4/1/2019 Morning Comments

Good Morning,

More encouraging comments from the weekend trade talks in Beijing, although we didn’t see anything with substance as the talks shift back to Washington D.C.  Still plenty of subterfuge from both sides as one suggests a deal is close while the other side is said to be preparing for many months of ongoing discussions.  We’ve made our feelings on the issue quite well-known with a deal likely to involve significant Ag purchases of goods China was already going to buy anyway.  In return, the U.S. will drop or cut some tariffs while keeping others in place in exchange for a bit better access into Chinese markets.  At the end of the day, the relationship between the two countries will probably look little different than before the trade row began.  The trade war and the border wall are the pivotal pieces of the Trump Administrations tenure and losses on both cannot be afforded heading into 2020.

Weather maps from the weekend look quite favorable for the Midwest as this morning’s GFS shows moderate to heavy rainfall across the eastern plains, midsouth and eastern corn belt.  Totals will be heaviest in the Delta with up to 3-5” amounts expected.  Temperatures will also continue their warmup with weekend models suggesting above normal temps are far as the eye can see, especially in the 8-14 day with sharply above normal temps.  This kind of heat is exactly what is needed to warm soils and allow farmers to prep seed beds.  Precip also looks to keep moving through which is encouraging even if many areas don’t need it.  Above normal precip is expected for the majority of the Midwest in the 6-10, 8-14 and week 3&4 outlooks.

Markets are higher this morning across the board with the exception of Minneapolis wheat as our markets try to bounce from Friday’s selloff.  The USDA reports were universally bearish with maybe the exception of soybean and wheat acres, although we are taking almost everything on the acreage report with a grain of salt at this juncture.  The important data was the stocks report, and that was overwhelmingly bearish, especially for corn.  The stocks number was so big it has many questioning whether the December 1 stocks report had issues with it thanks to the government shutdown.  Another possible explanation was the amount of corn harvested after December 1 was larger than usual and didn’t get counted as “stocks” on the last report.  As we will point out below, the implications from Friday’s report are large and should change the fundamental landscape of the corn market for the next several months.  Friday’s corn volume was the largest on record at 1,127,803 contracts changing hands based on preliminary data.  Open interest changes on report day saw corn up 21,911 contracts, soybeans up 12,860, meal up 120, oil up 4,755 contracts, HRW 2,538 and SRW up 245.

Looking at the stocks report, March 1 corn stocks came in at 8.605bbu, up from the average trade estimate of 8.335bbu and just below last year’s record 8.892bbu.  The upside miss was the second largest on record for the March report since 1989, and implied Q2 feed/residual at 1.174bbu which was down from last year’s 1.503bbu and the second lowest on record.  This is the piece which had the market scratching its head as the last five years have seen Q2 feed/residual use in a very consistent grouping.  The curve ball definitely came from somewhere, but we may not know what the culprit was for several more months.  With herd sizes larger than a year ago, and feeding margins mostly favorable during the quarter, it just doesn’t make sense to see the second lowest feed/residual demand in 30-years.  The accounting of the SIAP report always leaves the door open for wild swings.  Another way to view this “surprise” 270 million bushels we didn’t know we had is that this corn supply is the equivalent of “adding” 1.5 million planted acres of corn at a 91% harvested rate.  This means one could look at the 92.792 million acres the USDA says we are going to plant could either be 94.192 million acres or would allow actual acres to drop to 91.392 million without changing the current supply outlook.  It is a heck of a beginning buffer against any yield adversity this summer.  The revised supply estimates has 2019/20 balance sheets pointing toward 2.0-2.4 billion bushels of ending stocks next year which would argue for less than $4.00 new crop corn futures.

Stocks of soybeans and wheat also came in above average trade estimates by 33mbu and 36mbu, respectively.  This will probably lead to USDA cutting wheat feed/residual use further on the April WASDE, which could come in addition to another export revision.  Wheat ending stocks should end up close to 1.1bbu for the third straight year.  USDA most likely leaves soybean demand estimates unchanged this month, especially if Census Crush data out later this afternoon does not surprise.  The soybean balance sheet has a bit of breathing room, but ending stocks will still be dependent on actual exports which are running behind the pace needed to meet current estimates.  At the end of the day, there is nothing fundamentally supportive about a 2.0bbu carryout in corn, a nearly 1.0bbu carryout in soybeans and 1.1bbu carryout in wheat.  We are back to counting on yield adversity this summer to support prices and clear excess supplies.  This is not a comfortable position to be in already with spring planting just about to begin in the southern tier of the Midwest.

One can’t pick and choose which data points they like and don’t like from Friday, but we did like to see the drop in ‘other’ spring wheat acres to 12.830 million vs. 13.419 million expected and 13.20 million a year ago.  This should result in 12.35 million acres of hard red spring using past relationships, and with an average yield of 46.0bpa would give us production of 551mbu vs. 587mbu a year ago.  Total supplies would grow, however, to 900mbu on the nose vs. 850mbu last year.  We are still using domestic demand of 290mbu which would be up 15mbu from a year ago.  Export demand is called 290mbu vs. 275mbu a year ago, although we don’t feel particularly good about either of those demand figures on April 1.  Economics say the only way we increase demand from a year ago is with lower prices.  Our current ending stocks would be implied at 314mbu vs. 289mbu a year ago with a stocks/use ratio of 53.65% vs. 51.57% a year ago.  Both carryout and stocks/use would be the largest since 1987/88 and 1991/92, respectively.  Suffices to say the HRS balance sheet could stand to “lose” a few more acres to late planting or crop rotation.

The other takeaway from Friday which has everyone talking is the shrinking acreage pie.  Principle crop acreage is expected to decline to 315.352 million acres, down another 4.226 million from last year and the lowest since 2011.  Our question is where these acres are going?  CRP enrollment is expected to increase, while several other “set-aside” type programs will take additional acres as well.  In addition, Prevent Plant acreage last year of 1.8 million acres was half the 5-yr average and the lowest since the 2012 drought.  With this year’s flooding, it is quite likely acres in that category will rise.  Still, we remain a bit apprehensive the total acreage pie could be larger with acres available to multiple crops.  To be clear, total crop acreage needs to decline in order to help clear excess supply we are currently lugging around in corn, soybeans and wheat.  However, producers always count on their neighbor to take acreage out of production and to do the “right thing” while they are free to try and outproduce their way out negative margins.  Something to keep an eye on as we move into spring.

Bottom Line:  Markets want to bounce following contract lows on Friday in futures and spreads which is probably reasonable.  The hangover from the stocks report will be with us for quite some time and will cast a negative light on our markets heading into spring planting.  We can’t trade acreage numbers before a single wheel has turned so don’t kid yourself about what our markets are paying attention to.  While the pictures of ripped open grain bins and flooded acreage are devastating to look at, they usually represent a much smaller percentage than what they appear.  How have your marketing targets changed since Friday or have they at all?  Seasonality still says we will get a chance at higher new crop prices this season.

Good Luck Today.

Tregg Cronin

Market Analyst




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