2/26/2019 Morning Comments

Good Morning,

Another week, another Upper Midwest snow storm with more on the way later this week.  The NOAA snow analyses for the Upper Midwest now shows 98.8% of the area covered by snow with an average snow depth of 12.8”.  This is the largest area and deepest snow pack since 2011 when 99.4% of the area was covered at an average depth of 13.8”.  Last year featured several April blizzards which kept snow pack across the Northern Plains into May.  The saving grace last year was the warmest or near warmest May on record for many states which allowed planting to progress at record pace.  Will we get lucky again this year? GFS models this morning are showing another round of snow for the weekend with 0.10-0.25” of water-equivalent moisture across SD/MN/WI.  Unfortunately, the 6-10, 8-14 and week 3&4 temperature outlooks feature below normal temps through March 22nd which would appear to allow limited snow melt.  Precip remains above normal through the 8-14 day outlook for much of the Midwest.

Weaker markets across the board this morning with wheat looking to pick up where it left off Monday.  Chicago wheat is leading losses this morning with Kansas City close behind while Minneapolis shows relative strength.  Spring wheat is earning a bit of premium over the other two markets on the aforementioned weather across the Northern Plains as well as the fact soybean/spring wheat spreads are trading out to their widest levels in close to a year.  What looked like a sure-thing for soybean acres to switch to spring wheat now looks far less than certain.  Most producers across the Northern Plains would call current new crop prices below breakeven.   Otherwise, traders continue to speculate on what a final China trade deal will look like.  10MMT of soybean purchases announced Friday brings the total haul to around 17.5MMT with another 3MMT sitting in the unknown category.  This is still well-short of the 27.5MMT China purchased last year, but it is a start.  The question becomes what do these forced purchases do for South American supplies and other origins which had been buying U.S. soybeans?  Also, whether final carryout is 800mbu or 1.0 billion bushels, does it make a difference?  Huge open interest changes ahead of first notice day with corn down 68,548 contracts yesterday, soybeans down 8,547, meal down 5,829, oil down 8,867 contracts, SRW down 5,303 and HRW down 4,912 contracts.

Wheat prices dove hard Monday with Kansas City prices hitting the lowest spot values since January of 2018 while Chicago hit the lowest levels since April.  On Friday, social media and traders alike were abuzz with how good the export sales of the last six weeks were.  On Monday, we watched wheat trade down to near 100% of the weight-adjusted price of corn in W-KS.  Granted, to price into a feed bunk, we need to see cash HRW down around 90% of the weight-adjusted price of corn so feedlots can justify altering a 6-month ration.  Still, the fact the mindset went from owning the export market for the next 3-months to getting near feed values in the span of a couple weeks is quite shocking.  On the front-end, values would imply the selloff has done enough as US-HRW is the cheapest FOB wheat in the world and should be priced to win the upcoming Iraq tender.  On the back end, however, HRW is trading at a carry through December while Black Sea and other origins are inverted to new crop and trading large discounts to U.S. origin.

Adding to ideas wheat prices have probably done enough to the downside would be new crop wheat/corn and new crop soybean/wheat spreads.  To the latter, SX9/MWU9 hit fresh highs yesterday of $3.91 which is the highest value for these two contracts since March of 2018.  On a spot basis, S/MW traded to $3.59, the strongest value since June. A year ago SX8/MWU8 was trading right around $4.00 on its way to a high of $4.53 in March before selling off through spring and summer to go off the board around $2.73.  Despite a tough spring, spring wheat acres rose from 2017 to 2018 despite the wide soybean/wheat spreads, so obviously price is not the only factor. That said, the combination of low new crop prices and a slow start to spring could keep spring wheat acres at least unchanged vs. ideas for an increase as recently as December.  The MWU9/CZ9 spread is trading at $1.67 per bushel this morning, just off contract lows around $1.62 last week.  A year ago, that spread was trading around $2.27 per bushel.  The 40c/bushel is incentivizing corn in a big way across the Northern Plains if the question is between wheat and corn.

Data yesterday included weekly export inspections which were solid for wheat and beans but soft for corn.  Wheat inspections totaled 25.5mbu vs. the 25.4mbu needed weekly to hit the USDA forecast.  This is the first week since December to hit the needed level and just the second week of the marketing year.  Total inspections of 604.3mbu are still down 8.0% from a year ago vs. the USDA calling for a 10% y/y increase.  Corn inspections totaled 29.6mbu vs. the 46.5mbu needed weekly to hit the USDA forecast.  This is the fifth consecutive week to miss the level needed.  Fortunately, total inspections of 981.1mbu are up 38.5% from a year ago although that total has dropped from a 47.6% advantage two weeks ago.  We are one week from hitting the second half of the marketing year.  Soybean inspections totaled 48.0mbu vs. the 32.6mbu needed weekly.  Total inspections of 919.9mbu are still down 33.7% from a year ago but have closed the gap from 37.2% two weeks ago.  Soybean inspections have hit the needed level seven weeks in a row.

One other note, several states issued winter wheat conditions yesterday.  For HRW states, all but Kansas saw conditions decline from November.  Kansas jumped notably to 51% G/E from 46% G/E in November, and is 12% above a year ago.  All HRW states except Montana are above a year ago, which is an important distinction to make.  Conditions have declined since November for CO, MT, NE, OK, SD and TX.  SRW states also showed declined from November for every state reporting.  Unlike HRW, SRW states are also below last year’s conditions in February for all states except Illinois which is up 1% y/y.  February conditions mean little for final yield ideas, but the trends can give us clues about overall production.

Bottom Line: Wheat is clawing back toward unchanged as of this writing, although no one has much confidence the blood-letting is over.  We are competitive on the front end, but well above Black Sea and EU wheat on the back end.  Doesn’t feel like a wheat sale to China is going to save the day.

Good Luck Today.

Tregg Cronin

Market Analyst




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