3/4/2019 Morning Comments

Good Morning,

The Wall Street Journal put out an article this weekend stating the U.S. and China have a trade deal close at hand, although specifics were lacking as usual.  It does appear we are closer to a deal than at anytime over the last 12-months, especially with President Trump suffering another political “defeat” in Vietnam last week.  Critics suggest President Trump is eager to make a deal, regardless if the issues which have been mostly hotly contested are not resolved.  If this were to happen, U.S. Ag purchases would likely be at the center of the deal as that would be the easiest thing for Beijing to cross off the list.  We maintain a serious deal with meaningful tonnages would have a negative effect on the Brazilian Real and Brazil’s stock exchange.  Neither is suggesting anything imminent, even though most think a deal could be signed by the end of March.

Mostly clear Midwest radar this morning, although frigid temperatures remain in place from North Dakota to Texas.  Highs and lows from the weekend were anywhere from 20-30 degrees below normal for the first days of March, and that trend should continue for the foreseeable future.  Even by the weekend across the Dakotas, high temps are only seen in the low 20’s which would be 10-15 degrees below normal.  This is will prevent melting weather from beginning the slow process of getting rid of substantial snowpack.  Across the Upper-Midwest, 99.0% of the area was covered by snow with an average depth of 12.8”.  This is snow-water equivalent of 2.7” while some spots in the Northern Plains have as much as 12” of snow-water equivalent locked up.  The 6-10, 8-14 and Week 3&4 outlooks have below normal temps throughout which puts us out to March 29th.

Mixed markets this morning with row crops leading the way higher while wheat markets struggle to add to the impressive reversal from Friday.  Row crops would be the largest benefactors to any trade deal signed with China, even though Chinese purchases of U.S. corn and wheat have been rumored for months to no avail.  China might buy some U.S. wheat, but the idea they are going to swoop in and buy 5-7MMT of wheat seems unlikely given their perceived supply situation, and the fact their imports of Canadian wheat are sharply higher than a year ago.  Plus, any Chinese buy of U.S. wheat should be easily accommodated by the current balance sheet which is set to carryout 1.0bbu for the third straight year.  Even if China bought 7MMT, carryout would fall to around 750mbu which is obviously much lower than 1.0bbu but still not an environment which requires wheat prices $2.00/bu higher than spot.  In addition, if China did buy a big tranche of U.S. wheat, it would likely not happen in a vacuum.  In other words, the U.S. selling China wheat would probably happen at the expense of other destinations which would be forced to buy the remaining Black Sea supplies or European origin.  Deliveries continue to rack up against the March, reflecting the poor logistical situation on the river and by rail.  Open interest changes Friday saw corn up 18,117 contracts, soybeans up 8,562 contracts, meal up 3,369, oil up 6,111, SRW up 2,530 and HRW up 4,04 contracts.

Friday saw the latest COT data released, although it still has limited usefulness given the date on the data is 2/19.  Still, it is reflecting the growing net short positions which have helped drive us to current prices.  In KC wheat, funds sold another 8,147 contracts to put them net short -35,030 contracts.  This is the largest net short since August of 2016 and accounts for 63% of the largest net short on record.  Given the continued sell pressure, we think this position is probably closer to -50,000 contracts at current.  Commercial buying has occurred, but not to the levels one would like to see to feel better about a bottom.  In Chicago, funds sold 30,753 contracts to put them net short -74,657 contracts.  This was among the six largest weeks of net fund selling on record.  Funds are now net short -115,590 contracts of corn, the largest net short since September and a big shift from the 60,000-contract net long witnessed in December.  Commercials have been adding aggressively to their gross commercial long. In soybeans, funds are net short -81,030 contracts, the largest net short since November.

Additional registrations of corn overnight as deliveries continue to pile up there.  Total deliveries measured 2,267 contracts, bringing the month-to-date total to 5,152 contracts.  Over 25 million bushels have been thrown at the March contract, which puts the current logistical situation into perspective.  There were 80 fresh registrations in Kansas City Friday with total deliveries of 86 noted overnight.  The majority of which were Cargill.  Soybean deliveries totaled 545, bringing the month-to-date total to 2,020 contracts.  March SRW deliveries also continue to circulate with no strong stoppers.  Overnight there were 553 deliveries with the total now at 1,530 contracts.  Contract lows were noted in the SK/SN and CK/CN, while H/K spreads continue to enjoy a volatile delivery cycle.

Lots of seasonal studies and sentiment research flying around about wheat given the plunge to new lows last week.  Looking at the May contracts of both Chicago and Kansas City over the last 10-years, we see Chicago has now closed in on the lowest price for a May contract of the last decade.  In KC, current prices are the lowest since 2009 for this date on the calendar.  It begs the question what we are trying to price in considering the calendar says March 4th and the entire Northern Hemisphere growing season is still in front of us?  We also did some backtesting using the backtest engine on www.sentimentrader.com.  Their opinion index, or Optix, dropped to 24 last Thursday which would be considered excessively pessimistic.  We wanted to see what the returns were over the next 4-weeks every time wheat has had an Optix reading of 25 or less.  According to their data, the average return 4-weeks later was 2.58% with a win rate of 70%.  Over the last 5-years, there have been 147 times wheat has returned an Optix reading of 25 or less.  Expanding the results to multiple timeframes, wheat produced winners a majority of the time under every time frame from 1-week later to 1-year later with the highest win rate being 2-weeks later at 75% of the time.  Between the lowest prices of the last 10-years for early March, as well as pessimistic sentiment, we think downside is limited in wheat from current levels and a rebound in the coming weeks is likely.

Bottom Line: Higher row crops on trade war optimism, and even wheat contracts are trying to push higher at the 7:00 hour.  Things have likely gone far enough in wheat, although a neck-breaking rally doesn’t need to occur either.  The Saudi and Iraq tenders going to the U.S. would be a victory.  Otherwise, waiting on a turn in the weather or details from the trade deal.  At this point, not even sure we could call is buy the rumor sell the fact or sell the rumor buy the fact, because no one knows what is rumor and what is fact. 

Good Luck Today.

Tregg Cronin

Market Analyst




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