1/11/2019 Morning Comments

Good Morning,


The government is shutdown and it is looking likely it will never open again.  The end.  In all seriousness, the shutdown doesn’t look like it is going to end anytime soon.  After today, this will be the longest government shutdown in history, eclipsing the mark President Bill Clinton and the Republican-led Congress achieved back in the mid-1990’s.  The US Dollar Index still has our attention as the downtrend remains firmly in place and next level of support is down at the corrective lows from 10/16 at 94.7870.  After that, the September lows around 93.8140 would be expected to lend support.  In broad terms, a weak US Dollar is supportive to commodities priced in US Dollars, but specifically, the link between a weak dollar and higher grain prices is soft at best.  Too many folks blame the US Dollar for any and all price action when other news is lacking.

Extended maps for Brazil continue to paint a picture of above normal temps and below normal precip for much of the northern half of the country.  It is easy to see why crop production estimates are falling, although the herd mentality is usually at fault in such situations.  On the other end of the spectrum, Argentina continues to receive above normal precip and normal to below normal temps.  Crop production ideas are rising, and the reports of localized flooding are almost always overblown in such situations.  In the US, rains across the southern plains this morning as soil moisture profiles such be brimming in KS/OK/TX.  There is barely a stitch of drought conditions across this region, far different than last year.


Grains are higher this morning, bouncing after yesterday’s drubbing across the Ag room.  There as no abrupt change in the weather for South America yesterday, so it felt like traders tired of the narrative China was going to buy substantial amounts of US Ag products without confirmation.  Until the government reopens, we aren’t going to see confirmation of any of the rumored buying.  Cash and spread activity would certainly not suggest there has been a great “Chinese grain robbery” while the government was sleeping, so the larger risk would be the government reopens and export commitments fall well short of the rumored totals.  In addition, while Brazilian crop estimates are falling, we feel Argentina is rising and could be largely offsetting the losses to the north.  Add in the fact Chinese imports are still be called well lower than USDA’s last estimate and South American total supplies could be well larger than needed for current flat prices.  Also felt like traders were waking up to the fact new crop soybeans at $9.50-9.60 are too high to shed acres to corn and wheat, especially as the latter battles weak basis levels and soft demand.  Open interest changes yesterday saw corn up 4,497 contracts, soybeans up 5,844 contracts, meal down 3,108 contracts, oil up 10,441 contracts, SRW up 606 contracts and HRW down 5,265 contracts.

The big news yesterday was CONAB releasing their latest Brazilian soybean production figure which they cut to 118.8MMT vs. 120.2MMT previously and 119.3MMT last season.  Plugging this figure into our balance sheet does look as though it would require some level of rationing on exports, although only around 2MMT as it stands today.  Brazil carries out almost nothing, shipping every available bushel they can with storage infrastructure lacking.  With that in mind, we could see exports falling to 79MMT or so on a USDA marketing year or 73.5MMT on a local marketing year.  Both figures would still be a record level of exports by a fair margin while still allowing crush to be just 2MMT below last year’s record.  On the other side of the spectrum, we think there is no reason to not be raising Argentina’s soybean yields to near the record levels of 2014/15 or 2016/17.  If that is done, production could rise around 3MMT from the last USDA estimate with carryout rising to 44.449MMT on a USDA marketing year basis, a new record by almost 10MMT. On a local marketing year basis, which more accurately reflects carryout at the end of the season, Argentina would have over 21MMT of stocks, or 771 million bushels.  That is just 200mbu below the U.S. which is a new record.  Argentina would obviously be able to supply more exports than the 8.750MMT the USDA currently has pegged.  In fact, exports could nearly double and still provide an adequate level of carryout, easily covering any deficit out of Brazil.  In total, the South American production situation does not look all that dire to us, especially if the fire and brimstone in southern Brazil doesn’t persist into spring.

While still on soybeans, China’s government was out overnight reiterating their estimate for marketing year soybean imports at 83.65MMT vs. 94.13MMT last year and USDA at 90MMT.  Obviously, China has a vested interest in making it appear as though soybean demand is down and stocks are plentiful.  On the off chance they are correct, however, and Chinese imports are almost 7MMT below USDA, South America will have way too many soybeans left over to compete with the US to other destinations.  As noted above, Brazil will not store soybeans because they do not have the infrastructure.  Their prices will go to a level which clears inventory and that will almost assuredly be below US offers.  Argentina can and will store soybeans, but they will also crush at capacity which will compete directly with US meal supplies into Europe and Asia.  Even if we split the difference, and Chinese imports are 86MMT, that’s still another 3MMT of supplies they don’t need and 7MMT lower than last year while record production is achieved in both hemispheres.  Not difficult to see the resistance at current soybean prices with these narratives in mind.

The results of the recent GASC tender has us rethinking our stance on Russian supplies.  The narrative for the last couple months has been Russia would run out of exportable surplus by Dec/Jan, and the extraordinary business into MENA would show up.  That is not happening, and Russia continues to sweep up on these high profile tenders.  The pace of US wheat exports had picked up before the government shutdown, but it was still too slow to justify a 1.00bbu export program.  It is much more likely to be 950-975mbu if the demand remains constant into May/June.  Therefore, carryout is still likely to climb on subsequent WASDE reports, whenever they start to be issued again.  Either Russian production was higher than estimated, or carry-in stocks were larger than anyone gave them credit for.  Regardless, Russia continue to dominate the world wheat market as their quality and reliability improve.


Bottom Line: A bounce into the weekend as we absorb yesterday’s selloff.  Grains were on a nice bounce, running into farm gate selling and bulls running out of buyable narratives.  We can’t go up on rumors every day, especially when cash markets aren’t justifying the rumor buying.  It is likely China has bought US grains, but probably not to the level spoken.  We are also shifting focus to new crop where soybeans are not priced to shed acres, corn prices above 4.00 are profitable for most and no one knows what actual winter wheat plantings are.


Good Luck Today.

Tregg Cronin

Market Analyst






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