2/1/2019 Morning Comments

Good Morning,

The first day of trade talks didn’t disappoint, at least not for agriculture as President Trump announced from the Oval Office China would be making another 5MMT purchase of U.S. soybeans in coming days/weeks.  In usual Trump-verbage, the purchase was lauded although we will need to see purchase details to know the true gravity of the situation.  Unfortunately, the issues of intellectual property theft and technology transfer were not addressed but President Trump did say another meeting between he and president Xi would take place in coming weeks to hash out the more important issues.  Until those points are addressed, this trade war will drag on, regardless of what concessions we may or may not get in Ag.  The issue of China being a currency-manipulator has also drifted from the forefront, but could be brought to the surface anytime which would be one more hurdle to overcome.

South American weather continues to pose few threats with Argentina seeing dry weather through the weekend into early next week to allow wet areas to receded.  This will be followed by average rains by the end of next week which will probably be perfectly timed.  NDVI readings for Argentina’s largest three production provinces remain above normal, implying above normal yield potential.  In Brazil, the forecast sees average rains on most of the growing regions the next 5-days.  Extended maps see rains continue at average or above average to the north of Parana but more limited rains to the south of Parana.  Most still looking for a better February for Brazil than January which would support later planted and double crop soybeans as well as the safrinha corn crop which comprises the majority of production.

Stronger markets overnight led by the soy complex as bulls take heart in the comments from the Whitehouse yesterday.  In addition, February is a strong month from a seasonal perspective for both corn and soybeans, so some cyclical buying is likely taking place as well.  According to President Trump, the Chinese have agreed to buy another 5MMT of soybeans, which would be in addition to the 5MMT they’ve already purchased.  In total, the 10MMT would be near the rumored tonnage from back in December when the first news of China coming back to our market was discussed.  If the entire 10MMT is indeed bought, that would make a notable impact on our balance sheet to the tune of 350-360mbu.  However, with Brazilian and Argentine soybeans now trading discounts to US FOB offers, the rest of the world will obviously be buying from South America instead of the U.S.  There hasn’t been enough time or data from the USDA to see if the 1.900bbu export forecast is still appropriate even with the latest round of Chinese assurances.  Regardless, the headlines have kept soybeans in their uptrend and new crop prices are within a dime of the highest levels since early summer.  Spring crop insurance guarantee prices will begin averaging today, and all things equal, markets are not giving a clear signal to switch away from any of the three major crops.  Open interest changes yesterday included corn up 8,658 contracts, soybeans up 5,111, SRW up 3,404 and HRW down 371 contracts.  Corn open interest is up 34,120 contracts this week.

For the first time in over a month, we received an export sales report, although due to the USDA’s inept process of releasing this data, we won’t be current until the end of the month.  For the week ended 12/20, corn, wheat and soybean export sales were all better than expected.  All-wheat sales totaled 19.3mbu vs. the 16.0mbu needed weekly to hit the USDA’s export forecast.  The 19.3mbu were the largest for this week since 2013.  The improvement in sales is a positive, but much work remains to be done.  Total commitments of 631.8mbu account for 63.1% of the USDA’s export forecast which is the lowest on record for the third week of December.  The 16.0mbu needed in sales each week through May would be the largest average sales program since 2000.  Shipments as a percent of the export forecast at 43.1% is also the lowest on record going back to 1990.  So we have to sell and ship a record or near record amount of wheat to make the USDA’s guess look good.  Corn export sales totaled 66.7mbu vs. the 33.8mbu needed weekly to hit the USDA forecast.  The 66.7mbu is the largest week of export sales for this week since 1995.  Soybean export sales were record large for this week at 87.8mbu vs. the 22.2mbu needed weekly to hit the USDA forecast.  Total commitments of 1.099bbu are down from last year’s 1.483bbu and the lowest since 2011.  Export shipments of 588.7mbu as a percentage of the 1.900bbu export forecast at 30.99% would be the lowest since 1990.  The warm fuzzies being felt by the Chinese agreement to buy soybeans is great, but our soybean balance sheet needs a record finish to prove the USDA correct.

We posted several NDVI maps for Argentina yesterday to our Twitter account with Cordoba, Santa Fe and Buenos Aires all showing above normal NDVI values.  NDVI doesn’t always correlate perfectly with yield, but it definitely suggests favorable growing conditions compared with last year and average.  The USDA will update their Argentine corn production forecast next week, but we think it could rise by at least 2MMT if acreage remains unchanged.  A 2MMT bump in production would include a yield of 8.56MT/ha which would be a new record above 2016/17’s 8.37MT/ha.  It would also allow exports of up to 28-29MMT while still maintaining a roughly 62-63% exports/total supply ratio as has been the case the last 10-years.  On soybeans, we bumped the national average yield to tie the record yield in 2014/15 and 2016/17 of 3.17MT/ha.  This would see total production up at 58.6MMT assuming acreage does not drop due to flooding.  This would allow crush to rise several million tons from the current 43MMT estimate from the USDA and still maintain a solid ending stocks level.  A lot of the 2018/19 Argentine balance sheet depends on what their actual level of old crop stocks are.  Some are suggesting those stocks are as small as 4-6MMT while the USDA sees them at 16.85MMT as of 4/1/19.  Given the drought last year, and the importing of US soybeans, we would error toward the low side which could limit Argentina’s ability to push exports and crush.

Wheat basis continues to firm at the Gulf and domestically.  HRW bids at the Gulf yesterday for 12.0% protein were reported at +163H which would be a new high for the marketing year.  Russian wheat prices are pushing themselves out of major export business, but the US will have to contend with a more competitive Europe as Germany, France and the Baltic States still have wheat to sell.  Remains to be seen if China ends up buying some US spring wheat which basis would not indicate today.  Domestic values of spring wheat are firmer this week, but this has as much to do with the severe cold as anything.  After a brief 1-2 day warmup this weekend, the cold will slam the Northern Plains once again next week.  Mills who have been plugged as of late will start to see the weather affect inbounds.  Supporting the basis has been firmer time spreads with the WH/WK rallying to -4.75c overnight, the highest trade since mid-January.

Bottom Line: Headlines surrounding the trade talks appear to be driving trade at the moment.  We are receiving USDA data once again, but its usefulness is somewhat limited at the moment until data sets get current.  Nonetheless, demand was strong at the end of December, and if this rolls through January, current prices should be appropriate.  Will be lots of focus on new crop prices during the month of February and farmers need to be paying attention.  What do these prices do for you?  What do prices 20c lower do for you?  Start answering these questions now.

Good Luck Today.

Tregg Cronin

Market Analyst




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