3/15/2019 Morning Comments

Good Morning,

Equity markets are firmer this morning as media outlets are reporting Chinese state media said “substantive progress” on trade talks is being made.  In addition, Beijing passed a new foreign investment law designed to smooth the way to a new trade deal with the U.S.  These are the first positive signs in the trade talks we’ve seen in a couple weeks, although we are still cognizant of the fact the planned meeting between President Xi and President Trump has been postponed until at least April. The comments from the Trump Administration flip flop each day it seems between “a deal is close at hand” to “we’re very far apart with major differences still present.” President Trump also saw his emergency declaration at the Mexican border wall blocked by the Senate which will prevent him from beginning construction. President Trump could be anxious to strike a deal with China and claim a political victory.

Mostly clear Midwest radar this morning, and should continue to be for the next 7-days or so.  After the Upper-Midwest started to see its snowpack melt earlier this week, the mid-week blizzard slammed the region, adding to the impressive total.  According to NOAA, the Upper-Midwest has 98.7% of its area covered by snow at an average depth of 14.6”.  This compares with last year at 82.0% coverage with an average depth of 8.0”.  The snowpack is record large for this date going back to 2003.  Temperatures are expected to be mainly above freezing for the next 7-10 days, so the snow is expected to begin melting soon.  Extended maps show mainly above normal temps for the Midwest in the 6-10 and 8-14, while precip is below normal in the 6-10 but moves back toward above normal in the 8-14.  Soil moisture profiles are in the 90-99th percentile of all years on record.

Mixed grain markets this morning as traders have a host of price signals to factor in as the week draws to a close.  Export sales yesterday were a mixed bag but mainly poor with the exception of the large purchases by China.  Otherwise, export demand slowed for all commodities as competition heats up from South America on corn and wheat business flounders after a strong February.  Trade war comments from China are certainly encouraging, although difficult to think a signing is imminent based on comments from state-owned media in Beijing.  In addition, weather is throwing a completely different set of factors at the market as traders contemplate acreage switching and potential flooding/prevent plant. It is still very early in our opinion, but the amount of water which is still set to come down the nation’s waterways will make flooding and logistics worse.  The lack of fall field work done pushed a larger than normal amount of fertilizer application to the spring which is also not happening.  Ideally, nitrogen would be applied at least a week ahead of corn planting which could prove challenging this year.  Open interest changes yesterday included corn up 5,314 contracts, soybeans down 857, meal down 5,407, oil down 855, SRW wheat down 1,707 and HRW up 156 contracts.

Export sales of wheat were generally poor at 9.7mbu vs. the 7.9mbu needed weekly to hit the USDA forecast.  The sales were the smallest for this week on the calendar since 2008.  Total commitments are now 3% ahead of last year while the USDA is calling for a 7.0% increase.  Total commitments as a percentage of USDA’s forecast are now 86.9% which is still the smallest since 2012 but is no longer the lowest level on record.  Shipments as a percentage of the USDA forecast at 64.7% also picked up but are still below the 70-72% 5-yr average.  Corn export sales totaled just 14.6mbu which were the smallest sales for this week since 2013.  Total commitments of 1.607bbu now account for 67.6% of the USDA forecast which is ahead of last year’s 66.6%.  Shipments as a percent of the USDA forecast are 44.7% which is well ahead of the 37% 5-yr average.  We still need to sell 26-29mbu of corn each week through August to hit the USDA forecast, so no time to rest on our laurels. Soybean sales were strong at 70.2mbu, the second largest sales week on record.  However, of that total, China accounted for 62mbu, almost all of which was previously known.  Therefore, sales to the rest of the world were scant and a bit troubling if the Chinese purchases come to a halt due to trade talks.  The concerning stat for us is shipments as a percent of the USDA forecast at 53.6% which is the lowest on record.

Earlier in the week, the Norther American Millers’ Association released their 2019/20 SRW production estimate of 269mbu.  This was generally seen below the 280-300mbu average range of estimates and would be the smallest SRW crop since 2010/11.  If production came in at that level, total supplies would be the smallest since 2005/06.  Many have commented in recent weeks about the poor shape the SRW crop is in along with an expectation flooding and abandonment will grow as spring draws closer.  Economic calculations are being run, and in many spots, ripping the SRW crop up and planting soybeans or corn would be more profitable.  Our current demand ideas have exports down 20mbu from 2018/19, while domestic demand is largely flat.  This produces ending stocks of 123mbu which would be the smallest since 2013/14.  If a supply situation such as this materializes, it should support calendar spreads as commercials try to outbid each other to fill available storage.  Carries aren’t as lucrative as they have been in recent years, but having the wheat in-house is worth some level of premium.  As it stands today, SRW and HRW ending stocks should fall in 2019/20 while HRS grows depending on how spring planting turns out.

The USDA Ag Attache to China issued an update on pulse demand Thursday which had a few interesting tidbits. 2018/19 dried pea imports for China are forecast at 2.1MMT, up about 10% from 2017/18 on growing feed demand.  China continues to produce less of its own pulses as crop revenue is not as great as other crops. Yet, demand continues to rise, creating an opportunity for greater exports.  Pulse crops are offered no subsidies besides land rotation incentives, putting them at a big disadvantage to other crops.  India has been a large source of imports for pulses in recent years, but this marketing year they continue to have large import tariffs on foreign peas and lentils to protect their own market. With India often flipping from major importer to nothing, China could offer another home for North American pulse crops.  Strong competition exists for the U.S. from Canada and Australia whose supplies are much cheaper.  According to the attache report, the average quote for Canadian and Australian peas from January to August 2018 was $265/MT compared with U.S. peas at $545/MT.  The report’s prices for U.S. peas looks exceptionally high.

Bottom Line: Wheat trying to close higher on the week for the first time since January.  With end users stepping in, and funds already hitting record net short levels, it would appear wheat prices have found a low.  Seasonally, strength should be seen into April as the focus shifts to weather and other major exporters’ production prospects.  Too early in our opinion to be trading lower corn acreage, but that doesn’t mean we won’t try.  Huge incentive to plant corn from a futures and insurance standpoint, and until we get deep into April with no progress, bulls need to keep their powder dry.

Good Luck Today.

Tregg Cronin

Market Analyst




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