12/28/2018 Morning Comments

Good Morning,


A few lingering snow showers this morning in the Plains, otherwise the Midwest has mainly cleared out from yesterday’s winter weather.  Mostly dry weather the next 72-hours before the Northern Plains sees additional snow chances.  Temps will be well below normal the next couple days before a one-day reprieve and more below normal temps next week.  Extended maps are mainly dry the next 10-14 days while temps are mostly normal across the Midwest.  In South America, soaking rains will keep soil moisture in decent shape for both Argentina and Brazil the next 10-days.  There are some concerns about too heavy of rainfall in Argentina as well as some dry patches in west-central and south-central Brazil.  Overall, it seems like one has to get nitpicky to find a major issue with South American growing weather outside of Paraguay.


Grain markets are firmer this morning across the board, being led higher by soybeans and wheat which are both up around 0.50%.  Never a great deal of news the week between Christmas and New Year’s, and even less so this year with the USDA closed.  Several in the trade reported yesterday weekly export sales would not be reported but EIA weekly ethanol production would be later this morning.  Weekly ethanol data isn’t likely to be supportive given the still difficult margin structure across the industry.  Normally, we would get Census export/import data for the month of November next week but the FAS website says it will not be updated until funding has been restored.  That report would have provided key information on whether ethanol exports have slowed further amid the trade war and energy market collapse.  More ambiguity coming to South American soybean production estimates.  Feels like the range of ideas is drifting lower for Brazil with most between 117-122MMT vs. 125-130MMT a couple weeks back.  Still should be more than enough soybeans to meet global demand, especially with demand concerns out of China related to ASF.  Open interest changes yesterday saw corn up 515 contracts, soybeans down 13,265 contracts, meal down 1,232 contracts, oil up 3,821, SRW up 3,058 and HRW up 960 contracts.

A couple other production estimates worth noting, Rosstat increased their estimate of Russian wheat production to 72MMT vs. 70MMT previously and the USDA at 70MMT.  Using this updated production forecast, the USDA’s current export estimate of 36.5MMT looks much more comfortable.  This would put ending stocks for Russia at 7.468MMT which is just below the 5-yr average of 7.953MMT.  It would also put exports at 43.2% of total supplies which is still a new record but only marginally above last year’s 43.02%.  Looking ahead to 2019/20, if we plug in a bit higher acreage and a production figure of 75MMT with unchanged demand, ending stocks would come in at 5.968MMT.  Our view is these are adequate ending stocks levels but doesn’t leave a great deal of room for a weather issue.  In addition, a 36.5MMT export figure would likely require another year of global importers looking to either the U.S., Argentina or other major exporter to fill in supply gaps if global demand sees its usual increase.  European and Australian production should be higher in 2019/20 but the current Russian balance sheet doesn’t appear to have an immediate call-to-action for bulls in our opinion.

The other crop estimate of note yesterday was the European Commission upping their view of the 2018/19 EU corn estimate.  They increased the figure to 67.5MMT which was up 5MMT from last month and compares with the USDA at 60.4MMT.  Leaving USDA’s demand estimates unchanged, this would boost EU corn ending stocks to 13.863MMT which would be the largest on record.  The EU will not carry out that much corn, instead dropping imports from the current 21MMT figure which is the largest since 1981/82.  The increase in production undoubtedly comes from the Eastern European countries like Romania and Bulgaria.  Lower imports into the European Union should mean more Ukrainian corn available to compete with U.S. and South American supplies into the Middle East and Southeast Asia.  Depending on the size of the drop in imports, it could also mean the EU moves back to a net exporter of wheat and corn after being projected to be a net importer of grains for the first time since 2007/08.

Several in the trade talking about index fund rebalancing which would include selling Kansas City and Chicago wheat.  We go through this exercise every year and it rarely amounts to much other than some slight influence on calendar spreads.  More salient is the current VSR calculation period in Kansas and Chicago which is pricing both markets to drop storage rates by 3c/mo.  Once Chicago storage rates have been dropped to 5c/mo, they can go no lower although it is interesting to note the WK/WN calendar spread using 5c/mo for storage costs is still only trading 55% of full financial carry.  Hopefully, this tighter carrying charge environment prompts continued SRW exports and allows warehouses to flip inventories which have been on-hand for multiple years.  Combine this with the potential for smaller winter wheat acres and the wheat market continues to build a case for support underneath current prices.


Bottom Line: Just not a lot to discuss and difficult to take anything away from price action this week given the lack of participation.  Once the calendar flips to 2019, focus will be solely on Chinese purchases of U.S. Ag products and South American weather.  Without a significant weather event in either Argentine or Brazil which shaves production meaningfully, it’s hard to justify spot soybean prices above $9.00 and corn prices above $3.90.  Lots of reluctance for producers to look at 2019 new crop prices with so much unpriced 2018/19 grain but that doesn’t mean it’s not worth discussing.  Inputs have shown a great deal of movement vs. a year ago with diesel prices sharply lower, fertilizer sharply higher, seed mainly cheaper and chemical all over the board.  Rents in general seem to still be coming down and a recalculation of ROI might show some surprises.


Good Luck Today.

Tregg Cronin

Market Analyst






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