10/11/2018 Morning Comments

Good Morning,


The global equity rout, yesterday which saw the worst stock drawdowns since the Brexit vote in 2016, looks set to continue today with sharply lower Asian and European indices.  US equity futures are signaling a 0.7-0.8% drawdown as of this writing.  It truly shows how calm things have been when a single day move in stocks has financial media writing stories with headlines such as “Why is this happening?,” and the President sends out tweets attacking the Federal Reserve for raising interest rates.  US government debt is recovering this morning after yesterday’s rally when investors headed for the safe harbor or US Treasuries.  In the good old days, a strong economy was synonymous with steadily rising interest rates, but the world since the 2008 Financial Crisis has become drunk on cheap money.  Commodities dropped less than stocks yesterday with the S&P 500/Bloomberg Commodity Index ratio closing at 32.11, the lowest level since July 9th.

A dry Midwest radar this morning in what feels like the first day in a week.  Dry weather is badly needed across the Midwest and Great Plains with 7-day Accumulated Precip maps showing pretty much everywhere from North Dakota to Indiana and Kansas to Michigan seeing 1.00” of rainfall.  A large area has witnessed 2.00”, and a sizable area from Oklahoma into E-Iowa has witnessed 5.0”+.  Spots along the KS/MO border which couldn’t buy a rain this summer have seen 6-12” in the last 5-days alone.  The southern half of the continental US will remain active the next week with heavy rain chances in TX/OK/AR/S-MO/TN/KY, but areas north of the Mason Dixon line should be mainly dry.  The heat is slow to come back with below normal temps expected the next 10-days, but turning slightly warmer by the 8-14 day.  The Northern Plains look set for an extended period of dry weather which is exactly what is needed.


Nothing fresh in Ag markets this morning as we await WASDE updates at 11:00am CDT.  The trade will focus on the national average yield updates for corn and soybeans, but unless the changes are a huge surprise, the market should quickly revert to harvest conditions and weekly demand indicators.  At this stage of the game, supply side changes aren’t likely to change in a big enough way to upset the apple cart.  We’ve spent the last 5-6 months establishing some semblance of a trading range with the next 5-months spent grinding inside that range as the market pulls and pushes supplies.  To be clear, we still have event risk surrounding trade negotiations (or lack thereof) as well as the run up to Brazilian planting and harvesting.  By and large, however, our row crop markets are transitioning into the period where clues will be taken from the cash and spread markets about whether supplies are needed or not.  Corn open interest was up 1,019 contracts during yesterday’s lower session, while soybeans were up 9,531 contracts, meal up 2,262, oil up 6,997 contracts, SRW wheat up 2,654 and HRW wheat up 5,151 contracts.

The average trade estimate for national average corn yield is set to rise 0.4-0.5bpa to 181.7-181.8bpa with production up around 40mbu.  USDA is also likely to update planted and harvested acreage based on reconciled data from the Farm Service Agency.  Soybean yield is expected to rise by 0.4bpa to 53.2bpa with production up around 30mbu from last month.  Again, we will be focused more on the demand side than the supply side.  Corn ending stocks are seen rising by 150-160mbu thanks to larger than expected Sept 1 stocks from lower implied feed/residual use.  The average trade estimate of 1.917bbu is down from last year’s 2.140bbu, but is well above the estimates being tossed around earlier this summer.  If carryout continues to creep toward 2.0bbu, or even pokes above it, it will be difficult to make the argument December corn needs to trade back up through the range cap at 3.70, let alone 3.80-3.90.  This is also what makes us take a long look at CZ19 corn near $4.00.

On the soybean side of the equation, ending stocks are set to rise to 896mbu from 845mbu last month on a combination of higher 2017/18 ending stocks and lower demand.  We remain steadfast in our opinion exports are overstated by 100-200mbu, and 18/19 ending stocks could prove close to 1.0bbu when and if USDA decides to come clean.  That is unlikely to happen in the second month of the marketing year, but it is something producers need to keep in the back of their mind.  Anytime carryout doubles in a single marketing year, especially when we aren’t talking about doubling from 100-200mbu, you have a difficult time making the argument soybeans need to be priced higher.  Wheat ending stocks are also forecast to rise by 20mbu over last month on higher Sept 1 stocks and possibly lower exports.  Even though we have concerns about the 18/19 export book, we aren’t sure the USDA makes that cut this month.  More focus will be on changes to Australia and Russia which should both see exports come down and the former should see production drop by 2-3MMT.  With two of the world’s seven largest exporters seeing cuts to exports, the US wheat export demand probably gets a pass.

Later today we will see crop progress reports for Saskatchewan with Alberta reporting tomorrow.  Little to no progress is expected for either province, part of the reason the MWZ/MWH has been supported this week.  That spread traded up to -9.75c yesterday, and is holding -10.00c this morning.  These are the highest trades since two months, and 0.25c away from the highest trades since June.  The AB and SK crop reports should also show very slow progress on oat harvest, which has been supporting futures and the OZ/OH spread as well.  The OZ/OH spread is trading at +9.00c this morning after touching -5.50c at the end of September.  Canada is the world’s largest oat exporter, supplying the United States with 50% of total supplies.  The Minneapolis wheat market has plenty of supply to replace a Canadian production and quality shortfall, even though anecdotal reports suggest producers are confident about recovering the bushels still in the field.  Quality could suffer, but not at levels which the domestic market can’t handle.


Bottom Line: WASDE will be the story today, but we should quickly revert to trading harvest weather in the US and planting weather in Brazil.  Outside market influence will also be something to watch today, especially if the Dow feels like dropping another 500-1,000 point.  A little rotation out of equities and into fixed income and commodities wouldn’t hurt anyone’s feelings.  More after 11:00 CDT.


Good Luck Today.


Tregg Cronin

Market Analyst






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