2/11/2019 Morning Comments

Good Morning,

Another week, another builds up to trade talks between the U.S. and China as well as a potential government shutdown.  It is almost becoming comical at this point as financial media could basically use the same headlines week after week.  Mnuchin and Lighthizer will be in Beijing for another round of high-level talks later this week, although it would shock everyone if meaningful progress was made on the issues of intellectual property theft and technology transfer.  On the border wall and government shutdown, it feels like absolutely nothing has been done during the last three weeks.  President Trump’s State of the Union was well-received, but Democrats are unlikely to budge on giving Trump his wall and a political victory in the process.  Until strides are made on either of these issues, difficult to see financial markets moving in either direction or bringing volatility back to the commodity space.

An active radar this morning with scattered snow showers in the Northern Plains while rain and wintry mix is stringing from the southern plains of OK/KS/TX to Pennsylvania.  Outside of a small area in Texas, the southern plains look very good in terms of soil moisture and a lack of drought conditions.  Despite lower acreage confirmed by the USDA Friday, what wheat is there should have ample moisture reserves to kick off the growing season.  The central and eastern Midwest will remain active and wet this week with multiple rounds of moisture and water-equivalent totals in IL/IN/OH as high as 2.50-3.00”.  The Plains will be mainly dry with the exception of a little light snow.  Temperatures remain below normal the next 14-days, getting us out to February 24th.  Precip in the plains remains mainly above normal throughout.  Snow cover is shown at 98.9% across the Northern Plains with an average depth of 8.9”.

Weaker grain markets across the board on this first full session following Friday’s data dump from the USDA.  For all intents and purposes, the reports were pretty mundane with few outright surprises.  Many took to social media to bash the USDA for releasing such a clunker after a dearth of data the last 60-days.  To that, I would ask if it would have been better for the USDA to make drastic changes the trade would have ripped for being wrong?  To the experts and trolls of Twitter, there simply is no winning sometimes.  I for one am glad to have the USDA back, if for no other reason than to have their extensive resources around the globe back reporting on crop conditions and supply levels in other countries as part of the Foreign Ag Service.  All of the griping aside, it does feel as though the trade can move past the report build up and get back to the focus of South American crop prospects, the never-ending trade war, potential government shutdown in four days, U.S. cash markets and the acreage battle leading up to spring.  Open interest changes Friday on report day saw corn up 14,833 contracts, soybeans up 4,321 contracts, meal down 1,579, oil up 5,605 contracts, SRW down 10,752 contracts and HRW down 3,173.

We took most interest in the December 1st quarterly stocks data as well as the winter wheat planted acreage report.  The changes to corn and soybean production as well as demand estimates were predictable and not all that surprising.  In the winter wheat acreage report, USDA said winter wheat acreage was 31.290 million acres which was under the average trade estimate of 32.128 million, below last year’s 32.535 million and the lowest total acreage since 1909.  HRW acreage was down 723,000 acres from last year while SRW acreage was down 416,000 acres and SWW was down 96,000 acres.  As we wrote leading up to the report, it was going to take a major downward move in acres to make the US wheat balance sheet outright bullish.  The number the USDA gave us was not, on its own, low enough to achieve that status in our opinion.  Our reading of the by-class wheat balance sheet, which we will be expanding on in coming days, does not present an outright bullish scenario using unchanged demand for 19/20 and trend line yields.  If yields fall below trend, HRW and SRW can become supportive.  However, the argument can be made demand by way of exports will be lower in 19/20 thanks to a bounce back in production from Russia, Europe and Australia.  Shipping costs could keep US wheat a little more competitive, but competition should be stronger than it has been in 2018/19.  Winter wheat acreage will change, but this gives us a starting point.  HRS acreage is still very much up in the air, but most had been working off the assumption acreage would be up meaningfully as Northern Plains producers switch from soybeans to HRS.  Recent prices moves are making that much less certain.  The futures spread between November 2019 soybeans and September 2019 spring wheat is around $3.76 this morning which is essentially unchanged from the same level a year ago.  On a cash basis, the DTN National Soybean Cash Index closed Friday at $8.26/bu while the National Spring Wheat Cash Index closed at $5.31/bu.  That spread of $2.95/bushel is weaker than last year’s $3.47/bushel thanks to the weak soybean basis across the Dakotas and N-MN.

Quarterly stocks levels were also of interest to us with corn coming in at 11.952bbu vs. the average trade estimate of 12.092bbu and last year’s 12.567bbu.  The drop in quarterly stocks was due in large part to the larger than expected cut to corn production, while corn feed/residual demand was essentially unchanged from a year ago.  This obviously stood in contrast to the USDA’s prior feed/residual estimate which was up close to 200mbu, resulting in them cutting that line-item Friday by 125mbu.  This is important, as it could set the table for a lower feed/residual estimate heading into the 2019/20 balance sheet.  I honestly can’t remember the last time we had larger than expected feed/residual demand as it seems like the USDA is always cutting their feed number to make the numbers “work.”  Soybean stocks as of Dec 1 were 3.736bbu vs. the average trade estimate of 3.743bbu and last year’s 3.161bbu.  Wheat stocks were 1.999bbu vs. the average trade estimate of 1.957bbu and last year’s 1.873bbu.  Here again, feed/residual demand was implied lower than expected which prompted the USDA to cut that line item by 30mbu.  Oddly enough, the USDA left wheat export demand unchanged at 1.000bbu despite performance data to-date suggesting a forecast closer to 950-975mbu.  Part of the reason USDA likely left their estimate unchanged has been the pick up in demand as of late, including the GASC sale Friday.

Friday’s GASC tender saw Egypt buy 300,000MT of wheat from France, the US and Ukraine.  120,000MT was purchased from France at a C&F price of $260.05-261.65/MT, the US-SRW at $260.00/MT C&F and the Ukrainian at $261.20/MT C&F.  US-SRW was easily the cheapest FOB offer at $234.47/MT vs. $244.50/MT out of France.  This would seem to suggest Chicago wheat futures and physical SRW does not need to get cheaper, provided freight can continue to be obtained at similar levels.  The declining Baltic Dry Freight Index should keep pressure on freight and US wheat competitive into MENA destinations.  The question now becomes whether US wheat will continue to be sold into Egypt and other North African destinations until other Northern Hemisphere new crop comes online in June-July.  As US export data gets updated throughout the month of February, we hope additional swing destination business gets announced, supporting the USDA’s decision to leave their export forecast at 1.000bbu.

Bottom Line: We will continue to dissect the data in coming days and weeks, but honestly it feels as though the trade has moved on.  It might be wishful thinking to believe something of substance will come out of the US-China trade talks this week, but honestly as long as we avoid another government shutdown, will chalk this week up as a victory.  US wheat is competitive.  Acreage is plumbing 110-year lows.  The acreage battle is alive and well.  Domestic corn demand remains suspect. Chinese soy demand continues to slow.  These are the headlines we are interested in coming weeks.

Good Luck Today.

Tregg Cronin

Market Analyst




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