11/9/2018 Morning Comments

Good Morning,

WTI crude oil is trading below $60.00/bbl this morning while Brent crude has slipped below $70.00/bbl, both instances the first since February and April, respectively.  Adding to the selling pressure the last couple of weeks was the news last night Iraq is close to a deal with Kurdistan Regional Government to restart oil exports from the disputed territory of Kirkuk.  The Trump Administration has ramped up pressure to restart crude oil operations, in part to offset the expected decline in Iran from US-imposed sanctions.  If WTI closes lower on the day, it will mark the tenth consecutive lower close pushing crude further into a bear market now that it is more than 20% off its 52-week high.  Spot prices are looking to the Feb lows for support, but if those don’t hold, next support would probably be the May 2017 highs around $54.00.


Weaker prices across the board this morning as we see follow through selling post-WASDE report.  To be fair, however, grains recovered quite nicely into the close yesterday considering the cavalcade of bearish news dumped on the market.  The big talker, as we alluded to yesterday morning, was the risk USDA decided to update their global S&D’s to reflect the recent Chinese Census statistics.  They did, and the resultant 150MMT added to global corn ending stocks was an eye-opener.  The USDA also added 6MMT to global wheat ending stocks for the same reason.  By the closing bell, however, it felt like most traders and analysts realized these supplies did not just appear overnight.  The bushels had been there the entire time, they just hadn’t been accounted for properly, so cash markets were already aware they existed.  None of these bushels were available to the market before the November WASDE, and none of them are available now, it just might move the goalposts for China’s ambitious ethanol production plans.  The Chinese data helped defer attention away from what was a particularly bearish soybean report which we will cover below.  Open interest changes yesterday saw corn up 17,942 contracts, soybeans up 998 contracts, oil up 1,520 contracts, SRW down 15,942 contracts and HRW down 6,601 contracts.  Index rolls have commenced for the December futures which helped drop December open interest sharply.

We aren’t going to rehash all of the Chinese data as we did that fairly well yesterday with differences only amounting to a few million tonnes.  Still laughable to see world corn carryout at 307.5MMT vs. 159.4MMT last month.  In the US corn balance sheet, USDA reduced the national average corn yield by 1.8bpa to 178.9bpa which was over 1.0bpa more than the average trade guess.  As the analyst community is want to do, the average trade guess for December/January should be another 0.50-1.0bpa lower because original thought is discouraged among most in that group.  The yield cut took 152mbu off production which was tempered somewhat by a 50mbu cut to feed/residual and a 25mbu cut to exports.  Interesting to see USDA reduce exports this month after a couple poor weeks of sales when soybean sales have been abysmal for 3-months and the Department just now reduced exports.  Carryout for 18/19 at 1.736bbu is the lowest in four years and should support prices.  USDA increased the low end of their average farm price by 20c/bu to $3.20-4.00.  USDA made no changes to the US wheat balance sheet outside of a 7mbu increase to seed demand.  Yawn.  Globally, USDA cut Australian wheat production by 1MMT to 17.5MMT which is still 1.0MMT while they cut Aussie exports by 1.5MMT to 11.5MMT which is still 2.0MMT too high.  At least they are headed in the right direction.  No changes were made to Russia or Canada, punting on those until next month.

The soybean balance sheet revisions garnered a lot of attention, as they should have.   USDA cut yield by 1.0bpa to 52.1.bpa which was a bit more than expected.  This slashed 90mbu off total supplies, but this was more than offset by a 160mbu cut to exports, a 7mbu cut to seed use and 2mbu cut to residual.  Crush was increased 10mbu.  Therefore, carryout rose by 70mbu to 955mbu which was more than the average trade guess but will below some estimates over 1.0bbu.  Anyone with a carryout over 1.0bbu is carrying exports even lower than USDA’s revised 1.900bbu forecast.  We applaud USDA for making the severe cut, although based on export sales to date, this is not enough which we touch on below.  The USDA was forced to cut US soybean exports that much because of the 4MMT cut to Chinese imports.  USDA is now at 90MMT for 18/19 Chinese imports vs. 94MMT last month and 94.1MMT last year.

While USDA made a step in the right direction, we fear it is not enough unless something happens at the G20 Summit at the end of the month. Weekly soybean export sales last week totaled 14.3mb vs. the 26.8mbu needed weekly to hit the USDA forecast.  Total soybean commitments of 802.4mbu are down 31% from a year ago with the deficit increasing over the last two weeks by 5%.  The commitment total is the lowest since 2011 while the commitments/forecast ratio of 42.23% is the lowest since 2007.  As we noted yesterday, for the commitments/forecast ratio to fall in line with even last year, which was the lowest for this week since 2008, the export forecast would need to drop another 400mbu.  If the trade war drags on, and China never does buy US soybeans, but the rest of the world comes to us for their needs, there should be larger second half purchases.  I hope.  The other category I wanted to note in the export sales report was sorghum.  Sorghum sales last week were actually a net negative -2,656MT.  Total commitments are down 9.781mbu, the lowest on record by an incredible margin.  The next lowest commitment level for this week was 2011 at 23.4mbu.  The USDA slashed its sorghum export forecast yesterday by 50mbu to 100.0mbu.  Even doing that, we’ve sold just 9.7% of the USDA’s forecast almost 2.5 months into the new marketing year.  This lack of demand should impact domestic demand for corn and wheat where applicable.


Bottom Line: Disheartening price action, although not sure what we should expect after a report like we received yesterday.  For every supportive point (yield cuts), there was a negative point (weaker demand).  December corn likely settles into its 3.60-3.80 range until FND at the end of the month.  Still like the look of grains more so than oilseeds unless something is done on the trade front.  A little too much harvest left out for comfort considering the snow and cold temps across the upper-Midwest.  This could point to lower corn yields and should help basis recover even faster.  That said, the producer has plenty of ammunition to throw at any rally.  In our opinion, producers should be eyeing new crop sales as we move toward year end as the shift in focus to next spring should not be bullish corn prices if acres jump as much as expected.


Good Luck Today.

Tregg Cronin

Market Analyst






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