5/2/2019 Morning Comments

Good Morning,

Lots of chatter about the U.S.-China trade deal hitting the wires yesterday.  From what we could glean, negotiators agreed for the U.S. to remove a 10% tariff on a portion of the $200 billion worth of Chinese imports when the deal is signed.  The 10% tariff on the rest of the Chinese goods would also be removed “quickly,” but a 25% tariff on roughly $50 billion worth of other Chinese goods would likely stay in place until after the 2020 election.  Sources also suggested the deal could be signed as quickly as late next week.  This does not sound like the “grand deal” many have been hoping for which would lead to a reset in U.S.-Chinese relations, and it is difficult to say whether markets will like or dislike such an arrangement?  From an agriculture standpoint, the administration readying another $12 billion worth of assistance payments is about the worst outcome possible which we will try to discuss below.

Rains across the eastern portion of the southern plains and stringing up through the MS-River Valley.  Illinois is picking up heavy rains this morning which should produce even further planting delays.  Late this weekend and early next week sees another big round of rain to move through Iowa, Missouri, Illinois and Indiana with totals this morning in the 1.00-3.00” range.  The Delta will also see heavy rains which is delaying soybean planting there.  Fortunately, the Northern Plains will be mostly dry the next 7-days with the exception of a stray shower.  The issue in the north is temperatures which are slated to be below normal through mid-month.  Forecasters continue to point toward 5-10* below normal which keeps highs in the Dakotas mainly in the 50’s and 60’s.  This will keep soil temps subdued and drying weather limited.  The Midwest sees above normal precip through mid-month.

Mixed markets this morning with soybeans lower while corn and wheat are higher.  It wasn’t until this week the corn market has finally begun to take planting delays seriously, which would be expected considering the calendar finally flipped to May.  The forecast mentioned above will not lend itself to planters returning to the field quickly in the heart of the corn belt, so the delays posted on Monday’s crop progress report should be even further behind average on next Monday’s report.  Polling some analyst friends, most think progress on corn planting come Monday will be around 23-25% which would be the slowest since 2013 and the second slowest since 1993.  In 2013, we saw a 1.8 million acre reduction from the March PP report to the final report in January and the national average yield was 4bpa below trend.  We are a ways from making any sort of yield reductions ourselves, but losing 1.0-1.5 million acres would not be  a stretch.  There has been some suggestion the USDA will be forced to reduce their May WASDE yield estimate based solely on the planting pace being behind average.  As we’ve pointed out in this space in past weeks, the last five years have shown consecutive years of trend or above yields with everything from late planting to early planting.  We are not ready to reduce yield at this time.  Open interest changes yesterday included corn down 5,568 contracts, beans up 5,964, SRW up 7,051 and HRW up 5,825 contracts.

Data yesterday included weekly ethanol production which fell 24,000 bbls/day to 1.024 million bbls/day which is roughly 60,000bbls/day below the level needed to hit the USDA forecast.  This was the 15th week in a row which failed to hit the level needed to achieve the USDA forecast, and 17 out of the last 18 weeks.  Unfortunately, the USDA is probably going to have to reduce their ethanol demand for corn estimate by 25mbu on the May 10 WASDE.  Ethanol stocks fell 52,000 bbls to 22.695 million and remain near the lowest levels since November.  Stocks typically decline seasonally throughout the driving season and through August, so this should be a supportive feature moving forward.  We will receive March ethanol exports next week which should provide clues about that demand pull, but based on the stocks and production levels of the last several weeks, unlikely to be a bullish input.

Day 2 of the Wheat Quality Council tour wrapped up yesterday with another strong day of yield results.  The tour made 200 stops and found an average yield of 47.6bpa which is the highest since 2016 and the second highest on record.  The two-day yield is 47.2bpa which is also the highest since 2016 but slightly below both 2016 and 2012.  Tour participants continue to remark this crop is 4-6 weeks behind average development, so much can still happen, but solid prospects are present.  The western portions of Kansas could use at least one more finishing rain to put a bow on this crop.  HRW production ideas have continued to rise and are now in the 800-840mbu range.  Without a steady to higher export program, this is likely to many bushels, and will lead to a rising carryout in 2019/20.  FOB HRW offers remain the cheapest in the world by $19-26/MT through June while Russian offers are about $10/MT cheaper for July.  US-HRW is still offered at a discount to Argentine, Baltic and German offers through July.  Calendar spreads are certainly pricing in a large crop with September forward calendar spreads trading in excess of 100% of full financial carry.  Variable storage rates will likely increase July forward, and producers and elevators alike will once again be incentivized to store wheat rather than market it.  For this reason, we think HRW exports should decline in 2019/20 and stocks should remain burdensome for the balance of the marketing year.

Earlier this week, reports were circulating that the Trump Administration was readying another $12 billion in farm assistance payments should the trade war drag on longer than expected.  This would be very bad news in our opinion, as the futures market would likely try to extract the size of the assistance program via lower flat price.  In 2018, the November 2018 futures contract began declining on May 29, dropping from $10.60 per bushel to $8.26 per bushel by July 16.  Granted, much of that decline was due to solid crop conditions which were promoting ideas of a record crop.  Still, it is undeniable the trade war and zero demand from China helped push prices lower.  The $2.36 drop in the board was more than the $1.65 assistance payment, and we wonder if the market would simply try to offset another $1.00-1.60 payment should one be provided.  This would mean futures prices somewhere in the low “7’s,” and cash prices in the “6’s.”  It is hard to have a lot of conviction in such a forecast, but we just do not feel another farm assistance package would be what the market or U.S. farmers want to see.  A band-aid on top of a band-aid still doesn’t fix a bullet hole.

Bottom Line: Trade war and weather.  What spooks the record managed fund short position and what would make them add to their winning positions? Another aid package would be some of the worst news we could expect in our opinion.  That said, it does feel as though grain prices are near a bottom as bearish news doesn’t seem to be producing new lows.  Weather in the southern plains the next 2-3 weeks bears watching to see how much larger or smaller the HRW crop can get.

Good Luck Today.

Tregg Cronin

Market Analyst




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