11/8/2018 Morning Comments

Good Morning,


China released import/export data for the month of October last night, showing stronger than expected exports, even to the United States.  Chinese exports to all countries grew at 15.6% from a year earlier, while imports rose 24.1% according to the customs data.  Both figures exceeded expectations, while exports to the United States rose 13.2 from a year earlier.  The stronger than expected exports come despite the US-imposed tariffs which most thought would curtail US demand for Chinese goods.  As most analysts are pointing out, this could strengthen China’s resolve in the trade war if the US penalties are not having the desired effect.  Some of the strength is undoubtedly due to importers front-loading purchases ahead of the second and possibly third round of tariffs.  As the trade war drags on, hopefully not for long, we will get a truer sense of the tariff impacts.

Wonderful, glorious snow is falling across the Plains this morning much to the delight of farmers everywhere who still have crops in the field.  In Kansas, both snow and rain are falling, creating a wonderful mix of slop to keep farmers from finishing the tail end of winter wheat planting.  The moisture moves out of the Plains later today, bringing dry weather until Sunday/Monday when another light shower/snow mix will move over Oklahoma, N-Texas and Kansas.  The Northern Plains and WCB should be mainly dry the rest of the seven-day period.  The 6-10 day period will remain cold across the midsection of the US but by the 8-14 day the Plains and WCB move to above normal temps.  Fortunately, precip appears to shift below normal for the entire country during the 6-10 and 8-14 day.  Bitter cold through the weekend.


WASDE day today and we are higher heading into the report.  Most contracts were riding two to three day losing streaks heading into today, so a little bounce is warranted.  There are several themes analysts will be watching closely on today’s report: 1) changes to corn and soybean yields; 2) changes to Australian/Canadian/Russian wheat S&D’s; 3) changes to Chinese soybean imports and US exports; 4) changes to Chinese corn stocks from the last several years.  We will discuss the last point below as it is garnering a lot of attention on the newswires.  In our opinion, any change to US soybean and corn production should be minor at this stage of the game.  Harvest is dragging out longer than expected but a huge loss of bushels is not expected in any one area except maybe soybeans in the very far north of the Midwest.  Cash and spreads would not suggest harvest supplies are sharply smaller than estimates.  How aggressive USDA gets with cuts to Canada and Australia will also be in focus with the USDA likely adopting ABARES estimate of Australian production t 16.7MMT.  With harvest wrapping up in Canada, production cuts there also might be less severe than originally thought.  Corn open interest down 1,662 contracts, soybeans down 5,027 contracts, meal down 1,431, oil up 2,881, SRW wheat down 13,093 contracts and HRW down 5,78 contracts.

Last week, the Chinese Census was completed for the first time since 2008.  In it, they updated grain stocks for the last ten years, making substantial revisions to corn production and ending stocks.  Newswire services began picking the details up over the weekend and earlier this week after the Chinese National Grain and Oilseeds Information Center made sweeping revisions to its S&D’s.  In it, they increased Chinese corn production in 2017 to 259MMT vs. USDA at 215.9MMT, 2016’s crop up to 263MMT vs. USDA at 219.6MMT and 2015’s crop at 265MMT vs. 224.6MMT.  They also hinted at ideas the 2018 corn crop was near 259MMT vs. USDA at 225MMT and sharply above China’s official estimate of 213MMT.  Somehow, they reason they were understating corn area by close to 6 million acres, which would be nearly 15 million acres.  That would be missing the entire corn area in Minnesota, South Dakota and North Dakota combined.  Not exactly sure how you could miss by that amount, but I digress.  The important question is whether the USDA adopts these numbers this month, or at all, in coming months.  If they do, the global corn balance sheet will look drastically different.

If the USDA were to adopt these new supply statistics, without adjusting demand which isn’t likely, ending stocks in China would skyrocket to levels congruent to their wheat balance sheet.  Ending stocks for the 2018/19 marketing year would be projected at 219.4MMT which is more than double the level estimated at the end of the 2014/15 marketing year.  The supply situation would look something like that projected in the bar graph below.  Compare the first chart using CNGOIC updated numbers with the USDA’s current estimates from the last WASDE report in October.  Using the USDA data, China’s corn balance sheet was finally taking on a supportive look with ending stocks falling to the lowest since 2010/11 and a stocks/use ratio at one of the lowest levels of the last 30-years.  Looking at things a little differently, it is unlikely area was missed by that large of a margin, but instead demand was probably not as strong as originally thought while the crude storage methods in China allowed a massive amount of slippage from the last Census.  Global consumption of corn is still growing, and Chinese stocks are not available to the market in any capacity anyway, so it isn’t clear whether these new data figures will have a great deal of impact on the market anyway.  If USDA adopts the numbers, funds and algos could have a selling spree for a few days, but the market should work out of that once it realizes global corn trade doesn’t really involve China anyway.  With China’s ambitious ethanol production plans the next several years, it could mean imports will not be needed as quickly as originally thought, but we’re not sure it SHOULD have any more impact than that.

CONAB will be out later this morning with their latest estimate of Brazilian corn and soybean production.  On their last report, they were 116.8MMT vs. 119.3MMT in 2017/18 on soybeans while they see this year’s corn crop at 90-91MMT vs. 81.4MMT last year.  USDA sees Brazilian corn production at 94MMT and soybean production at around 123MMT.  Soybean exports are the other area of focus on today’s report for us.  We’ve only sold 38.2% of the USDA’s current soybean export forecast which is the lowest since 2005.  A sobering take on the export forecast, to bring the current commitments/forecast ratio in-line with last year (52%), the USDA would need to cut their forecast by 560mbu.  We do not believe they will do that, but this gives an idea of how bad our exports currently are.


Bottom Line: Let’s get the WASDE behind us and we will all be smarter.  Focus for us is outlined above.  China’s updated data is just headline risk, but that doesn’t mean funds and algos can’t have fun with it for a while.  More after the report.


Good Luck Today.

Tregg Cronin

Market Analyst






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