5/10/2019 Morning Comments

Good Morning,

President Trump held true on his claim he would raise tariffs from 10% to 25% on $200 billion worth of Chinese goods at might night last night, and according to financial media outlets, he did just that.  The move comes as Chinese negotiators are in Washington D.C., so that should make for a particularly awkward morning-after breakfast.  It would seem unlikely a deal will be hastily thrown together before the Chinese delegation leaves town, but nothing would surprise us at this point.  Around 6:00 am CDT, President Trump released another series of tweets suggesting they were readying tariffs of 25% on the remining $325 billion of Chinese imports which would be deemed the “nuclear option.”  One of these tweets intimated the U.S. would take the tariffs and buy $15 billion worth of grain from U.S. farmers and ship it to countries who need humanitarian aid.  Lots of questions being raised in that scenario, but probably not worth trying to sort it out now.  The long and short of it is Trump seems to be downplaying odds for a deal, so don’t take anything off the table.

A light shower across North Dakota this morning, otherwise, the Midwest is clear.  There is a shower chance for the Dakotas and Minnesota Saturday which could bring totals of 0.10-0.25” with follow up chances in Iowa, Minnesota, Wisconsin, Illinois and Indiana on Monday/Tuesday.  In between the light shower chances, there should be mainly dry weather which should see farmers trying to plant as much and as fast as they can.  Extended maps from NOAA put above normal precip in place over the Plains and WCB in the 6-10 and 8-14.  Below normal precip will be the norm in the eastern corn belt, Mid-South and Delta which is badly needed.  Temps are expected to be mainly below normal in the Plains and WCB.  Make hay while the sun is shining.

Grains are mixed this morning after enjoying a higher overnight session across the board with soybeans giving up gains as we head toward the 7:00 hour.  Tariffs went into place at 12:01am last night, so that should drive trade chatter until the USDA releases their WASDE report at 11:00am.  It is difficult to know what to make of President Trump’s tweets about buying grain from the U.S. with tariff money but it will keep folks’ attention at least.  The washout we suffered yesterday was impressive as front-month soybeans traded down to the lowest spot price since December of 2008.  November 2019 soybeans hit the lowest level for a new crop contract in early May since 2007.  November would have to shave another 50-60c to take out the 2007 levels, so let’s hope it doesn’t feel like taking out all the records this year.  Obviously the tariffs and the trade talks are driving price action, but it also feels like the soybean market is coming to grips with the fact planting delays will mean more soybeans across the Midwest.  We will not see USDA adjust planted acres on today’s report, and they likely won’t adjust trendline yields either, but that doesn’t mean the trade isn’t making adjustments to those numbers as we speak.  In addition, demand updates from the USDA should be negative as we discuss below.  Open interest changes yesterday saw corn up 1,319 contracts, soybeans were up 427 contracts, meal u 6,960 contracts, oil up 14,462 contracts, SRW up 7,045 and HRW up 786 contracts.

The USDA Attaché to China released his updated estimates of Chinese soybean balance sheets yesterday, and they were certainly negative.  He sees 2018/19 soybean imports at 84MMT and 2019/20 soybean imports at 83MMT which compare with 94.1MMT in 2017/18.  The USDA hasn’t issued a 2019/20 Chinese import estimate yet, but they will later today.  However, their last estimate of 2018/19 imports was 88MMT, so we could see as much as 4MMT axed off on today’s report.  The Attaché sees 2019/20 crush demand dropping to 82.5MMT from 88MMT last year and 90.0MMT in 2017/18.  African Swine Fever is obviously taking the brunt of the blame, but the switch in trade flows has also contributed mightily.  Incredible to think about the upward trajectory of Chinese soybean demand just a few years ago, and what a tailspin it is now.  Their demand should recover, but not until ASF has been stifled and herds can be rebuilt which will be a process over several years.

As if we needed another negative input, export sales yesterday were atrocious across the board.  Old crop wheat export sales were light, as expected, with the marketing year winding down.  3.3mbu of wheat was sold, bringing year-to-date commitments to 938.9mbu which are up 9% from a year ago.  New crop wheat export sales totaled 15.2mbu which brings total 2019/20 commitments to 94.0mbu vs. 70.8mbu a year ago. Corn sales were light at 11.3mbu vs. the 22.6mbu needed weekly to hit the USDA forecast.  Total commitments of 1.824bbu are down 10% from a year ago with the USDA last estimating exports down 5.6%.  We think USDA holds their estimate on today’s WASDE, but it is certainly on notice given rising crop ideas in South America.  Soybean sales were dismal with net cancellations of 5.5mbu vs. the 9.2mbu needed weekly.  Total commitments are down 18% from a year ago at 1.653bbu and we fully expect the USDA to reduce their marketing year forecast of 1.875bbu.  To be honest, a cut of 100-125mbu would not be out of line, especially with odds now lower China actually executes their previous commitments on the books.

The focus on today’s WASDE report will be corn and soybean yields as today’s estimates will provide the first forecast from the USDA using something other than just a trendline yield placeholder.  It is our understanding the USDA will employ the Wescott-Jewison weather-based yield model on today’s report, which should imply a slight yield reduction based on planting pace.  Some of said a reduction is all but guaranteed, but we are not willing to go that far on corn.  We will have very little conviction in a yield number on corn or soybeans in either direction considering a majority of the seed needed to raise these crops are still in the bag.  In theory, their potential is still at a maximum even though we all know a shorter growing season usually does not beget record crops unless the balance of the summer turns out perfect.  USDA will not issue and update to acreage which we feel is the only thing one can have some conviction about at this juncture.  Soybean acres are on the rise, spring wheat acres are on the decline and all things equal, corn has probably lost some acres as well.  We will also be looking forward to the HRW and SRW estimates.  The average trade guess for the HRW estimate is 767mbu which we feel looks low based on conditions and anecdotal reports from the country.  Something closer to 800mbu is probably more appropriate.  SRW production on the other hand at 277mbu looks high and could be closer to 250-260mbu vs. 286mbu a year ago due to higher abandonment.  South American crops should also get larger and deserve their fair share of attention.

Bottom Line: Wheat and corn have joined soybeans in slipping into negative territory as I get ready to hit send.  It is difficult for us to see how USDA can give bulls anything to sink their teeth into on the WASDE report later this morning.  They will not make the kind of supply cuts necessary to turn balance sheets bullish at this juncture.  Conversely, every demand input should be negative today, further inflating old crop and new crop carryover estimates.  South American supply estimates will be large and Chinese demand should drop.  Happy Days are here at last.

Good Luck Today.

Tregg Cronin

Market Analyst




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