3/20/2019 Morning Comments

Good Morning,

Financial markets waiting for some details from the latest round of U.S.-China trade talks taking place in Beijing.  Secretary Mnuchin said the two sides enjoyed a “productive working dinner” on Thursday evening, but earlier in the day, President Trump’s top economic advisor, Larry Kudlow, said talks could continue for months.  This type of back-and-forth between top advisors to the President is what has traders’ patience wearing thin.  One minute a deal is close at hand while the next we are being told to prepare for months of continued talks.  We were told earlier in the week that today’s meetings in Beijing and next week’s in Washington would be pivotal to a deal being struck.  If the can is kicked down the road once again, which it appears it may, put the “out to lunch” sign on the door and pay attention to something else for a while.  The fear in our opinion is that a deal will be struck, it will include large purchases of farm commodities which China needs to buy anyway, and little will be done in the way of the more serious economic reforms this trade war was started over in the first place.  A grand, 12-month circus which lands us right back where we started.

Some moisture in the southern plains and eastern corn belt this morning which will keep the wet conditions and flooding in place.  Snow continues to melt across the upper-Midwest with 36.4% of the land area covered by snow vs. 98.3% last month and 57.2% last year.  Average depth still present in the upper-Midwest is called 2.4” vs. 4.2” a year ago, and 2018 saw heavy snow fall which by mid-month.  Still expecting heavy rain in MO/IL/E-KS the next 24-36 hours which moves out by the end of the weekend.  The Plains stay mainly dry the next week while the eastern corn belt will see a couple rounds of precip by midweek.  Extended maps from NOAA show temps mainly normal to slightly above while precip remains normal/above during the 6-15 day period.

Mixed markets this morning with the soy complex holding small gains and grains trading softer ahead of the next round of USDA reports.  Worth noting, canola futures are setting highs for the session as we close in on the seven ‘o clock hour.  We haven’t seen any updates to the China-Canadian trade row which resulted in China essentially banning all canola and canola product imports.  No fresh news from the trade talks in Beijing to speak of, although Reuters did report China buying 1.5 MMT of U.S. soybeans for July/August shipment yesterday, citing cash sources.  The purchase would be encouraging provided China begins to actually take some of the beans they’ve purchased.  The export sales report yesterday showed dismal soybean sales, so some large-scale purchases to China would be greatly appreciated.  We’ve been fearful over a bearish stocks report for all major commodities on today’s report given the awful logistics present in February.  The data is as of March 1, so the even worse logistics in March would not have affected stocks levels.  Acreage estimates should be largely cast aside as the data will have limited value after the flooding and economic differences vs. March 1.  Open interest changes yesterday saw corn up 5,646 contracts, soybeans up 1,650, meal down 612 contracts, oil down 3,677 contracts, SRW down 738 and HRW up 898 contracts.

Data yesterday included export sales which were a mixed bag.  Wheat sales were solid at 17.5mbu vs. the 6.7mbu needed weekly to hit the USDA forecast.  Total commitments of 867.8mbu are up 4% from a year ago while the USDA is calling for a 7.1% increase y/y.  However, as inspection data has been pointed out, actual export shipments of 654mbu are down 3.5% from a year ago, a 10% swing from where the USDA expects exports to finish.  There are only 10 weeks left in the marketing year, so another cut to the USDA’s export forecast appears likely.  Corn sales totaled 35.6mbu vs. the 26.3mbu needed weekly with total commitments of 1.679bbu down 8% from a year ago. The USDA is only calling for a 2% decline in export sales from a year ago which could prompt a cut to their forecast next month.  Soybean export sales were awful at 6.7mbu vs. the 15.4mbu needed weekly.  Total commitments of 1.531bbu are down 17% from a year ago while the USDA is calling for an 11.9% decline from last year.  Here again, every reason to think USDA could cut their export forecast on a future report and domestic demand isn’t strong enough in corn, wheat or soybeans to offset the cuts.

USDA also reported on the hog herd yesterday, calling the March 1 hog and pig level up 102.1% from a year ago vs. the average trade estimate of 102.0%.  The 74.296 million hogs and pigs as of March 1 is an all-time record and is over 10 million hogs larger than 5-years ago.  Lean hog futures continue to soar even with the larger inventories as all signs point toward China needing to make large scale purchases of finished pork from the U.S. as their African Swine Fever situation gets worse.  Whether a rising tide lifts all boats remains to be seen, but this level of protein shortfall in China should be supportive to the entire protein complex and eventually feed demand.  Swine kept for breeding came in at 102.2% vs. 101.9% expected while kept for marketing totaled 102.1% vs. 102.0% expected.  The Dec-Feb pig crop was 102.8% of a year ago, pigs/litter was 101.1% of a year ago and Dec-Feb farrowings were 101.6% of a year ago.  Mar-May farrowing intentions were 100.6% while Jun-Aug intentions were 99.7% of a year ago.  If the data can be taken at its word, the herd size should continue growing this quarter but slow this summer, although continued gains in price could change intention ideas quickly.

We said above the acreage ideas will have limited value given the weather over the last 30-days.  That said, it is still fun to play around with balance sheets to see what different scenarios look like for 2019/20.  The average trade guess for “other” spring wheat acres is 13.419 million acres vs. 13.20 million a year ago.  Using average relationships between “other” spring wheat and hard red spring wheat acres, this should give us around 12.90 million HRS acres vs. 12.709 million last year.  If we use an average yield of 46.0bpa, production would be around 575mbu vs. 587mbu a year ago with total supplies surging to 924mbu vs. 850mbu a year ago.  Total supplies at that level would be the largest since 1987/88.  While USDA tends to increase demand in years of large supply increases, it is difficult to move demand up too much higher than 2018/19.  Nonetheless, we bumped domestic demand by 10mbu and increased export demand by 15mbu, even though Canadian export competition should remain stiff in 2019/20.  Doing all of that, carryout comes in at a bulging 339mbu, the largest since 1987/88, and only the second time stocks/use has been over 50% since the early 90’s.  At our yield of 46.0bpa, acres need to drop by 900,000 acres from a year ago to see carryout unchanged.  If acres do come in at 12.90 million, yield would need to fall 5bpa from last year to the second lowest since 2011/12 to have carryout unchanged.  As one can see, the HRS market has its work cut out in 2019/20.

Bottom Line: Let’s get the data from the USDA out at 11:00 and go from there.  Lots of time until planters roll in the Midwest, but no reason to sound alarm bells just yet.  If stocks come in above expectations as of March 1, and carryout ideas are increased, one needs to remember this is the equivalent of planting more acres.  Logistics are improving but still slow.  Remains to be seen if we can make up the lost demand from the month of March.

Good Luck Today.

Tregg Cronin

Market Analyst

Tregg.Cronin@halocommodities.com

www.halocommodities.com

@5thWave_tcronin COMMODITY TRADING INVOLVES RISK AND MAY NOT BE SUITABLE FOR ALL RECEIPIENTS OF THIS EMAIL. Neither the information presented, nor any opinions expressed, constitutes a solicitation for the purchase or sale of any commodities. The thoughts expressed in this email and basic data from which they are derived are believed to be reliable, but cannot be guaranteed due to uncertainty about future events and complexities surrounding commodity markets. Those acting on the information are responsible for their own actions.

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