4/3/2019 Morning Comments

Good Morning,

Multiple media outlets are reporting U.S. and Chinese officials have resolved most of the outstanding issues in the long-running trade dispute, but it is the enforcement of a deal which remains a sticking point.  Without enforcement, the deal is essentially worthless as few think China will uphold a deal which isn’t seen in her best interests.  Also worth paying attention to today are EU Ambassadors meeting in Brussels today to decide whether to grant EU Trade Commissioner Malstrom the mandate she needs to begin formal US/EU trade talks which were agreed to last July.  Washington is tiring over the delay to these talks, raising the prospect of the Trump Administration unleashing tariffs on auto-imports which would surely result in retaliation by the EU.  In addition, the EU hasn’t agreed to bring agriculture into the trade talks which the US has demanded.  European Union farmers are some of the most subsidized in the entire world on top of the member countries being some of the most averse to GMO technology.  Cracking the European Union nut on ag imports from the U.S. would be a monumental accomplishment but one we are not holding our breath over.

Still looking at rain chances in the central/eastern corn belt as well as the Delta/Midsouth the next several days.  The entire eastern half of the contiguous United States will see varying degrees of rainfall between 0.50-5.00”.  This should keep high-water and flooding concerns alive and well along the nation’s waterways.  The MS-River in St. Paul crested yesterday with those waters working their way down the next several weeks.  The Red River in Fargo is expected to crest sometime Monday/Tuesday next week around 34.8’ which is 6’ below the all-time record of 40.8’.   Extended maps keep precip above normal during the 6-14 day outlook while temps are seen normal to below normal by the 8-14 day.  Not exactly the forecast the Northern Plains was looking for.

Firmer markets across the board this morning, led by Chicago wheat which finds itself up over 1.0% as we head toward 7:00am CDT.  Monday afternoon, the USDA confirmed the poor conditions of the SRW crop which had been bantered about most of the winter.  Uneven emergence, drowned out spots and an overall decline in acres from a year ago were all concerns.  It would appear those concerns were well-founded, and when combined with tightening old crop stocks, raises the risk premium needed for the 2019/20 growing season.  As of today, SRW is the one class of wheat which could see a fairly tight balance sheet next growing season.  Corn and soybeans are also higher as we continue to claw back from Friday’s dismal report.  Still plenty of concerns about flooded acres, higher prevent plant and the ability to obtain nitrogen ahead of seeding which didn’t get applied last fall.  Economics still argue for farmers trying to plant as much corn as possible, but mother nature and logistics can and will have a say in the final number. Open interest changes yesterday saw corn up 7,122 contracts, soybeans up 3,147 contracts, meal up 1,037, oil up 2,456, SRW up 2,704 contracts and HRW up 3,836.

Deliverable stocks in Chicago fell another 1.5mbu last week to 47.813mbu which compares with 69.722mbu a year ago.  Total wheat stocks of 55.078mbu are down 2.002mbu on the week and down 18.24mbu from a year ago.  Wheat stocks in Toledo are at their lowest level since 2013/14 while wheat stocks in Chicago proper are at their lowest level since 2007/08.  An improvement in SRW export competitiveness has helped draw those stocks down and reduce variable storage rates.  HRW wheat stocks fell 490,000 bushel last week to 100.591mbu which is 4.559mbu below a year ago.  MGEX stocks fell 144,000 bushels in both Duluth/MPLS last week to 15.741mbu which compares with 22.521mbu a year ago.  The K/N averaging period for the next VSR calculation period is underway with 11 of the 29 settlements in the books.  KWK/KWN is averaging 41.2% of full financial carry while the WK/WN is averaging 39.1%.  Chicago wheat is already at the minimum allowable storage rate of 0.165c per day and cannot be reduced even if the average ends up below 50% of financial carry.  KC on the other hand can reduce storage rates by another 3c/mo from 8c/mo to 5c/mo and be even to Chicago.  It would appear this is going to happen.

The deliverable stocks discussion leads into the 2019/20 SRW balance sheet discussion which will face growing scrutiny in coming weeks/months.  As things stand today, we see 2019/20 ending stocks of SRW around 152mbu vs. 163mbu for the current marketing year and would be the lowest since 2013/14.  We are currently using a 65bpa national average yield which is essentially the 5-yr average.  If we bend this back to a 63bpa yield as we had last year, our ending stocks fall to 142mbu.  For demand, we are assuming domestic demand is unchanged next year while exports fall 20mbu to 110mbu.  Both demand line items could be reduced it can be argued, which we have no problem with.  One of the real questions is whether planted acres or harvested acres fall further?  We are currently using an 81% harvested percentage which is the 5-yr average.  However, each of the last two years, harvested percentage fell below 75% with arguably better early season conditions than we are facing this year.  If we see harvested percentage fall to 75% or less, ending stocks begin closing in on the lowest level since 2007/08.  Lots of conjecture in this paragraph, but it feels like these are the questions the market is beginning to ask.

USDA Ag Attache to China released his initial thoughts on the 2019/20 balance sheet for soybeans yesterday, pegging imports for 2019/20 at 91.5MMT vs. 88.0MMT this year.  The growth is encouraging as the current year’s reduction in imports is the first in close to 15 years.  However, we remain a bit skeptical of returning to import growth considering we don’t know how bad the African Swine Fever situation actually is.  If culling ends up being in the 30-50% range like some are positing, then finished meat imports might surge while grain protein suffers.  So many unknowns to this story, but the one universal theme seems to be even China doesn’t know how bad it is yet.

Bottom Line: Lots of trade talk this week with negotiators meeting in Washington while European Union discussions could get restarted soon.  In addition, tariffs continue to be cut for TPP-members into Japan while they remain in place for the United States.  We are fighting trade battles on multiple fronts, and it could be argued, aren’t winning any of them at the moment.  Let’s not forget, the USMC still hasn’t been ratified by Congress and President Trump is threatening to shutdown the border with Mexico.  Lots of balls in the air.  Let’s hope this administration is good at juggling.

Good Luck Today.

Tregg Cronin

Market Analyst




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