1/9/2019 Morning Comments

Good Morning,


Trade talks will dominate headlines today, but we are more interested in what the US Dollar Index is doing and saying as a result.  Yesterday, the USD traded sharply lower, continuing the downtrend which began on 12/14.  Momentum indicators are sharply lower, suggesting the move is showing no signs of slowing down.  From a longer-term, weekly perspective, the US Dollar index is showing a textbook bearish divergence in momentum stemming from the highs August and the highs made in December.  The entire fall and early winter rally was done on declining momentum, an early sign the move was running out of steam.  There really isn’t a lot of support for this market between spot levels and the October lows.  Throwing this against the larger back drop of the current trade war and Fed policy, is the weakness in the US Dollar Index signaling a breakdown in trade talks or a move to easier monetary policy?


Grain markets are higher this morning, led by corn and SRW wheat as the latest round of trade rumors suggested China will be in the market for not only US soybeans but also corn and wheat.  At this point, and with no government to confirm, almost all of these rumors need to be treated with a grain of salt until cash markets respond in kind of the government reopens.  The tonnages being spoken are intriguing with 1-2MMT of corn and 3.0MMT each of HRS and SRW.  If those sort of numbers were traded, we would see a sharp response to cash off the PNW and at the Gulf for SRW.  The spring wheat market could probably handle such a purchase, but the SRW balance sheet would be hard pressed given China’s stringent requirement on test weight.  Still, where there is smoke, there is often fire.  If trade talks have a breakthrough, and additional good will purchases are made for strategic reserve, wheat would benefit mightily.  Otherwise, we are trading South American weather which is ambiguous enough to keep premium in the market.  With the USDA closed, CONAB’s update of Brazilian production on Thursday will be one of the more important figures during January.  Open interest changes yesterday saw corn up 6,333 contracts, soybeans up 1,191 contracts, meal up 3,631 contracts, oil down 3,290 contracts, SRW up 3,959 and HRW up 1,633 contracts.

Data remains light, although we did see weekly export inspections as the FGIS still has funding.  Wheat inspections totaled 9.6mbu vs. the 23.0mbu needed weekly to hit the USDA’s objective.  Total inspections of 475.3mbu are down 12.5% from a year ago.  Last week’s inspections were the lowest of the marketing year which is not unusual given the holiday break.  Corn inspections of 19.7mbu were low vs. the 45.9mbu needed weekly.  Total inspections remain 61.3% ahead of last year, although that gap has narrowed from 72.3% two weeks ago.  Soybean inspections totaled 24.7mbu vs. the 35.1mbu needed weekly to hit the USDA objective.  Total inspections remain 41.6% behind a year ago a consistent gap over the last month.  The 1.3bbu worth of export shipments remaining for soybeans look daunting without a large-scale purchase from China in the next few weeks.  There is not threat of the USDA cutting the soybean export forecast as long as they remain closed, but when they reopen, that number will be ripe for a cut without a pickup in business.

Lots of tender business for wheat this week including Syria, Algeria, Bangladesh, CCC in for Yemen, Taiwan, Jordan and Morocco.  The most focus will be on Algeria as US, Baltic and German offers are all within a few dollars per tonne of one another.  Argentine offers would also be competitive, but difficult to believe they will be considered after the rejection last week.  The tender is for a nominal 50,000MT, but Algeria often buys 400-600,000MT at a time which might be difficult for any one European country to supply.  EU wheat exports through January 7th remain 25% behind a year ago, but many have made mention of the fact their data sets are likely lagging actual performance.  Even if they are 10% better, however, EU exports would still be down 17.5% from a year ago while the USDA’s latest estimate is calling for basically unchanged exports.  Difficult to project full-year EU wheat exports above 18MMT vs. USDA last at 22-23MMT.  With that in mind, hard to imagine Europe competing heavily for the Algerian business.  The USD weakness this week also isn’t hurting a thing.

As we near February 1, we remain mindful of new crop prices as December ’19 corn trades near $4.04, November ’19 soybeans trade near $9.60 and September ’19 spring wheat trades at $5.86.  The current new crop soybean/new crop spring wheat spread is trading at $3.74/bu this morning, the strongest level since April of 2018.  Similarly, new crop spring wheat/new crop corn spreads are within 5-10c of the weakest levels for the contracts, meaning spring wheat is soft relative to corn.  Both of those spreads are not arguing for higher spring wheat acreage across the Northern Plains as has been the talk most of the fall.  Add in the fact nitrogen costs will be up almost across the board, and the economics of spring wheat vs. corn and soybeans gets even worse.  So we must ask the question, what will the soybean balance sheet look like if we don’t see 5-6 million acres shifted away from beans to other crops?  If we see only a 3.1 million acre drop in soybean acreage, along with trend line yields, our carryout grows to 1.050bbu vs. 957mbu this year, and that is assuming 70mbu of additional crush demand and 100mbu of additional soybean export demand.  An argument could be made exports need to be higher if a trade deal is done, but we will cross that bridge when we get there.  Even with record soybean exports of 2.200bbu, carryout would still be around 850mbu.  This also begs the question of what the corn balance sheet looks like with only two million additional acres instead of four?  With two million additional acres and a record yield of 179.0bpa, our carryout grows to 1.825bbu vs. 1.787bbu this year but would remain below the psychologically important 2.0bbu mark.  We also have feed demand higher, ethanol demand higher and exports down by 150 million bushels.  Ethanol profitability remains a major sticking point until current economics turn around.


Bottom Line:  Feels like there is enough trade-talk optimism and Chinese purchase rumors to keep us higher in the near-term.  If negotiations yield guaranteed purchases of US commodities, then we’ve probably got more rally left in these markets.  If we get another continuance, and South American weather doesn’t get worse, difficult to see another leg higher.  Lots of inputs being purchased and planting decisions being made ahead of the spring insurance pricing.  We don’t think acreage is going to move as much as some would like it to.


Good Luck Today.

Tregg Cronin

Market Analyst






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