2/22/2019 Morning Comments

Good Morning,

Markets are higher around the globe as optimism runs high over trade talks between the U.S. and China.  Commodity markets in particular enjoyed a strong finish Thursday as word spread representatives from both sides were putting pen to paper on purchases of U.S. Ag products.  Specifics remain elusive, as always, so until details are known it will be difficult to get too overjoyed.  The number thrown around yesterday was $30 billion worth of “additional” purchases by China.  Using 2017 baseline numbers, this could amount to $50 billion worth of purchases, although whether all of it would occur in  one year and on a reoccurring basis remains to be seen.  As we’ve noted in the past, the Brazilian Real and BOVESPA equity index should be leading indicators to any deal with teeth as Brazil’s economy would feel the effects most pointedly if China is actually going to give preferential treatment to U.S. grain.  So far, the USDBRL has remained inside its recent range.  We would expect the USDBRL to head back toward 4.00:1.00 against the USD vs. 3.75 for a last trade.

Winter continues to grip the Northern Plains, and will do so for the next 15-days at least.  More snow will hit the Northern Plains today into tomorrow, followed by extreme winds on Sunday which will see gusts as high as 50mph in E-SD and S-MN.  The logistical woes for the Northern Plains do not look to ease anytime soon.  7-day forecasted precip maps show a large swath of moisture from Kansas to Wisconsin with 0.50-1.00” water-equivalent moisture expected.  6-10 and 8-14 day outlooks haven’t changed with below normal temps through March 7th while above normal precip has been put back in for the time period as well.  This pattern is making producers across the Plains and WCB nervous as little fall field work was completed and another late start to the spring like 2018 could affect acreage decisions. The week 3&4 outlooks released later this afternoon will be of great interest.

Higher markets as the euphoria of potential Chinese purchase gives bulls the high they’ve been looking for.  It is rather remarkable we don’t know anything we didn’t know at the beginning of the week, except for the fact someone reported people were writing things on paper.  Buy it.  The trade is caught up in the $30 billion number, but we don’t know if that will occur in one year, be spread over 5-6 years, actually be anything more than they were already buying from the U.S. pre-trade war or have any enforceable teeth to it.  As we’ve seen all too often, China saying they will do something and then actually doing it are two completely separate things.  Regardless, it doesn’t pay to fight headlines until they run out of gas.  As important, if not more important, this morning will be the six-week export sales dump which will get us caught back up to current.  A lot riding on that data, especially for wheat and soybeans.  If wheat doesn’t show some substantial swing purchases, we can put the nail in the coffin of the 1.0 billion bushel export forecast.  In addition, if soybeans don’t confirm the large Chinese purchases rumored in the trade, it will be difficult to hold current prices.  Open interest changes reflected positions being closed out of the March ahead of FND next week.  Corn O/I was down 33,679 contracts, soybeans down 20,751, SRW up 402 contracts and HRW up 921.

Yesterday at the USDA Outlook Forum, we received acreage ideas which were unchanged from the November long-range ideas.  This morning we got somewhat more informed estimates of 2019/20 supply and demand.  We have lots of questions.  First on wheat, USDA stuck with their 2018/19 balance sheet from the February WASDE.  In 2019/20, however, USDA cut exports just 25mbu to 975mbu from this year’s 1.00bbu estimate.  We don’t think there is anyway we get to 1.00bbu unless this morning’s export number blows us out of the water.  With Northern Hemisphere production expected to bounce back, difficult to believe we can hit 975mbu next year which would be required to keep carryout below 1.00bbu.  We think carryout rises for the current marketing year and inches its way toward 1.00bbu for next year as well.  The corn balance sheet is probably the biggest head-scratcher.  Yield was seen at 176.0bpa for next year and we have no issues with that.  Essentially unchanged for the third year in a row.  On demand, however, the USDA kept ethanol at 5.75bbu (too high), exports up at 2.475bbu vs. 2.450bbu this year (way too high), and feed/residual at a ridiculously high 5.500bbu.  We have real issue with USDA starting at that high of a feed/residual number considering final feed/residual has been over 5.400bbu just one time in the last decade.  It is a number they back into, but still seems unreasonably high knowing what we know about the last several years.  Their demand estimates push carryout down to 1.650bbu which would be a 5-year low.  A more realistic demand situation would bump carryout up to 1.750-1.800bbu which would be appropriate.

While we have issues with the corn balance sheet, the soybean balance sheet almost isn’t worth discussing considering the level of uncertainty surrounding the Chinese negotiations.  Nonetheless, 85.0 million planted acres with a national average yield of 49.5bpa gives us the smallest production in four years.  USDA is obviously optimistic a deal gets done as they see exports next year at 2.025bbu vs. 1.875bbu this year.  Crush moves to a new record 2.105bbu.  Carryout is projected at 845mbu vs. 910mbu this year and would be the second largest since the 1980’s.    They see the average farm price at $8.80/bushel vs. $8.60/bushel this year.  Not worth arguing over at this juncture as the trade talks will have more bearing and influence than anything out of the Outlook Forum.

Worth noting wheat/corn spreads hit fresh contract lows yesterday, notching the lowest spot price since May of 2018, a marketing year low.  Hard to believe wheat is trying to price itself into feed rations considering we are supposed to be supply the world with their export needs, at least that’s the narrative we’ve been operating under for the last several months.  The last two years have witnessed the lowest feed/residual demand of the last decade as abundant corn supplies and variable storage rates kept wheat out of the feed bunk.  Wheat basis was mostly softer on Thursday with the Minneapolis spot floor easing back another 5-30c for 13.0-14.0% pro while 14.5’s were up 5-10c.  The KC spot floor was unchanged for what feels like the 15th day in a row.  No changes to CIF SRW despite not being offered in the most recent GASC tender.  FOB indications should have had SRW competitive to Egypt, but confidence in quality can be the only logical explanation.  SRW and HRS deliverable stocks remain 30% below a year ago.

Weekly ethanol production was delayed until Thursday due to President’s Day.  Production fell 33,000bbls per day to 996,000 barrels per day.  This was the second lowest production average since May of last year as poor margins continue to impact the industry.  Ethanol stocks surged by 447,000 barrels to 23.913 million barrels.  This is a record for this week of the calendar and just below all-time records.  The fact weekly production has missed the level needed for 11 straight weeks and 13 out of the last 14 suggest USDA still needs to make cuts to their marketing year forecast.  A glimmer of hope Thursday came in the form of unsubstantiated reports the US and China were discussing dropping Chinese tariffs on US-DDGs imports which have been in place since 2017.  That would certainly help support DDGs prices and margins, but it remains to be seen.

Bottom Line: Firmer markets on Chinese optimism.  Export sales could have a word to say about that.  Spring insurance pricing is about done and soybeans are not priced to shed the acres like they should.  November ’19 soybeans at $9.56 needs hard consideration in our opinion.  Corn priced to buy acres while spring wheat is priced to shed them.  Wheat growers have had a real eye-opener this week with fresh contract lows throughout the curve.  Plenty of old crop left to price and new crop seems like an afterthought.  

Good Luck Today.

Tregg Cronin

Market Analyst




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