12/19/2018 Morning Comments

Good Morning,


While focus today will be on the Federal Reserve decision toward short-term lending rates, it is difficult to believe anything is more salient than the energy market meltdown of late.  Yesterday and overnight, crude oil futures fell below $46.00/bbl before recovering.  These are the lowest prices since August of 2017 as energy inventories in the U.S. continue to grow and OPEC+ production cuts remain less than a sure thing. The energy washout continues to pressure commodities as a whole with the Bloomberg Commodity Index falling to the lowest levels since June of 2017.  This is pressuring the entire energy complex, but of interest to producers would be some of the cheapest dyed diesel prices since September of 2017. While nitrogen and phosphorous prices are expected to be higher next year, diesel prices could be a quiet benefit to break evens in 2019.

Generally favorable weather forecast in Argentina through the weekend and into early next week.  Favorable drier weather is seen moving in after the current system which should aid in continued planting efforts.  In Brazil, 0.25-0.75” fell across most of RGDS, Santa Catarina and Parana yesterday with dry conditions elsewhere.  The forecast this morning sees soaking rains in the aforementioned three provinces over the next 7-10 days.  Limited rains will be the feature elsewhere.  The dry areas of interest in Parana and MGDS look to see average to above average rains early next week which should limit additional stress.


Mixed markets this morning with soybeans firmer and grains mostly weaker as wheat prices trade off 1.0%.  The 40-55c rally in wheat prices since October has run into fairly stiff overhead resistance as Chicago wheat prices butt up against the 50% retracement of the 5.93-4.85 selloff at 5.39, while KC wheat has been blunted by the 23.6% retracement of the 6.44-4.82 selloff at 5.20.  Major moving averages are also banding trade at current prices with the 100 and 200-day moving averages stopping advances in KC and Minneapolis wheat.  Global wheat prices have been rallying of late, led by Russian and Argentine advances although the sharp weakness in the Russian Ruble helped offset some of this wheat strength.  The issue with a continued rally in either SRW or HRW is the fact the commercial already owns the vast majority of stocks and flat price rallies are not going to encourage him to move it.  Basis and spread rallies will be needed to coax commercials into moving their hedged inventories, with basis actually trading weaker with the board advancing.  Much less spring wheat is owned by the commercial than winter wheat, so flat price advances in Minneapolis will still be needed to buy wheat from the farmer.  Chatter in the market yesterday suggested China bought another 300-600,000MT of soybeans from the Gulf and PNW.  Most will be watching the wires for any daily sales announcements at 8:00am CST. Corn open interest was up 2,724 contracts, soybeans down 4,213, SRW down 1,175 and HRW down 1,884.

News was light yesterday but we took interest in the deliverable stocks data on wheat from the three exchanges.  Spring wheat stocks fell another 1.946mbu last week to 14.198mbu which compares with 21.652mbu a year ago.  These are the lowest stocks levels for this week in December since 2011 and just 2.5mbu above the lowest stocks levels on record for this week in 2008.  Since November 1st, spring wheat stocks have been drawn down by a combined 8.4mbu.  Part of this has been the great weather which has allowed movement to continue without delay.  Farm gate selling has been heavier the last couple weeks ahead of year-end but has slowed with prices failing above $5.80.  In our opinion, a 6-handle on the board will be needed to buy the next round of spring wheat from the farmer as current futures and basis levels are below $5.50 cash in the country for 14.0% protein.  With stocks levels dropping to this degree, we would be careful about being short the MWH/MWK spread with the MWZ/MWH going inverted with more supplies still available.  At the other exchanges, Chicago wheat stocks fell 1.408mbu to 72.443mbu which compares with 88.656mbu a year ago.  Similar to Minneapolis, stocks at these levels should continue to support calendar spreads.  In KC, stocks fell by 1.281mbu to 115.816mbu but remain above year ago levels at 113.335mbu.  Commercials are still getting paid too much in cash carry to part with stocks in-house.

The other big talker Tuesday were the social media reports on ethanol producers.  The poor profitability in this sector is no secret to anyone but it seemed like the chatter picked up yesterday with share prices hitting multi-month and multi-year lows.  Pacific Ethanol shares fell 9% yesterday, trading to $1.20/share and approaching the “penny stock” level as one reported noted.  Green Plains Renewable Energy shares hit multi-year lows at $12.92/share, down 8% on the day.  GPRE shares were trading near $30/share at the end of 2016.  Additional plant closures and slowdowns were also announced by multiple companies as the threshold of not wanting to slow the plant and hurt efficiency is finally being overcome by too poor of margins.  It is clear the small refinery exemptions are having a large impact on the domestic demand for ethanol as stocks remain at record levels.  No ethanol exports to China is also having an impact, although exports to other counties are still keeping demand from that sector at respectable levels.  It also can’t be overstated that March corn prices are 30-35c above each of the last two years at this time while ethanol prices sit at 13-yr lows.  With ethanol accounting for the largest share of demand on the corn balance sheet, it is difficult to make the argument higher prices are needed when plant slowdowns and closures are occurring amid the equity bloodbath by producers.


Bottom Line: Weekly ethanol production out later this morning but its difficult to see how a big rebound is coming.  Otherwise, most will be focused on any additional Chinese purchase announcements.  We need much more buying by China to justify higher prices from current levels in our opinion as 2.0MMT isn’t going to phase a 1.0bbu carryout.  With MFP payments out the door, and 2018/19 soybean profitability not really an issue anymore, the discussion is growing louder about how this could effect planting intentions next spring.  A 2.36 soy/con ratio is not pushing acres to corn the way one would imagine, especially with higher nitrogen prices vs. a year ago.  Lotta ins, lotta outs, lotta what-have-you’s. Lotta strands in old duder’s head.


Good Luck Today.

Tregg Cronin

Market Analyst






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