1/3/2018 Morning Comments

Good Morning and Happy New Year,


Before taking our holiday break, the U.S. government had shutdown due to an inability to pass a budget.  The U.S. government is still shutdown and the world has not ended.  If too much time goes by, people might realize the world can survive without Washington D.C.  At any rate, we continue to watch the USD Index which is stronger again today following Wednesday’s surge higher.  Looking at charts while markets were closed, we actually thought the USD had a particularly bearish technical tilt, especially from a weekly standpoint.  The USD violated long-term trend line support on Monday before recovering above that level yesterday, but momentum studies from a weekly perspective are showing a textbook bearish divergence in momentum.  Forex, Federal Reserve Interest Rate policy and trade policy will be the driving forces in 2019 in our opinion and if given the choice, we can envision more scenarios where the USD breaks sharply from current levels than ones where it rallies appreciably higher than current levels.

Quite a mix of rain and snow in the southern plains this morning which also stretches across the Delta and up the Mid-Atlantic.  Following a particularly nasty winter storm in the Northern Plains over the weekend and earlier this week, weather looks mostly favorable for the Midwest the next 10-15 days with limited precip and mostly above normal temps.  The US Drought Monitor looks substantially better than it did a year ago at this time and the soil moisture profile is brimming almost everywhere.  In South America, most growing areas of Brazil and Argentina have seen rain the last 7-days but it is the forecast for the next 10-15 days which is a concern, particularly in Brazil.  Dry areas have been reduced to 15% of total production areas, but dryness is expected to rebuild by mid-month as above normal temps and mostly below normal precip is the norm. With how early soybeans started to be harvested this year, making generalizations about the weather in Brazil this year will be difficult.


Mixed markets this morning with grains higher and the soy complex a bit weaker.  Strength in soybeans Wednesday caught the attention of most as dry forecasts for Brazil as well as chatter about China beginning to purchase U.S. soybeans again supported.  Cash traders suggested the tonnage was in the 1-2MMT range, which would push total purchases up around 5MMT.  5MMT was the number alluded to when China said they would allow Sinograin to refill strategic reserves.  This could mean the 5MMT will be all the purchase made until a larger trade deal is completed.  If that is indeed the case, it is tough to view the purchases as bullish given 150-180mbu isn’t going to get us up to even the current 1.900bbu export forecast held by the USDA, in our opinion.  Still, purchases of any kind are good, and with Brazilian weather turning at least two-sided, it is enough to halt sell pressure for the time being.  In grains, cash sources continue to talk about U.S. wheat being competitive into Egypt, Algeria, Saudi Arabia and several other major destinations.  This is being offset by fears over the implementation of the Trans Pacific Partnership which goes into effect Sunday.  This will see tariffs reduced for Australian and Canadian wheat into Japan but nothing done with tariffs on U.S. wheat.  According to U.S. Wheat Associates, Australia and Canada will see an immediate 7% drop in tariffs which will go to 12% by April and after nine years of the partnership the cut will be as large as $70/MT.  Very unlikely we will see the present situation persist forever, but Japan does not seem high on the list of priorities with trade tensions in China raging.  Taking it a step further, even if Japan is addressed, agriculture isn’t likely to be on the front-burner.  Beef will be the other commodity hit hardest by the lack of participation in TPP.

Has been a lot of chatter lately about soybean acres across the Northern Plains switching to spring wheat among other crops.  In the last week or so, NDSU released their preliminary 2019 crop budgets for a host of crops including soybeans and spring wheat.  We pulled the budgets for the south-central, south-west, northern-valley and north-west crop districts to see what the profitability looked like between the two crops.  In south-central North Dakota, spring wheat is projected to return -$6.96/acre assuming a yield of 43bpa and a market price of $5.62/bu.  Soybeans see a return of +$13.15/ac assuming 31bpa yields and $8.05 cash.  Spring wheat is profitable in southwest-ND a +$6.36/ac at 38bpa yields and $5.53 cash but soybeans are returning $29.29/ac assuming 29bpa soybeans and $7.95 cash.  In the northern valley, spring wheat is showing returns of +$4.09/ac vs. soybeans at +$13.46/ac.  Northwest ND sees spring wheat at a -$7.48/ac with 37bpa yields and $5.52 cash vs. soybeans at +$18.84/ac.  So despite the historically terrible basis levels across North Dakota, it doesn’t look nearly as cut and dried for acres to switch from soybeans to spring wheat.  Until the futures board pushes new crop back over $6.00/bu, we could see a status quo on acres, although there is likely to be some switching from soybeans to minor and specialty crops.  This should be somewhat of a relief considering 5-10% more spring wheat acres as most have been assuming would result in one of the heaviest spring wheat balance sheets in 30-years.

Very light on data with the government still closed, although we did see weekly deliverable stocks.  In Chicago, total wheat stocks fell another 1.416mbu to 69.262mbu which compares with 86.426mbu a year ago.  The lower weekly stocks levels combined with improved export demand and stronger basis levels are definitely supporting stronger calendar spreads.  As the VSR calculation period continues to average, the WH/WK is currently trading an average of 35% of full financial carry which would reduce storage rates further to 5c/mo.  In Kansas City, wheat stocks fell 1.272mbu to 113.737mbu but are still above last year’s 111.827mbu.  In Minneapolis/Duluth, stocks rose by another 1.147mbu after rising by 488,000 bushels last week.  The last two weeks broke a streak which went back to the first week in November of weekly stock draws.  Total wheat stocks of 15.833mbu are still sharply below last year’s 21.900mbu and are the lowest for year-end since 2011.  There have been almost no shipments from either Duluth or Minneapolis since the holiday break according to the daily status reports, so it will be interesting to see what stocks do once we get a full week of business under our belts.

Jumping back to acreage discussion for a moment, one other thing to consider with respect to cropping rotations is the higher cost of nitrogen vs. last year and the last several years.  Across the Northern Plains, urea prices are anywhere from $25-75/ton higher than a year ago while 28% UAN prices are up $15-30/ton but expected to be as much as $50/ton higher by spring.  Very few people can offer justification for the higher N costs but even fewer expect them to fall by spring either.  Considering spring wheat takes nearly as much nitrogen as corn does to produce an adequate yield goal, this could impact planting decisions if producers haven’t locked in inputs already.  As the chart below shows, spot UREA swaps at the Gulf have corrected over $40/ton since the highs put in this fall but spot prices remain above the high end of the range which capped prices dating back to the summer of 2015.


Bottom Line: Grains trying to add premium this morning but still well inside recent ranges for corn and wheat consolidating just above recent contract lows.  Without the government, unfortunately we don’t have a good handle on what we are selling or who we are selling it too outside of cash market activity.  Wheat spreads remain firm, so doesn’t feel as though futures need to retest contract lows in our opinion.  Corn’s range looks iron clad for the foreseeable future between 3.67-3.87.  Soybeans likely cling close to $9.00, waiting on more SAM weather and Chinese purchase announcements.


Good Luck Today.

Tregg Cronin

Market Analyst






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