2/6/2019 Morning Comments

Good Morning,

Financial markets are largely quiet this morning as many are still dissecting President Trump’s State of the Union and how it may shape 2019.  The highlights were definitely another summit with North Korean dictator Kim Jong Un later this month as well as the President ordering another 3,750 troops to the Mexican border.  The President was light on comments toward the trade war with China as both he and president Xi of China are set to meet in another summit later this month.  The President has solid economic data to support most of his policies at the moment, although further slowing of economic growth in China and the larger global economy could alter plans if that continues later in 2019. The President also remained bullish on US energy production, touting the fact the U.S. became a net energy exporter in 2018 for the first time in our country’s history.  No sign of slowing natural gas, crude oil or coal production anytime soon.

Lots of moisture in the Midwest this morning with snow in the Dakotas while a band of rain and rain/snow mix stretches from central Texas to Ohio and Michigan.  The deep freeze continues in the Northern Plains with highs barely making it above zero across the Dakotas, Montana and Minnesota for another week.  Not until Monday do air temperatures break into the teens in South Dakota and Minnesota.  Wind chill values will be severe the rest of this week, keeping rail and truck transportation slow to non-existent.  The cutoff is severe, however, as just a few hundred miles south into Kansas and Oklahoma, temps are in the 40’s and 50’s.  6-10 and 8-14 day maps from NOAA keep precip above normal and temps below normal which gets us out to February 19th.  Nothing out of the ordinary with South America as weather remains mostly benign and supportive of recent crop estimates.

Quiet, rangebound trade overnight as most of our markets sat in 1-2c ranges as we anxiously await the end of the week reports from the USDA.  We are especially looking forward to the winter wheat seedings report as that will provide much more clarity on what kind of supplies we can be looking forward to later this season.  Importantly, even with lower acreage from a year ago, drought conditions are non-existent across the Plains which is much better than year ago levels.  Soil moisture profiles are full from Megakota to Texas which should get the crop off to a favorable start this spring.  Quarterly stocks will also be the other big focus for us as this gives us a clearer view of Q1-demand on corn and soybeans, although the data will be less useful this year considering it will be over 60-days old by the time we get it.  We will be just 30-days from the next reporting deadline for quarterly stocks.  Mostly quiet on the traded front this week with China off markets for the Lunar New Year.  So far this week, we’ve seen 3.489MMT of soybeans old to unknown and China which is still shy of the 10MMT rumored unless we get more sales notifications the rest of this week.  If the entire 10MMT is recognized, the question becomes whether other destinations will take enough US soybeans to justify the USDA’s current 1.900bbu export target.  At this juncture, we still say no are expecting full year exports between 1.750-1.800bbu.  Corn open interest was up 8,626 contracts yesterday, soybeans up 15,692 contracts, SRW up 2,391 and HRW down 159.

Data was light yesterday as is typical for a Tuesday, although we did get deliverable stocks at the three wheat exchanges.  Chicago wheat stocks fell 1.187mbu to 64.643mbu which compares to 81.638mbu a year ago.  Deliverable stocks in Chicago and the Ohio River remain at multi-year lows, supporting calendar spreads.  Deliverable grades are down 20mbu from a year ago, while non-deliverable grades are up around 3mbu from year ago levels.  This helps explain some of the premium US-SRW has carried in recent GASC tenders.  HRW stocks were 107.297mbu vs. 108.54mbu a week ago and 109.015mbu a year ago.  HRS stocks were up 130,000 bushels to 17.189mbu but were down from 22.019mbu a year ago and remain at the lowest levels for this time of year since 2012.  Speaking of spring wheat, there were zero cars on the Minneapolis spot floor yesterday as winter weather stalls trains and keeps elevator crews inside.  The entire marketing year, mills have been complaining of being plugged and covered up nearby.  Two weeks of poor rail movement can help rectify that pretty quickly. 

Speaking of wheat, difficult to find a more impressive move in grains than that in calendar spreads.  The WH/WK rallied to -0.75c yesterday, the highest trade since September of 2017.  Overnight, the KWH/KWK rallied to -4.75c, the strongest trade since August and tying the strongest levels since March 2017.  We’ve got a good old-fashioned squeeze going on as basis trades at the Gulf have been strong and a majority of the open interest remains in the March contract.  Futures rallying does little for hedged commercial inventories who own 75-80% of the winter wheat crop.  Basis has already rallied to levels which have made US wheat somewhat uncompetitive on the global stage.  That leaves spreads to rally and disincentivize carrying wheat.  The cash carry had already been removed in SRW and with the lack of carry in HRW, that cash carry has also been removed.  At these sort of carries, we should see basis start to weaker as some hedged length gets thrown at the market.  Until basis breaks, however, do not want to be short wheat futures, especially considering spreads inverting might be what is needed to really pry hedged bushels loose.  Never underestimate wheat’s ability to extract pain.

StatsCan released their version of the quarterly stocks report yesterday showing al-wheat stocks on Dec 31 at 23.233MMT vs. 23.4MMT expected by the trade and 23.283MMT a year ago.  Durum stocks were pretty spot on the average trade estimate but above year ago levels of 4.734MMT.  Canola stocks were reported at a record high of 14.553MMT but slightly below the average trade estimate of 14.7MMT but above last year’s 13.869MMT.  Oat stocks were below expectations while barley stocks were sharply below expectations.  Canada has had a solid wheat export program since August.

Crop insurance pricing period off and running with the corn average after three days at $4.03 per bushel which would be the highest average since 2015.  The soybean average price is $9.58 per bushel while spring wheat is $5.91 per bushel.  The spring wheat average price is below last year’s $6.31 per bushel but above 2017’s $5.65 per bushel.  The soybean average price is solidly below last year’s $10.16 per bushel, and would be the lowest since 2016’s $8.85 per bushel.  In this context, the soybean insurance guarantee is only around 45-50c below the 5-yr average despite what most would consider especially bearish fundamentals.  Wheat’s average insurance price over the last five years is $5.89 per bushel while corn is $4.11 per bushel on the 5-yr average.  So assuming the February insurance prices come in near current levels, revenue guarantees should be comparable to the last several years.  Producers should be actively plugging in these prices to their balance sheets to see what kind of profitability exists.  Too often, producers view crop insurance as their protection against their crop being wiped out completely and take a break from marketing until later in the season when production is more assured.  Instead, producers need to view crop insurance as a tool which allows them to market aggressively at levels which make their operation profitable, knowing they have the insurance as a back stop in the event of a wipe out.  By the time production is known, seasonality and odds tell us the highs for the calendar year have already passed and the window to market grain closes swiftly.

Bottom Line: Biding time until we get more export sales announcements from the USDA or data sets are refreshed Friday.  Trade war developments should remain limited this week until China returns from holiday.  Weather remains a major feature in the US as logistics from the Northern Plains and to the PNW remain snarled.  Crop insurance pricing is off and running, and we would argue things aren’t nearly as bad as they are being portrayed by Ag media.  Opportunity exists for producers willing to manage risk with the tools they’ve been provided.  We’ve added tens if not hundreds of thousands of dollars in technology to our planting, spraying and harvesting equipment over the last five years in a quest for more bushels.  What changes have you made to your marketing plan if the results haven’t measured up to the changes you’ve made on the production side?  Not sure anyone should be banking on more Bailout Bucks to save their 2019 balance sheet.

Good Luck Today.

Tregg Cronin

Market Analyst




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