11/13/2018 Morning Comments

Good Morning,


Crude oil is sharply lower overnight, working on its 12th lower close in a row.  Since 10/29, crude oil is off over 13% and spot prices are $9.00/bbl below their 200-day moving average.  Spot prices are now the lowest they’ve traded since February as OPEC appears unwilling to cut production and risk losing market share as they’ve seen happen in the past.  In addition, despite US-imposed sanctions, Iran appears to have allies like Russia willing to help get its crude to market.  Further, the US granted exemptions to seven or eight major countries to continue importing Iranian crude which defeats the entire purpose.  Also, as we’ve seen time and time again, shale drillers in the US have become the leanest, lowest cost producer outside of Saudi Arabia and appear to be able to keep pumping crude and make money at these levels.

Some snow flurries around this morning, but otherwise the Midwest should see 7-10 days of wide open weather to finish harvest.  After the unseasonably cold weather to begin November, the second half looks to warm to above normal beginning on Wednesday.  This will aid in farmers getting the last 10-20% out of the fields.  Otherwise, meteorologists taking stock of the heavy rains in Argentina over the weekend which dropped 3-10” in various spots of their growing belt.  Ripening wheat would have received the largest damage, although corn and soybean planting could also be delayed for several days.


It’s a wheat world and everyone else is just living in it.  Grains are weaker overnight, but the buying enthusiasm in Chicago and to a lesser extent Minneapolis and KC are the talk of the markets.  The idea variable storage rates would be reduced from 11c/mo to 8c/mo did not show up yesterday, but you would have thought it did they way traders are reacting.  For much of the last two years, managed funds have been short Chicago wheat thanks to the huge carrying charges which allowed them to attain a positive roll yield by moving their contracts down the curve each delivery period.  The returns were not sexy, but they were stable and consistent which is preferable to a roller coaster each way.  The drop in storage charges should mean tighter calendar spreads which reduce the incentive and amount of yield from rolling each delivery cycle.  Chicago storage charges will be reduced, but Kansas City will not, so it will be interesting to see if funds move more short positions in KC?  That spread has also been upended as funds tried to reduce their risk exposure by being just short Chicago with a long position in KC.  As funds decided to bail on Chicago, they’ve also bailed on the long in KC, sending that spread from +7.00c on October 12th to -26.50c this morning.  Not much to say about corn and soybeans this morning although soybeans acting well at resistance from the last 30-days.  Open interest changes saw corn down 2,408 contracts, soybeans down 2,769, SRW down 5,638 and HRW up 2,753 contracts.

Adding to the strength in wheat yesterday was another 132 delivery registrations being canceled out of Indiana last night at Cargill’s elevator.  This leaves just 10 outstanding delivery registrations in Ohio, which is a bit interesting to think there are only 50,000 bushels as the supply of last resort.  There are still 232 delivery registrations outstanding in Kansas City as that market is not facing the same sort of pressures as Chicago.  Minneapolis has 102 outstanding registrations with 94 in Duluth and 9 in Minneapolis.  With cash basis above delivery equivalence in all zones including Chicago, it would not be a surprise to see the last 10 registrations canceled in Ohio.  Adding to the cash strength and demand component is the idea winter wheat acres could be unchanged or even down from a year ago when most expectations were for a 10-15% increase back in September.  A poor fall for seeding and germination has put a damper on those ideas with this afternoon’s crop progress report expected to show at least 10% left to plant.  All areas of Kansas will have hit final plant dates for winter wheat on Thursday.  Around 70% of Kansas already hit last plant dates on November 5th.

We used this opportunity to do a little by-class balance sheet work for 19/20.  For our HRW balance sheet, we are using USDA’s numbers for 18/19 but put the winter wheat acreage change at up 3% from the current year.  This gives us 23.924 million planted acres and harvested acres of 18.182 million using a 5-yr average for harvested percentage.  We plugged in a yield of 42bpa as the slow pace of planting and higher chance of winterkill only gives us confidence in an average yield at the moment as opposed to above average.  Total supplies would then be at 1.196bbu vs. 1.246bbu this year.  We had domestic demand up 7mbu from the current marketing year and exports down 10mbu with all of this subject to change.  Carryout would be estimated at 379mbu vs. 426mbu last year and the lowest carryout since 2014/15.  A stocks/use ratio of 46.33% is not bullish, but it is not egregiously bearish like we’ve seen at times over the last five years.  If anything, we feel it makes a compelling argument for spot month futures remaining over $5.00 and probably closer to the premiums being carried by deferred contracts in new crop slots.  We also ran a way-too-early balance sheet for HRS assuming average in the Northern Plains up 5% from the current year based on a shift away from soybeans.  This would give us planted acreage of 13.344 million vs. 12.709 million this year and would be the largest spring wheat planted area since 2008/09.  A yield of 47bpa and a harvested acreage percentage of 97% would give us production of 608mbu vs. 587mbu this year.  Demand is pretty much unchanged from this year, although we did take exports down 15mbu to 280mbu which is still up 6mbu from the 5-yr average.  Carryout would be projected at 353mbu vs. 260mbu this year and would be the largest carryout going all the way back to 1987/88.  Stocks/use of 61.23% would dwarf the 5-yr average of 41.77% and has us contemplating hard what should be done with new crop futures at $6.08-6.20.  If supplies are indeed that large, it will be tough to justify spring wheat over $6.00.  The largest question is how hard the shift away from soybeans will be at $9.30 SX9, and whether the shift will be into HRS for the most part?  Time will tell, but also has us curious about the current spread between Kansas City and Minneapolis.

Other news included Ukraine reporting crop progress with harvest at 84% complete and 28.4MMT collected so far.  Using USDA’s yield estimate of 7.4MT/ha pushes that crop size to 33.8MMT if yields hold the rest of the way which is slightly larger than USDA’s production estimate of 33.5MMT.  The yield and production estimates would shatter the previous records in Ukraine of 6.89MT/ha and 31.906MMT.  it will also keep Ukrainian supplies competitive into Europe and the Middle East.  Spot offers out of the Gulf last night were $166.63/MT FOB vs. Ukrainian offers at $166.00/MT.  Brazil’s nearest offer was $168.99/MT for December and Argentina didn’t have any available offers.


Bottom Line: Remains to be seen whether the last of the fund blow out is over yet.  Today should see the final day of the Goldman Roll which could allow front-month spreads to relax a bit.  This will prove a long winter for bears in the wheat market if calendar spreads are already tightening and cash is above delivery equivalence at all three wheat exchanges.  Export sales have improved and should hopefully hold for the next several months.  Russia still rolling out wheat is going to keep the market in check, as is ideas for record winter wheat acreage there.  Corn and soybeans need some fresh inputs.


Good Luck Today.

Tregg Cronin

Market Analyst






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