2/28/2019 Morning Comments

Good Morning,

Investors are watching the summit in Vietnam this morning closely as it appears the U.S. and North Korea failed to reach a deal on the denuclearization they agreed to in Singapore.  The sanctions were the sticking point as North Korea demanded all sanctions be lifted in order to comply with full denuclearization.  It would appear President Trump and the U.S. was the side to cut the talks short, and more than anything, should give traders pause in reference to talks with China.  Otherwise, we continue to watch the U.S. Dollar Index which has worked its way lower the last 2-3 weeks.  The basket has pushed through its 50 and 100-day moving averages with sights on its 200-day moving average just below.

Snow across SE-SD, E-NE and rain/snow mix in MO/IL this morning ahead of another round of snow across the Dakotas and Minnesota this weekend.  This should add to an already impressive snowpack across the Midwest with parts of the Dakotas, Minnesota, Wisconsin and Iowa sporting water-equivalent snowpack between 4-10”.  Unfortunately, temperature forecasts from NOAA remain below normal as far out as one should have confidence.  Below normal temps are seen in the 6-10 and 8-14 day outlooks for the Plains and Upper-Midwest.  This takes us out to March 13th with little chance for melting weather.  Extended precip maps keep above normal chances in place as well, which likely adds to the current snowpack.  Would not appear an early spring is in the cards.

Mixed markets this morning with wheat trying to finish February on a bit better note than what has been seen all month long.  For the month, Kansas City wheat is down over 50.0c per bushel, the largest single month loss since June.  Corn is down 12.25c for the month while soybeans are down 14.0c.  Looking ahead to March, www.sentimentrader.com shows the third month of the year as a positive one for soybeans with a 30-yr annualized average return of 1.299%.  Corn also likes March with an average seasonal return of 1.08%, although January and February were also supposed to be strong months from a seasonal perspective.  Chicago wheat sees more selling with an average return of -0.393%.  Besides the technical selling seen in most of our markets, traders seem to be growing weary of the “China buying everything that isn’t nailed down” narrative.  There have been no purchases of corn, wheat, DDGs or ethanol, and even the soybean purchases which have been “announced” haven’t been confirmed.  In addition, the Trump Administration has made it abundantly clear these talks are about more than a few boats of soybeans.  Open interest continues to come off with today official first notice day.  Corn open interest fell 32,734 contracts, soybeans down 8,617 contracts, meal down 14,095, oil down 1,770 contracts, SRW down 425 and HRW down 1,976 contracts.

There were some additional delivery registrations last night ahead of first notice day.  In Chicago wheat, The Anderson’s registered a fresh 400 certs in Ohio, taking total registrations to 410.  They delivered all 400 fresh registrations, with no strong commercial stopper showing up on FND.  These deliveries are weighing on the WH/WK this morning.  There were no deliveries of Minneapolis spring wheat or Kansas City winter wheat.  There were 488 fresh registrations of corn last night, taking total registrations to 2,075.  On first notice day, there were 910 deliveries with ADM House delivering 690.  Does not appear to be any strong commercial stoppers.  463 fresh soybean certs registered last night, pushing total registrations to 1,576.  820 soybeans delivered on first notice day with a smattering of weak hands showing up.  With poor logistics on the river, these deliveries shouldn’t be a major surprise and probably recirculate for much of the delivery cycle.

Data yesterday included weekly ethanol production which rose 32,000bbls/day to 1.028 million bbls/day.  This offset last week’s solid decline, but was still 1.5% below the same week production a year ago and below the level needed weekly to achieve the USDA’s forecast.  We have now missed the needed level of production in 12 straight weeks and 14 out of the last 15 weeks.  The USDA forecast of corn demand for ethanol production remains too high and should receive another 25mbu cut on the March WASDE.  Ethanol stocks fell 204,000bbls to 23.709 million bbls but remain high from a seasonal perspective.  Ethanol prices have been rallying, hitting the highest level yesterday since August 16.  This is helping margin structure, especially as corn prices have been under pressure.  Weather has also been particularly brutal on the ethanol industry as extreme cold makes a plant incredibly inefficient.  If weather can moderate by the end of the month, and margins continue to get steady/better, we should be able to see a continued pick up in weekly production.

We were off markets Tuesday/Wednesday when the last round of COT data was released, but found it interesting the trend of index fund the last several weeks.  In corn, index funds have been shedding length rather aggressively since mid-December.  Since 12/18, index funds have sold over 76,000 contracts to give them their smallest net long since March of 2009.  Index funds have shed around 10,000 contracts of soybeans over the last month with their smallest net long since September.  In Chicago wheat, index funds were selling but have turned buyers recently.  They sold wheat length from 12/11-1/15 but have bought the last four weeks although their net position over that time frame is still down close to 10,000 contracts.  All told, the combined net long in corn/soybeans/wheat of 486,079 contracts is the smallest net long since June 20th, 2017.  Anytime you start to see passive index traders shedding length in this fashion, it is difficult for the trade to absorb.

We continue watching wheat/corn spreads which are hitting contract lows on a daily basis.  Spreads are well-inside of a dollar, with HRW trading at 114% of the weight-adjusted price of corn.  On a cash basis, HRW is trading at 102% of the weight-adjusted price of corn in southwest Kansas.  This relationship probably needs to be closer to 90% of feedlots to seriously think about switching a 6-month feed ration.  In North Carolina, cash SRW is trading at 91% of the weight-adjusted price of corn.  That relationship could be close enough to be putting SRW into poultry and hog rations as the finish time is much shorter, allowing for greater flexibility.  More so than feedlots making wholesale changes to their rations with wheat, wheat trading this close to corn is bearish corn as we’ve seen the last week or so.

Bottom Line: Waiting for wheat to find a bottom and take some of the pressure off corn and beans.  No reason to get excited about China buying anything until an agreement is inked in our opinion.  There will be plenty of time to “buy” the China purchasing US grains headlines, but how long does one want to hold the bag until they actually happen?  Iraq buying HRW would help wheat bottom as would Saudi Arabia, who has been notably absent since November.  Inverses to new crop can make importers do some unusual things.

Good Luck Today.

Tregg Cronin

Market Analyst




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