12/27/2018 Morning Comments

Good Morning,


Equity futures are back on the defensive this morning, trading off nearly 400 points on the DJIA following the single largest nominal gain in the index’s history.  At the close, the DJIA was up 1,086 points, or nearly 5.0%.  After two weeks of sharp losses, all of which were attributed to the current administration, it seemed as few bothered to note the large surge.  Energies also came surging back with crude oil closing up $3.69/bbl for its largest percentage gain in almost a decade.  It remains to be seen whether yesterday’s gains were the aberration or a near-term bottom.  For all the fanfare, the USD Index remained inside the range present for the last several weeks.  We continue to watch the Brazilian Real which is trading at 3.93:1 against the USD this morning, inching back toward 4.00:1.  In addition, the Russian Ruble is back over 70:1, just ticks away from the September lows at 70.62 which was the weakest trade since March of 2016.  Weakness in these two currencies specifically will make competing against their grain exports more difficult.

As the kids would say, the U.S. radar is lit fam.  Huge swaths of snow and rain are blanketing the Midwest and Plains this morning, impacting travel and adding stress to livestock.  The worst hit areas are or have received rain in the last 24-hours which is switching to snow amid freezing temperatures.  The precip will be accompanied by high winds today with gusts across the Dakotas pushing past 40mph.  The snow map below shows snow cover across most of the Northern Plains after having been largely dry the last 30-days.  Once the current system moves out tomorrow morning, the rest of the 7-day period will be largely dry for the Midwest.  The Delta and Mid-South will remain especially wet with 2-5” expected by this time next week.  Extended maps are mainly dry in the 6-10 and 8-14 day with temps near normal.  Watching developing heat across southern Brazil in the extended forecast while northern Brazil looks below normal on precip.  No pressing issues, but these two themes need to be monitored closely.


Higher grain markets across the board this morning as we bounce from yesterday’s bloodbath.  The selloff was led on a nominal basis by beans and wheat, but the percentage losses were largest in Minneapolis wheat.  Many traders pointed to a Wall Street Journal article published in the last few days outlining some of the outcomes of the Trans Pacific Partnership which are set to be implemented in 2019.  Among these are tariff reductions for Australia and Canada which the U.S. will not enjoy.  More on this below.  The selling pushed March Minneapolis to new contract lows, and little exists in the way of support between spot levels and the $5.23 lows from July.  Very little corn and soybean news yesterday outside of posturing about Chinese purchases.  Most traders are confused whether daily export sales announcements would happen with the government closed?  Export inspections were released yesterday, but it isn’t clear if export sales will be published this week or EIA ethanol production data.  We have seen government shutdowns last 12-18 days before over the last several decades, so it isn’t unreasonable to think the government could remain closed up to the January WASDE.

Regarding the TPP, multiple articles cited a figure of roughly $67-68/MT as the tariff reduction Canada and Australia would enjoy on their wheat exports the U.S. would not.  The 11-member TPP will begin on December 30th, which will result in tariff reductions for Canada, Australia, New Zealand and Chile.  The Japanese wheat market is one of the most coveted in the world because of their consistency in purchases.  Japan buys regularly, regardless of price, unlike many of the Middle Eastern importers who try to time their purchases with lows in the market.  The U.S. is trying to negotiate a bilateral trade deal with Japan directly which could limit the impact of the TPP tariff reductions, but nothing has been done on that front.  With Chinese trade negotiations and the border wall front and center, highly unlikely U.S. wheat exports are very high on the totem poll at the Whitehouse.  Spring wheat exports off the PNW would probably be hardest hit as those supplies compete directly with Canadian Western Red Spring wheat.

Export inspections were released yesterday despite the government shutdown.  Wheat export inspections dropped back below the needed level after having hit the level for the first time all season last week.  Wheat inspections totaled 20.0mbu vs. the 22.1mbu needed weekly to hit the USDA export estimate.  Total inspections are now 450.5mbu, down 14.1% from a year ago vs. the USDA calling for a 10.5% increase.  Sales have improved, which needs to occur before shipments can pick up, but the marketing year is now half over with more than 50% of the export estimate left to ship.  Corn inspections were 39.2mbu vs. the 44.9mbu needed weekly.  Corn inspections haven’t achieved the level needed in four weeks.  Total inspections of 668.8mbu are still up 72.3% from a year ago, providing quite a bit of breathing room.  Soybean inspections of 23.9mbu were below the 34.7mbu needed weekly and the lowest since early October.  Inspections of 581.3mbu are down 41.8% from a year ago while the USDA is only calling for a 12.6% reduction.  Another export reduction is surely forthcoming without a pickup in export demand.

We are now five sessions into the variable storage rate calculation period for the H/K spreads in Chicago and Kansas City.  Chicago is averaging around 34-35% of full financial carry while Kansas City is averaging around 44-45% of full financial carry.  As it stands today, both spreads would lead to a reduction in storage rates with Chicago dropping from 8c/mo to 5c/mo while KC would drop from 11c/mo to 8c/mo.  When it looked likely Chicago would reduce storage rates from 11c/mo to 8c/mo back in November, this led to a surge in buying on the front-end of the curve as managed funds realized the easy carry game was coming to a close.  It remains to be seen whether this could happen again in Kansas City if it indeed looks likely storage rates will drop.  Part of the reason wheat exports have been so slow are the lucrative carrying charges in KC.  The first step in getting commercials to part with hedged inventory is taking away the incentive to store wheat.  A reduction in storage rates will be a good first step.  Quickly, after having declined for the last two months, deliverable stocks of spring wheat in Duluth and Minneapolis finally rose last week by 488,000 bushels.  Total wheat stocks of 14.686mbu compare with 21.900mbu a year ago and remain the smallest for this week since 2011.  Will be interesting to see if a seasonal low spot has been hit or if this is simply related to reduced movement around the holidays.


Bottom Line: Turnaround Tuesday on a Thursday because Tuesday wasn’t Tuesday and Thursday is like Wednesday.  Makes sense right?  Remains to be seen what government reports we get this week and how much impact they’ll have with trading desks half-staffed and the government partially open.  Bullish headlines are fleeting and without more Chinese purchases, not sure what props this market up.  Even if China buys, we’re not sure we would know about it with the government closed.  Continue to watch basis and spreads or short-term direction.


Good Luck Today.

Tregg Cronin

Market Analyst






COMMODITY TRADING INVOLVES RISK AND MAY NOT BE SUITABLE FOR ALL RECEIPIENTS OF THIS EMAIL. Neither the information presented, nor any opinions expressed, constitutes a solicitation for the purchase or sale of any commodities. The thoughts expressed in this email and basic data from which they are derived are believed to be reliable, but cannot be guaranteed due to uncertainty about future events and complexities surrounding commodity markets. Those acting on the information are responsible for their own actions.

Leave a Reply

Your email address will not be published. Required fields are marked *