at 2.428bbu, the largest export total since 2007/08, and the second largest on record.  Soybean exports finished at 2.128bbu, just 2% below last year’s record.  Iran led August soy purchases with 15.2mbu.  We were also given first quarter wheat exports which were disappointingly low as most were expecting.  JJA wheat sales totaled 197.8mbu, the lowest total since 2009, and the second lowest total since 1971.  This raises the bar for second quarter exports if we have a prayer of hitting the USDA’s current 1.025bbu export estimate.

Selling pressure in wheat mounted yesterday as newswires began carrying stories about Russia auctioning off 1.5MMT of state reserve wheat over the next 2-3 weeks.  Details were incredibly lacking, which has become commonplace for anything coming out of Russia.  When one considers the fact Russia is expected to export 30-35MMT of wheat and consume 38MMT of wheat domestically, the 1.5MMT of wheat doesn’t really move the needle.  However, anything which allows Russia to keep exporting is not price supportive.  In addition, the longer Russia can continue exporting helps bridge the gap to Argentina which should be able to ship 2.5-3.0MMT of wheat per month once new crop comes online in December.  Argentine FOB offers are currently offered $25/MT cheaper than similar protein US-HRW.  If Argentina achieves their 3MMT/mo export target, they should be able to ship wheat until April/May, just in time for Northern Hemisphere new crop harvest.  On the other end of the spectrum, Australian crop production estimates continue to decline with one well-known brokerage dipping to 16.4MMT of production vs. USDA at 20MMT.  USDA should cut exports by 3-4MMT on Thursday.

Crop progress and export inspections are delayed until today.


Bottom Line: Markets seem in no hurry to go anywhere until the weather clears or the USDA reports are in hand.  Every piece of supportive news seems like it is countered by two pieces of pressuring news.  The slower pace of harvest will help support cash markets, especially as growers try to hold onto every bushel they possibly can.  Bottom line seems to be the longer this trade spat with China endures, the less likely China is to come back to the United States once it is resolved unless soybeans are made part of the bargaining process.  Agriculture isn’t likely to be high on President Trump’s list, and once China figures out how to do without us, why would they come back on their own?


Good Luck Today.

Tregg Cronin

Market Analyst






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