11/7/2018 Morning Comments

Good Morning,


Well.  The Midterms are finally over and the experts were mostly wrong again.  There was no “Blue Wave,” although Democrats did manage to take back control of the House of Representatives.  However, Republicans strengthened their lead in the Senate, including taking down several prominent Senators which could have implications in the next election.  Democrats needed 23 seats to secure 219 in total and have a simple majority and they got 216.  This was well short of the 30-40 some analysts were forecasting, but should ensure gridlock for the next two years regardless.  Of most importance will be trade policy with China in our opinion which President Trump can largely conduct without Congressional approval as we’ve seen with his tariff implementation.  Any formal trade deal does need to go through Congress, however, setting the table for an interesting two years.

Scattered rain showers across Kansas, scattered snow shower across Nebraska with rain in Arkansas and flurries around the Great Lakes.  We will be watching the next 24-48 hours in Kansas as another 0.25” is forecast to fall with high temps mainly in the 30’s and 40’s through the weekend. All counties in Kansas have hit final plant dates for insurance purposes except the southeast 23 counties which have until November 15th.  Otherwise a mainly dry week will occur across the Midwest, although temps remain bitterly cold, especially across the Northern Plains.  High temps into the 20’s will be common place to close the week.  Well below normal temps hold in the 6-10 but start to moderate in the 8-14 while precip moves to well below normal by the 8-14 day.


Mixed markets with wheat and soybeans higher but corn weaker.  Grains are waiting on tomorrow’s WASDE report and fresh data tables before taking on fresh direction.  Of most importance on tomorrow’s WASDE will be changes in national average corn and soybean yields, what USDA elects to do with Chinese soybean imports and therefore US soybean exports and finally if they will finally make the necessary changes to Australia and Canada.  Like the Midterm elections with equities, our markets will be happy once the report is behind us so we can move the focus back to weekly demand indicators, estimating actual winter wheat planted area and gauging the eventual slowdown in Russian wheat exports.  Open interest changes in yesterday’s session saw corn up 555 contracts, soybeans down 124, meal down 2,614 contracts, oil up 1,291, SRW down 3,461 and HRW up 769 contracts.

Deliverable stocks out yesterday with a continued draw down in Chicago are warehouses.  Total wheat stocks in Chicago fell by 647,000 bushels to 77.786mbu vs. 95.836mbu a year ago.  That marks an 18.8% drawdown in stocks from a year ago, a pretty impressive feat considering similar carry-in and production sizes.  In Kansas City, stocks totaled 123.877mbu vs. 123.809mbu a week ago and also above the 119.794mbu a year ago.  HRS stocks fell 680,000 bushels from the week before to 21.975mbu and compares with 24.057mbu a year earlier.  The move in the MWZ/MWH spread yesterday garnered a lot of attention as it shot up to -3.00c, the highest trade since February.  Traders couldn’t point to a specific reason for the move, although there is the general expectation Canada will see a cut to production and exports on tomorrow’s WASDE.  In addition, if the quality issue are worse than feared, that could also make Duluth stocks more valuable.  Domestic bids also said to be better which would be supportive.  WZ/WH also in focus as the VSR calculation period rolls on.  That spread is trading at -14.75c this morning, which accounts for around 39% of full financial carry.  The rolling average for this spread is 49.8% of full financial carry which would be under the threshold to reduced variable storage rates from 11c/mo to 8c/mo.  To us, this would mark a major fundamental shift for managed funds who have gotten used to the solid roll yields provided by being short Chicago wheat.  Doubt it leads to an outright liquidation of their entire short position but could shift more contracts to KC where storage rates are not at risk of being reduced.

Also out yesterday was South American planting progress which showed Brail at 55% complete vs. 44% last week and 41% average.  Largest soybean province Mato Grosso is 90% seeded vs. 74% last week and 62% average.  It looks like a near certainty Brazil will have early beans ready for export in January, cutting the window of when US soybeans have a chance to make inroads into China.  Brazilian 1st crop corn planting progress was 75% complete vs. 67% last week and 69% average.  With the USDA Attache cutting hit estimate of Chinese soybean imports to 85MMT this week, we remain very concerned the USDA could finally make their needed cut.  Unlikely the Department makes a straight road cut to 85MMT from 94MMT, but even reducing 4MMT this month would signal more cuts to come.  4MMT worth of cuts would equal 146mbu which would pretty much go straight to US export and eventually ending stocks.  This is how many private estimates have been projecting carryout over 1.0bbu for much of the last month.  And if we needed more bearish information, officials from Argentina said if the trade spat between China and the US continues, Argentina could export up to 16MMT of whole soybeans to China vs. 7-8MMT average and 3MMT this year.  If Brazil is able to export 75MMT to China, add in 16MMT from Argentina, and 3-4MMT from other minor producers, China can import their 94-95MMT.  Definitely not what the US producer needs to see/hear right now but it is reality.

Ethanol production will be in focus later this morning after stocks finally broke last week and production rebounded from multi-month lows.  Ethanol margins have continued to deteriorate, however, with estimated gross ethanol margins from RJO at $0.47/gln vs. $0.56/gln last week and $0.74/gln last year.  According to their chart, these are the worst margins in at least four years.  RBOB/Ethanol spreads continue to downtrend, although have rallied 1-2c the last day or so.  At 37-40c/gln premium RBOB over Ethanol, these are the tightest spreads since March.  Further illustrating this point is the ethanol/corn spread which helps paint a picture of ethanol profitability by seeing how well the price of ethanol covers the input cost of corn.  At current, the spread is trading at -$0.04/bu highlighting the fact ethanol does not cover the input cost of corn on a futures basis.


Bottom Line:  More chop until tomorrow.  Wheat arguably has the best fundamentals at the moment with improving demand, concerns about winter wheat acres and declining prospects in Australia/Canada.  Soybeans easily have the worst fundamentals in the grain room, but it’s a matter of how aggressive USDA wants to get.  Corn is somewhere in the middle with supportive carryout projections but demand indicators a little shaky.


Good Luck Today.

Tregg Cronin

Market Analyst






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