4/5/2019 Morning Comments

Good Morning,

Favorable comments emerging from the U.S.-China trade talks on Thursday with Bloomberg reporting Vice Chairman Liu said a “new consensus” had emerged.  President Trump said there were prospects for a “monumental” agreement.  President Trump also said it may take four weeks to put together a framework for the deal and two more weeks to put the details on paper.  There were details being thrown about suggesting China may have until 2025 to meet commitments put forth in a trade deal.  As a colleague pointed out, if China agrees to buy 20MMT of U.S. corn, but they have until 2025 to do it, then this amounts to roughly 3MMT of corn purchases.  120 million bushels of corn exports per year is nothing to scoff at but it is far different than 20MMT having to be executed in the span of 12-months.

Morning GFS models are putting more moisture in the forecast for the central plains and western corn belt next week.  As of this morning, the models are suggesting 0.75-2.50” could fall in South Dakota, Nebraska, S-Minnesota and Iowa.  This will add to flooding concerns and prevent any meaningful dry down from occurring.  As if the 7-day weren’t enough fun, the 6-10 and 8-14 day maps from NOAA keep below normal temps and above normal precip in place through April 19.  If drying and firming doesn’t really start to happen until then, actual planting might not take place until May. The situation is still very much fluid, but this forecast is far more problematic sitting on April 4th than it is March 4th and on top of the already saturated soils across the Midwest.

Weaker markets across the board this morning with nominal losses being led by soybeans and KC wheat.  Lots of cross-currents at the moment, with the omnipresent trade talks at the forefront but also another spring snowstorm/rain event set to sweep through the Plains and Western Corn Belt next week.  Up to this point, there has been little concern about planting pace and progress and for good reason.  Last year, several rounds of snow moved through the Plains and WCB in April, delaying the start of planting but farmers recovered and went on to produce big crops.  This year, the flooding has been worse already, and with river systems still dealing with a large amount of run off and what appears to be more on the way, some of these acres just don’t seem likely to dry out in time.  As we’ve discussed before, prevent plant acreage in 2018 hit the lowest level since 2012 at 1.8 million acres.  That number should be sharply higher this year, but most of our balance sheets absolutely require less acres to prevent burdensome supplies getting even larger.  What will matter most at the end of the day is how many acres we lose from our starting point and whether the ample soil moisture reserves will offset the loss of a couple million acres in terms of yield potential.  Open interest changes yesterday saw corn down 19,793 contracts, soybeans up 3,901, meal up 605, oil down 4,934, SRW down 6,782 contracts and HRW down 4,168 contracts.

Export sales were a mixed bag yesterday with wheat and soybean sales solid while corn sales faltered.  Wheat export sales totaled 25.9mbu vs. the 4.6mbu needed weekly to hit the USDA forecast.  Total commitments of 893.4mbu are 6% ahead of a year ago while the USDA is looking for a 7% increase.  The issue for us is not sales, but rather shipments with only 10 weeks left in the marketing year.  We need to ship 29.5mbu per week through the end of the marketing year to hit the current USDA forecast which would be the largest since 2011.  It is unlikely these sales will be executed in 2018/19, but should still sail in Q1-2019/20.  With that in mind, it is likely USDA will cut exports on next week’s WASDE, raising carryout toward 1.0bbu.  Soybean sales were solid at 72.4mbu vs. the 12.8mbu needed weekly to hit the USDA forecast.  That level of sales were the largest for this date on the calendar on record.  Total commitments of 1.603bbu are down 15% from a year ago while the USDA is looking for an 11% decline.  Like wheat, soybean shipments are the problem, not necessarily the sales.  We have only shipped 58.7% of the USDA’s forecast, the lowest percentage for the end of March on record.  We need to ship 35.1mbu each week through the end of the marketing year which would be the largest on record by nearly 8mbu.  Corn export sales were soft at 21.2mbu vs. the 26.5mbu needed weekly to hit the USDA forecast.  Total commitments of 1.700bbu are now down 9% from a year ago while the USDA is only calling for a 2% reduction.  Unlike wheat and soybeans, we don’t need a record shipment pace but this year does need to be the second largest shipment program on record.  Essentially, we need record wheat, soybean and corn export programs through the end of their respective marketing years in a season with awful logistics or the USDA will be forced to cut their forecasts and raise carryout.

Minneapolis continues to lead downside losses, closing lower for the sixth consecutive session on Thursday, the longest losing streak since June 2018.  Comments from canola exporters suggest Canadian producers will switch away from canola in 2019/20 if the trade dispute with China is not resolved soon.  The most obvious candidate for many of these producers looking to reduce acreage by 10-15% would be spring wheat. Canada has already been undercutting U.S. hard wheat exports for months, and this would look to continue into 2019/20 if additional supplies are produced.  As we’ve written about over the last several weeks, the HRS balance sheet for both 2018/19 and 2019/20 is bearish as it stands today. With the incoming weather next week, acres could fall further given the poor profitability of HRS and the lack of nitrogen availability across the Northern Plains.  Still, by our calculation, acres would need to fall another 500,000 acres to see carryout unchanged on the year which is still the largest since the late 80’s.  Asking for a one million acre drop from last year when trade tensions are still simmering, and soybean basis remains historically poor might be a tall ask.  Pure economics favor soybeans over HRS, but economics alone rarely make the decision for a producer.

Continue to watch the variable storage rate calculation period as the WK/WN is so far averaging 36.8% of full financial carry while the KWK/KWN is averaging 39.8%.  Chicago is already at exchange minimums for daily storage at 0.00165c/day (5c/mo), while KC is at 0.00265c/day (8c/mo).  Kansas City looks likely to see storage rates drop once the calculation period is over which would put the KWN/KWU at 77.10% of full financial carry and the KWU/KWZ at 101.1% of full financial carry.  One would think commercials will be bullspreading those sort of levels in large volumes considering the spread at that level represents a risk free trade, especially if commercials are borrowing money in-house at below market interest rates.  Corn moving to variable storage rates for the CZ9/CH0 spread period is also getting more attention as that spread sits at 69.02% of full financial carry.  The spread would need to move to  -15.50c or wider which represents 80% of full financial carry in order to move storage rates out to 8c/mo.  As we get closer to that calculation period in November, expect a growing chorus about corn exports set to be ruined like wheat exports.  Corn differs from wheat in the sense that U.S. wheat has major transportation disadvantages against competitors, relegating us to the supplier of last resort.  In corn, the U.S. is still easily the largest corn exporter in the world, although this doesn’t mean commercials storing more corn to pick up storage revenue can’t hurt annual prospects.  In addition, the other major corn exporters in South America have similar transportation costs to the U.S. once corn hits port.

Bottom Line: Sloppy finish to what had been a supportive week of price action.  We will be watching next week’s storm track closely as a lot of the rain/snow looks to fall in areas which can scarcely afford any more.  Larger prevent plant acreage probably makes USDA’s total acreage pie being lower than a year ago look more believable.  Continue to watch trade talks, but extensions to when China has to buy the agreed upon tonnages will make them less impactful to our burgeoning balance sheets.

Good Luck Today.

Tregg Cronin

Market Analyst




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