1/4/2019 Morning Comments

Good Morning,


Global equities are surging this morning, supported by optimism toward trade talks next week between China and the U.S. as well as moves by the PBoC overnight.  China’s central bank cut the required reserve ratio for commercial banks by 0.5 percentage point effective January 15th with a similar amount to be cut on January 25th.  This is to encourage commercial banks to lend more or their funds and in-turn stimulate the Chinese economy.  Later this morning, we will see the December employment situation report which is expected to show 177,000 jobs created in December.  The unemployment rate is expected to stabilize at its recent low of 3.7%.

No big updates to South American weather with rains expected to keep soil moisture in decent shape in Argentina and most of Brazil the next 10-days.  Most are still expressing concern about dryness rebuilding in southern Brazil by mid-month, however.  6-10 and 8-14 day maps show below normal precip and above normal temps over a large swath of Brazilian production areas which we are going to go with until proven otherwise.


Grains are higher across the board this morning with most contracts working on their first higher weekly close since the first week in December.  Wheat has been one of the strongest legs this week on ideas of better export demand which we have no confirmation of with the government closed.  Still, FOB offers and freight spread assumptions certainly suggest US-HRW is competitive into many major importers, and even China got thrown into the rumor mill this week regarding spring wheat.  As we discuss below, China’s demand for spring wheat is certainly alive and well, so the fact they’d be interested in diversifying suppliers isn’t unreasonable.  Still Chinese soy purchase rumors around, but we remain unimpressed with the tonnage, especially when held up to delivery activity.  Corn news is quiet and not all that supportive as ethanol plants continue to be idled amid poor operating margins.  Open interest changes on the rally saw corn up 7,982 contracts, soybeans down 4,693 contracts, meal down 917, oil down 2,420 contracts, SRW down 4,439 contracts and HRW up 255 contracts.

Canadian export data for the month of November was released in the last week or so with wheat shipments for the month at 1.591MMT vs. 1.671MMT in October.  Exports were above the 1.464MMT from November 2017, however.  Crop-year-to-date exports of 6.423MMT are up 20% from a year ago, while durum exports are down about 19.7%.  Of interest to us were exports to China which came in at 155,000MT for the month and are at 552,100MT for the year-to-date.  The November exports were up 156% from November a year ago, and YTD exports to China are up 110% from the same period a year ago.  Cumulative exports are over double the next largest export total to China at this point in a marketing year.  China has taken a bit more No.2 CWRS than No.1 CWRS, but the split is pretty close.  CWRS has been carrying a healthy premium to US-HRS most of the marketing year, so China reaching for some spring what, provided the tariff situation is squared away, would not be all that unreasonable.  August-November exports of oats, barley, soybeans and lentils are all ahead of a year ago while canola and pea exports are lagging 2017/18.

FC Stone issued their latest guess on Brazilian soybean production, cutting their estimate to 116.25MMT.  This would be the lowest estimate we’ve seen in print by anyone who actually has a presence in the country.  This seems aggressive but would be just below a lot of other estimates grouping around 117MMT.  A number of 117MMT or below would require export estimates to be pared back based on our read of the balance sheet.  We prefer to look at the Brazilian balance sheet from a local marketing year basis which begins Feb 1 and ends Jan 31.  This gives a more representative feel of Brazilian supplies left over before new crop.  Based on a production number of 116.25MMT, and unchanged USDA demand, Brazilian soybean carryout would actually go negative by 4.075MMT.  This is obviously untenable and would require exports to be cut.  That said, Argentine exports could easily be 3-4MMT larger than current USDA estimates as their projected ending stocks on a local basis are up around 18.5MMT, the second largest on record.  It would take extra incentive to get those bushels to export given taxes, inflation and farmers who prefer to store well into the next marketing year.  The supplies are there would be the point.

There were another 1,100 re-deliveries of January soybeans overnight, bringing the month-to-date total to 4,021 contracts.  There has been no good commercial stopper yet, so these should continue circulating until last trade date.  Month-to-date deliveries are over 20mbu which is around 1/3 of the rumored Chinese purchases of soybeans this week.  Puts their buying into perspective.


Bottom Line: Firmer across the board and finally putting in a solid week of trade.  I believe we should get weekly ethanol production as that agency still has funding, but exports will continue to be a no-show.  Wheat got cheap enough for long enough to get some business done, we just don’t know to whom.  Soybeans are in the discovery phase for South American production with ideas being tweaked lower.  We aren’t ready to subscribe to some of these low-ball estimates, but they need to be monitored.  If the lost demand from Brazil gets made up in Argentina, then there isn’t anything to rally about.  The boats need to leave our shores to matter.


Good Luck Today.



Tregg Cronin

Market Analyst




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