1/23/2019 Morning Comments

Good Morning,

Trade war.  Trump Administration. Headlines. Posturing. No action.  Should about cover outside market headlines of the last 24-hours.  Otherwise we continue to watch the strength in the Russian Ruble which is trading at the strongest level against the USD since December 12th.  In opposite fashion, the Brazilian Real continues to weaken, trading at 3.79:1 against the USD this morning.  Yesterday, the USDBRL hit the weakest level of 2019.  Russian wheat offers continue to slowly march higher as origination becomes more difficult which should promote competitiveness of US wheat.  Brazilian soy offers are already undercutting US soy, and the weaker currency will promote more farmer selling, all things equal.

Rains in the forecast for eastern production areas of Brazil ahead of what should be a fairly dry and warm stretch in the 6-10 and 8-14 day.  According to several forecasters, now through the end of January will be peak stress for the areas hardest hit.  However, it should all be kept in context.  As Commodity Weather Group pointed out yesterday, the driest areas of Brazil which are of most concern have had “only” two inches of rainfall over the last two weeks.  This is less than 50% of normal, but 2” over a two-week period should be more than enough to sustain a growing soybean plant.  Granted, some of the soybeans are reaching maturity, and additional rainfall will have limited impact, but we often forget what is “normal” in terms of rainfall for Brazil is often much more than what is normal in the United States.

Firmer markets across the board this morning as grains bounce back from the hefty reversals posted in several markets.  One can find the exact moment newswires started running headlines from the Financial Times and Wall Street Journal yesterday which said the Trump Administration was canceling preparatory meetings this week ahead of more high-level discussions next week.  The reasoning for the cancellation according to the Trump Administration was because the two sides still remain quite a ways apart on the issues of intellectual property theft and state-owned investment.  Without a better offer on those issues, there would be no point in meeting.  This has always been the concern as those close to the grain trade get excited about possible Chinese purchases but then realize where grain falls on the pecking order of the trade war.  While China has made purchases of U.S. grain, without the USDA, we don’t know if this is a few cargoes or something more meaningful.  It would surprise us if a serious deal is done before the March 1 deadline.  Wheat markets continue to show relative strength on headlines out of Ukraine and Russia, as well as chatter about increased export demand.  Corn open interest changes yesterday saw O/I up 16,760 contracts, soybeans up 6,666 contracts (fitting), meal up 925, oil up 3,530, SRW up 4 and HRW down 6,323 contracts.

Data continues to be light, although we did have export inspections which gives us something to track in the way of demand.  Wheat inspections totaled 19.0mbu vs. the 23.4mbu needed weekly to hit the USDA forecast.  Wheat inspections have hit the needed level only once this entire marketing year.  Total inspections are down 10.4% from a year ago at 514.5mbu while the USDA was calling for close to an 11% increase in December.  We will have four months to inspect and ship a little under 500 million bushels when the calendar turns to February.  On an encouraging note, we did see two cargoes of wheat inspected for Egypt out of the Gulf.  These included one cargo of HRW and one cargo of SRW, lending credence to the idea of wheat trading to private Egyptian millers.  Corn inspections totaled 43.6mbu vs. the 46.1mbu needed weekly.  Corn inspections haven’t achieved the level needed eight straight weeks.  Total inspections of 810.1mbu are still up 61% from a year ago, but we shouldn’t count on the same size program May-August as last year given an expected rebound in South American maize crops.  Soybean inspections were solid at 40.8mbu vs. the 34.8mbu needed weekly.  Total inspections of 716.8mbu are down 39.6% from a year ago while the UDSA is calling for a 12.6% reduction.  This is outdated forecast from December with most in the trade looking for 1.700-1.850bbu of exports.  We did see six cargoes of soybeans inspected for China last week with two out of the Gulf and four out of the PNW.  This makes eight total for the 2019 calendar year.  Also, sorghum inspections totaled 2.6mbu which was above the 2.2mbu needed weekly and the first-time inspections have hit the needed level in eight weeks.  The total was almost exclusively to one panamax to Spain.

Chatter yesterday morning about Ukraine’s Ag Minister issuing a decree to the country’s exporters they are getting close to the 8.0MMT cap of milling wheat exports agreed upon last fall.  According to cash traders, Ukraine has shipped around 83% of that total.  Total wheat exports can be 16MMT, but only 50% can be milling wheat which would mean Ukraine may only be participating in the feed space for the remainder of the marketing year.  Combine this with news from Russia about the government wanting to influence domestic grain price via rail subsidies, and it isn’t difficult to see the strength out of the Black Sea.  As mentioned in the open, strength in the Russia Ruble to one-month highs is also limiting producer selling.  Spot US-HRW FOB offers around $6/MT cheaper than Russian, while offers for April are $9/MT cheaper and May offers are $11/MT cheaper.  Most major importers have February needs booked and are o to March/April, so the extraordinary demand needs to be showing up now to get out the door by the end of May.  The KCBT spot floor was 1-6c weaker for 11.0-12.8% protein yesterday.  Minneapolis spot floor values were up 5-20c for 13.5% and down 10c on the bid side for 15.0% pro at +85H.  Domestic mills remain covered up with spring wheat nearby and aren’t all that interested in bidding up deferred slots.  Farm-gate movement from the Northern Plains has been very light and with the cold snap and recent snow, isn’t going to be any better until at least February.

We continue tracking nitrogen prices as we get closer to spring planting and the insurance pricing period.  Spot UREA swaps at the Gulf have turned sideways as of late at $269.00/MT which is near the lowest levels since August and well off the $320.00/MT highs from October.  April and May swaps are down at $255-257/MT.  UAN swaps have seen a fair bit of weakness as of late with spot swaps at $193.00/MT vs. $215.50/MT on ½ and highs above $225/MT in late October.  UAN swaps are at their lowest levels since mid-September.  It should be noted, even with the weakness, both UREA and UAN are still above the range which contained price action from mid-2015 to mid-2018.  So while the price direction is moving the way of the farmer, nitrogen costs are still likely to be well up from the past several years unless fertilizer continues to decline straight into spring.  Most retailers in the country are not reflecting the swap weakness being seen, instead sitting on higher priced inventory acquired this fall.  Much like gas stations, their prices aren’t likely to fall until they need to reach for more and the cheaper prices are still available.

Bottom Line: Likely to see some price recovery today with the trade remaining especially sensitive to headlines.  The roller coaster that has become the trade talks are wearing everyone thin with each headline seemingly contradicting the last one.  Ag groups continue to express support for the Trump Administration and its mission, but if they fumble negotiations which cost us exports again this year, that support isn’t likely to be so steadfast.  Producers need to be taking a long look at the rangebound price action of old crop as well as new crop prices above $4.00 and $9.50 on corn and soybeans, respectively.  What do these prices look like compared to breakevens?  What kind of stress-testing have you done to your balance sheet?  Do prices have to rally to make you profitable and can you handle lower prices from here?  These are questions that need to be asked and answered so a proper marketing plan can be devised.  As 2018 showed us, the most well-laid plans can go right out the window with a few tweets here and there.  Regardless of politics, don’t leave your marketing plan in the hands of folks 1,000 miles from the corn belt.

Good Luck Today.

Tregg Cronin

Market Analyst

Tregg.Cronin@halocommodities.com

www.halocommodities.com

@5thWave_tcronin COMMODITY TRADING INVOLVES RISK AND MAY NOT BE SUITABLE FOR ALL RECEIPIENTS OF THIS EMAIL. Neither the information presented, nor any opinions expressed, constitutes a solicitation for the purchase or sale of any commodities. The thoughts expressed in this email and basic data from which they are derived are believed to be reliable, but cannot be guaranteed due to uncertainty about future events and complexities surrounding commodity markets. Those acting on the information are responsible for their own actions.

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