5/20/2019 Morning Comments

Good Morning,

Tensions between the U.S. and Iran are probably the leading headlines this morning, but obviously a rift there has less impact on the grain and oilseed markets than does the trade row with China.  Commentary we fielded this weekend was not positive in our opinion and would seem to suggest a deal is nowhere close.  A spokesman for the Chinese Foreign Ministry said “because of certain things the U.S. side has done during the previous China-U.S. trade consultations, we believe if there is meaning for these talks, there must be a show of sincerity.”  In addition, other comments suggested China would not give in to the major trade concessions the U.S. is asking for, including reforming its judicial system.  The bottom line is that until China is willing to allow outside investment, and juris prudence toward Chinese companies stealing American intellectual property, these talks are unlikely to produce anything of meaning.

Weather is the word with rain in the southern and central plains this morning with forecasts suggesting several rounds of heavy rains this week.  7-day rainfall totals showed much of the corn belt and Plains receiving 1.00-2.00” amount.  Morning GFS models runs are putting 1.50-5.00” amounts over N-TX/OK/KS/MO/NE/IA/N-IL/WI/S-MN/SD/ND/MT.  Probably would have been easier to write “everyone is going to get a lot of rain” but I digress.  There will be little to no fieldwork done this week unless some is squeaked out today before tomorrow’s rain.  Temperatures will be below normal this entire week, slowing dry-down and keeping excess moisture above ground.  Extended maps do not show much change with temps mainly below normal and precip above normal through June 2nd.  Week 3 and 4 updates on Friday showed the same trends persisting.

Sharply higher markets overnight with Sunday night gaps present on many contracts.  Strength this morning is being led by wheat with KC wheat up 2-3% as concerns over lodging and disease running rampant are a front-burner issue.  Much of the HRW and SRW crop is heading and/or flowering at the moment, putting a lot of crop at risk for fusarium head blight(FHB)  which is the disease that causes scab/vomotoxin.  The map below shows the risk of FHB across the United States with nearly every state showing at least some high risk.  There is obviously more concern about losing bushels due to flooding/ponding/lodging at the moment than issues with quality related to FHB as a major quality outbreak would be more bearish as exports could suffer.  Corn is also showing strength as ideas of prevent plant and acres switching to soybeans are growing.  Ideas being thrown around the trade range from 2-6 million acres of corn being lost to PP or soybeans, but time will tell.  Soybeans are being supported by grains and record fund short as soybeans in their own right are not bullish given current S&D factors as well as the potential to pick up acres from wheat and corn.  Open interest changes on Friday’s rally included corn up 26,421 contracts, soybeans up 882 contracts, meal up 821, oil up 916, SRW down 9,762 contracts and HRW down 787.

Balance sheet crunching is how many spent their weekends, especially with regard to corn.  In looking at our current balance sheet, we are using 89.8 million acres of corn vs. USDA at 92.80 million with a downside bias.  We are still using a trend line yield of 176.0bpa, but this is also a moving target given Illinois is likely to see half their corn crop planted more than a month late.  When the second largest corn producing state in the nation has corn planted in June, it won’t bode well for setting new records.  Total supply therefore would be seen at 16.671bbu vs. 17.156 billion from the USDA.  If USDA demand ideas were left unchanged, we would see a 2019/20 carryout of 1.996 billion bushels which is psychologically important being under 2.00 billion bushels but still more than comfortable.  However, as many of our friends have pointed out, USDA has a very strong track record of reducing demand by a factor of 0.871:1 to supply.  In other words, if total supplies drop by one million bushels, USDA would likely lower demand by 871,000 bushels.  With that in mind, If supply drops 485 million bushels, demand would be expected to be cut by 422 million bushels, reducing carryout by 62 million bushels.  In that scenario, carryout would then be estimated at 2.423 billion bushels.  That figure is outright bearish.  Now, will USDA make that reduction all in one month?  Difficult to say but the point is cuts to supply cannot be made in a vacuum, and with ARG/BRAZ/UKR supplies at record levels, cutting exports will not be a problem.

Friday’s Commitments of Traders data gave us plenty to chew on, especially in soybeans as funds pushed their net short to a new record.  In the week ended May 14, funds sold 9,054 contracts to leave them net short -177,035 contracts.  This has obviously been trimmed since the report end date, but is still a supportive influence nonetheless.  Unfortunately, commercials did almost nothing last week with both the gross short and gross long changing by only a couple thousand and a couple hundred contracts, respectively.  It would have been much more encouraging to see the gross commercial long position surge with prices plumbing new lows but it would appear commercials are keeping powder dry.  In corn, funds covered a few more contracts, buying 9,424 contracts to leave them net short -291,742 contracts.  That is still a huge net short position although it has likely been pared greatly.  For bulls, they should take solace in the fact many of the short positions put on by managed funds since February are now underwater.  This could produce additional short covering this week.  A little bit of short-covering in Chicago wheat as well with funds buying 4,813 contracts but their net short is still -110,098 contracts.

IKAR raised their estimate of the Russian wheat crop to 81MMT which compares with USDA’s 77MMT and 71.7MMT a year ago.  This would be the second largest wheat crop on record and ensure Russian exports will be dominant in 2019/20.  FOB offers tell the tale in the global wheat market with US-HRW still holding the cheapest offer for 11.0% protein wheat in June, but in July, Russia is cheapest at $185/MT FOB vs. US-HRW at $202/MT.  By August, German and Baltic wheat are also trading a $8-12/MT discount to US-HRW.  The Q1 wheat export book for the U.S. should still be solid as it takes some time transition away from the U.S. and back to the FSU/EU.  However, with the U.S. winter wheat crop lagging average maturity by 2-3 weeks, this could limit the potential Q1 demand.  In addition, while Q1 demand might be stronger than a year ago, Q2-Q4 has the potential to be much lower than a year ago, especially if we end up having a low pro/high vom crop.  Storage looks as though it will be the best returns in terms of wheat demand in 2019/20.

Bottom Line:  Higher markets and short funds means additional weekly gains should be made this week.  Farmers will be able to get caught up on old crop sales in the coming days, but it seems like few have intentions of really laying into the new crop portion of the curve until more is known about planting and emergence.  As usually happens, price targets farmers set a couple weeks ago, and could now be hit, are being raised or pulled altogether as the horns come out.  Supplies have the potential to tighten this year in the U.S. if acreage really drops, but we’ve got record major exporter corn stocks to soften the blow.  Carryout needs to be well below 2.00 billion bushels in 2019/20 to justify a run above $4.15-4.20.  Not sure we can say we are there yet.

Good Luck Today.

Tregg Cronin

Market Analyst




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