5/6/2019 Morning Comments

Good Morning,

Just when we thought it looked as though the trade war was entering the ninth inning and a deal was close at hand, President Trump fired another salvo Sunday night with tweets suggesting he was ready to raise tariffs on ALL Chinese goods to 25%.  Markets reacted as expected with global equities getting pounded and the Shanghai Composite suffering its worst single day loss in over three years.  To be clear, the Chinese stock market is still up 17% YTD, but it feels as though the goal posts have moved once again.  From what financial media have been able to piece together, the U.S. trade negotiators returned from Beijing with reports China had reneged on some of their commitments to address technology transfer.  The representatives then told President Trump to ready additional tariffs as Chinese negotiators are set to still come to the U.S. this week, although it sounds like their trip has been reduced from a few days to one.  Why they would still plan on coming if a deal isn’t close at hand remains to be seen but the fact they are still coming is a positive.  This will not be over quickly.  We will not enjoy this.

Were it not for the trade war focus, the weather would have to be called supportive in the United States.  Morning GFS models show moderate to heavy rains across the entire Midwest as well as the Delta.  Totals this morning are putting 1.00-4.00” totals across eastern Kansas, Missouri, Iowa, eastern Nebraska, Illinois, Wisconsin and parts of South Dakota and Minnesota.  In addition, even heavier totals will fall in eastern Texas, Louisiana, Mississippi, Arkansas, Alabama and Tennessee.  It would not appear much of any fieldwork will occur in the next 5-days, especially as temperatures remain below normal the next 7-10 days.  Weekend maps from the CPC show below normal temps persisting the next 14-days while precip is mainly normal/above.  Would not appear the month of May will turn conducive to planting.

Sharply lower prices overnight with most contracts barely off the lows set in the overnight session with the exception of corn which has bounced 6-7c from the open.  For weeks, all we have heard about from the broker community is how short the funds were and how hard markets would rally once they realized they were wrong and needed to cover.  As has been the case for all of 2019, funds’ positioning was spot on and now the threat of a “no deal” with China gives even more reason for them to add to winning positions.  It is true, weather for planting is awful, and we will no doubt end up seeing a larger percentage of prevent plant than we have for several years.  However, most of our major Ag commodities can afford to lose acres and still maintain adequate to burdensome levels of ending stocks.  As we feared when rumors of additional farm gate support were floated a week or so ago, the soybean market seems ready and willing to deduct any financial support the U.S. government plans to give to the farmer to make it through these trying times.  On Friday, open interest continued to decline as we clear out May contracts.  Corn fell 6,955 contracts, soybeans up 9,614 contracts, meal up 972, SRW down 2,718 contracts, HRW up 693.

Had the weekend to chew on the COT report with funds posting a new record short position in soybeans.  Funds sold 15,247 contracts of soybeans to leave them net short -161,453 contracts which is 10% larger than the previous record short.  Commercials were busy liquidating contracts ahead of FND, so it is difficult to look at either the gross long or short and glean much from that category.  As we’ve been doing the last several weeks, we tabulated the average short position held by managed funds to see where their “pain” threshold is.  Going back to February 5 when that position really started to ramp up, and using COT day settlements for the front-month contract, we figure the average fund short is $8.99 basis July futures.  Using spot prices this morning, their average position is 76c in the money, a huge margin against any random updrafts.  Difficult to see how we “squeeze” them enough to really induce short covering, especially as poor weather forecasts likely mean more soybeans.  Funds bought a little corn, purchasing a net 16,769 contracts to put them net short -317,493 contracts.  Funds also added to shorts in both KC wheat and Chicago, and are now record net short in Minneapolis wheat.  Collectively, funds are net short -729,935 contracts of corn, soybeans, wheat, KC wheat, Minneapolis wheat, meal and oil.  This is a new record by a gigantic margin and accurately reflects sentiment in our space.

Wheat Quality Council hard red winter wheat came and went last week with solid crop prospects expected.  Lots of rumblings about low protein this year with the continued moisture moving through the southern plains.  The last time we saw low protein was in 2016 and 2017, which combined with high yields, resulted in basis to the farmer across Kansas well under $1.00 per bushel.  Cash prices saw 2-handles in many areas with some worried the same could happen this year if protein is at a premium.  Still high basis levels being seen on the KC spot floor with 12’s called +127/137N, so no imminent threat but it wouldn’t be the worst idea to be taking a look at basis levels further out the curve for producers with ample storage.  Carries would be expected to widen, and incentivize storage which need to be sold as the board tries to extract the carry through lower flat price.  If we learned anything during the 2016 and 2017 doldrums, it is carries which are not sold, are not earned.  The market only “pays you to store” is the carry is locked in.  We are calling HRW carryout for 2019/20 518mbu vs. 490mbu last year and a 5-yr average of 480mbu with demand up around 20mbu from a year ago.

Bottom Line: Probably not worth discussing anything else until we know more about the possible ramifications from the trade war.  There are 6-handles on cash prices for old crop soybeans in the Northern Plains once again this morning.  If this week continues the way it started, new crop values will also have a 6-handle by Friday.  Farm aid will become inevitable unless the narrative changes and another year of trying to replace Chinese demand will be upon us.  Crop progress will be a focus after the close but not enough to tun the negative tide.

Good Luck Today.

Tregg Cronin

Market Analyst

Tregg.Cronin@halocommodities.com

www.halocommodities.com

@5thWave_tcronin

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