3/13/2019 Morning Comments

Good Morning,

Two articles caught our attention overnight.  The first summarized US Trade Rep Bob Lighthizer’s comments to the Senate finance committee on Tuesday in which he said negotiations with China were at risk of failing due to “major, major issues” which needed to be resolved before and agreement can be reached.  He said he could not “predict success at this point.”  This stands in direct contrast to rumors circulating that a trade deal was close at hand and one could be signed by the end of the month.  The former comments would certainly agree more with the weak trade in grains as of late.  Another article from the FT talked about China’s birth rate continuing to decline and pointing toward population decline in coming decades.  The number of new births in China last year fell 2 million to 15.2 million, the second consecutive year of decline since China repealed its “one child” policy in 2015.  China’s population expanded by 0.38% last year, a rate similar to many western European countries and well short of the rate associated with booming populations.  This was the lowest pace since 1961 when China was still struggling with famine which killed 40 million people.  Estimates suggest China’s population will peak in 2029 around 1.44 billion before declining.  The number of people aged 60 or over will reach 479 million in 2050, or about 1/3 of the population vs. 16% today.  Big changes for China in the coming decades.

Still bracing for winter storm “Everyone is Tired of This,” which is expected to begin this afternoon in the Dakotas and Nebraska and last through Thursday.  Precip totals are downright impressive with many areas looking at 1-2” of water-equivalent moisture, but just a matter of how it will fall at this point.  With the ground still frozen in many places, much of this moisture is expected to run off, causing flooding and overflowing waterways.  After this storm, things are mainly dry the rest of the 7-day outlook which extends through the 6-10 day.  Above normal precip is seen in the 8-14 day outlook.  Temps slowly warm to above normal for much of the southern plains and Midwest in the 8-14 day, while the Northern Plains remains stubbornly normal to below normal.  Spring does look like it is on its way, however.

Weaker Ag markets across the board this morning led by our old familiar friend wheat after it enjoyed a brief hiatus in the sun.  The rally yesterday in winter wheat contracts was impressive, and caught many off-guard, but the bounce seemed completely technical and structural in nature.  When managed funds positions reach record levels, air-pockets of short-covering can take place for no apparent reason.  This appears to have been the case yesterday as futures attempt to give back a bit less then half of yesterday’s gains.  Global wheat markets are off this morning as well with Paris futures lower, while Black Sea futures closed lower yesterday despite the rallies elsewhere.  Row crops are lower this morning as comments from trade negotiators seem less than optimistic after we’ve been trying to price in huge Chinese purchases for 90-days.  The trade war comes down to this in our opinion: we got into this fight to force China to make structural economic reforms, and unless that takes place, the last 10-months have been a complete waste of time.  Even a grain farmer who would love to see China buy U.S. grains can see that if all we get out of this kerfuffle is some grain purchases China likely would have made anyway, the current administration will not be held in high regard in 2020.  Open interest changes yesterday saw corn up 18,711 contracts, soybeans up 2,345, meal up 3,038 contracts, oil up 8,235, SRW down 2,403 contracts and HRW up 1,899 contracts.

In addition to CONAB’s updated production forecasts, we also got Brazilian crop progress yesterday.  Soybean harvest was pegged at 52% complete vs. 38% last week, 46% last year and 46% average.  Largest production state Mato Grosso is 89% complete with soybean harvest.  1st crop corn harvest was seen at 43% complete vs. 40% last week and 43% average.  2nd crop corn planting was ahead of schedule at 91% complete vs. 80% last week, 83% last year and 81% average.  Most believe Brazilian corn prospects will continue moving higher due to favorable weather during February and March, especially as the 2nd crop makes up such a large portion of the total production vs. several years ago.

Analytics firm Informa Economics released their latest estimate of 2019/20 acreage ahead of the March 31st USDA numbers.  They see corn at 91.771 million which would be up 2.642 million from a year ago, and in-line with most average estimates.  Soybean acreage is seen at 85.494 million acres, down 3.702 million from a year ago, which looks a bit light compared with some of the recent numbers we’ve seen.  Spring wheat acreage is seen at 13.580 million, up 380,000 from a year ago, but here again, we are a bit skeptical of that kind of increase based on weather and economics.  Sunflower acreage is seen at 1.464 million, up 163,000 acres from a year ago.  Cotton acreage is seen at 14.702 million, up 603,000 from 2018/19.  From their last estimate in February, corn acreage moved up, soybeans down and all-wheat down.

China’s Ministry of Agriculture said yesterday their total pig herd was down 13% from last year at the end of January with breeding sows down around 15% from a year ago.  Officially, only 1 million head of been culled due to ASF, but it is apparent many more than that have been culled.  In addition, ASF has now been found in feral hogs in Russia.  ASF has now been found in Russia, Vietnam, Mongolia and Belgium, although more countries could probably be added to that list which have been detected yet.  This is why Brazilian soybean production falling a couple million tons pales in comparison to the potential demand destruction from an outbreak like ASF.  Imagine if ASF manages to actually hop continents as it was rumored to have done a few weeks ago into Canada?  African Swine Fever is a textbook definition of a “Black Swan,” an unforeseen event which materially alters the fundamental landscape.  As is usually the case, Black Swans are typically bearish events as this one most certainly is.  Heap on top of slowing demand trade talks which seem to be going nowhere, and bulls have to wonder if they are living on borrowed time in the soy complex?

One last note, it was reported in several outlets yesterday and overnight that USDA’s NASS would discontinue its objective yield component of the August 1 Crop Production report for corn and soybeans.  This is the first objective yield survey of the year in which USDA enumerators head into the fields to get hard data of our maturing crop.  Removing this report would rely more heavily on farmer-based surveys and satellite data which he USDA appears to be getting increasingly confident with.  Satellite data is how USDA obtains most of its yield data around the globe at current, so it was probably inevitable, and cheaper, to move in this direction.  Nonetheless, it will change relationships which have been present in the August survey for decades.  This will increase the exposure and reliance on private companies which forecast U.S. crops, which may or may not be a good thing depending on the objectivity and reliability of some of these private methods.

Bottom Line: Wheat markets are trading on the lows at the 7:00 hour, making Tuesday look like nothing more than a short-covering bout of profit taking.  As we noted yesterday, funds have all the equity in their recent short positions, so until they are materially threatened, difficult to see them exiting these positions in rapid fashion.  Otherwise, weather and trade talks will dominate until we get to the end of the month reports.  New crop corn, soybean and spring wheat prices are trading at multi-month lows, so do not expect the farmer to be engaged anytime soon, especially considering the date on the calendar.

Good Luck Today.

Tregg Cronin

Market Analyst




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