4/22/2019 Morning Comments

Good Morning,

A large system moving across the upper-Midwest this morning bringing moderate to heavy rains in localized places.  Not much for rainfall returns yet but there are places getting up to 0.50” since midnight.  Plenty of rain around in the southern plains and upper-Midwest the next 7-days with the former seeing 0.50-2.00” amounts on a large swath of Oklahoma and Texas.  MN/IA/WI will see rains of 0.50-2.00”  broken down between the current system and one toward the weekend.  The eastern corn belt will be mainly dry which should promote seeding progress.  Extended maps keep above normal precip in place the next two weeks while temps slowly cool toward below normal in the north by the 8-14.  Worth keeping an eye on Kansas as the 30-day percent of normal precip map is running a bit dry although conditions to-date have been very good.

Weaker markets across the board this morning, led lower by winter wheat contracts which are down over 1.0%.  The favorable conditions to-date along with solid rain potential for OK/TX this week continues to promote ideas of above-trend yield potential.  In addition, many analysts cut their U.S. export forecasts for the 2018/19 marketing year over the weekend with those ideas now close to last year’s 901mbu.  If exports do indeed prove that low, carryout will be well over 1.1 billion bushels and provide a huge buffer against any growing season stress.  Add in ideas of a bounce-back in production out both the EU and FSU, and it is difficult to construct a narrative which include wheat being markedly higher than spot prices.  Wheat looks as though it is in for another year of producers being incentivized to store wheat, but the lucrative storage returns will only come to those willing to lock in carries out to 2020.  Corn planting progress broke loose heading into the weekend for Iowa and Nebraska.  Areas to the north are still waiting on fields to dry and warm, but progress as of May 1 isn’t likely to show the delays being talked about a couple weeks back.  Lots of trade talk the next two weeks to keep the market interested.

Friday saw the Commitments of Traders data released with large spec traders selling another 29,313 contracts to leave them net short -323,665 contracts, a new record.  Not only is this a new record, but it is almost 10% larger than the previous record from last week, showing how aggressively short the funds have gotten.  Over the last three weeks, funds have sold 116,117 contracts.  Encouragingly, commercials have been buying corn with the gross commercial long up to 734,529 contracts, which is the largest since July 24.  This position is among the top ten largest on record and is record large from a seasonal perspective.  Funds sold 23,401 contracts of soybeans last week, bumping their net short back up to -108,362 contracts.  In KC wheat, funds sold 4,171 contracts to leave them net short -49,818 contracts.  This is not a record short on the CIT report, but it is within 5,000 contracts of a record.  Of interest, the gross commercial short position at 98,617 contracts is the smallest since January 2017 and record small from a seasonal perspective.

The global wheat market is most interested in production ideas from Europe and the Black Sea after last year’s drought in Europe and slightly lower than expected production in Russia.  There had been dryness concerns creeping into Europe once again, although weekend forecast maps show widespread rains across Europe the next 10-days.  In fact, many areas will see 100-200% of normal rains in the next 10-day period.  In Russia, export ideas for the 2019/20 marketing year are about steady with 2018/19 as lower beginning stocks will prevent Russia from getting off to a blazing start.  Based on some of the early production ideas in the market of 80-83MMT, we could see exports rebound to 38MMT from 36.5MMT, and still leave a decent carryout of 9.468MMT vs. 7.468MMT projected in 2018/19.  At that level, exports would be 43.20% of total supplies and would be 48.41% of total demand.  For reference, the 5-yr average for exports/supplies is 40.58% while exports/demand is 45.21%.  Admittedly, our ideas of 43.2% and 48.4% look high relative to average, but not relative to the last two years which saw higher percentages as well.  As long as the Ruble remains weak, and the government stays out of the export market, Russia will be positioned to regain lost market share in 2019/20.  Europe will also remain strong competitors after a down year, leaving US-HRW on the outside looking in.  An issue in the U.S. with production is no longer enough to rally wheat markets by itself.  It takes a minimum of two major exporters, and preferably three, with below trend crops to create an environment in which demand needs to be rationed globally.

Friday saw the latest cattle-on-feed report released with on-feed at 102.0% of year ago levels vs. ideas for 101.7%.  Cattle-on-feed of 11.964 million is the largest on-feed total for any month since December 2011.  Placements of 104.8% were larger than expected as the trade pegged them at 103.4%.  Marketings were 96.6% vs. estimates of 96.9%.  The stronger than expected cattle on feed with larger placements should keep feed demand strong heading into the summer months, although the animal numbers and feed demand correlation has been about as bad as it could be the last two quarters.  This is precisely why estimating feed/residual demand is almost futile considering how the USDA arrives at that number.  Nonetheless, feeding margins remains strong in both cattle and hogs, and the strong forward pricing opportunities thanks to the ASF scare in China should keep expansion underway through 2019.

Bottom Line: Remember when crops were going to be late planted? Yeah, me neither.  Now that planting delays aren’t likely to be a major issue, combined with above normal to record soil moisture, early season doubts are fleeting.  We could still see corn acreage below March USDA ideas, but we’ve got acres to give, especially if further cuts to ethanol and exports are still to come.  Spring wheat acres are likely to be lost in South Dakota, although less than feared a couple weeks ago and could be made up in North Dakota and Montana.  Feels like a breakthrough in trade talks with China is about the only thing which is going to provide this market with lift.  Large bearish positions held by the funds, winning positions at that, are not a reason to be bullish until they are forced to cover.  They are being every reason to stand their ground at the moment.

Good Luck Today.

Tregg Cronin

Market Analyst




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