5/22/2019 Morning Comments

Good Morning,

Plenty of rain activity around the Midwest this morning with snow even falling in the Black Hills of South Dakota.  24-hour rain totals are finally coming in with 0.50-1.50” amounts common in central/west Nebraska and South Dakota while even heavier totals fell across Kansas, Oklahoma and Missouri.  Areas on the OK/KS border saw 3.00-6.00” in the last 24-hours.  Shower activity will continue on-and-off the next several days in the Plains and Western Corn Belt.  Even after yesterday’s totals, morning GFS models are suggesting another 1.00-4.00” for OK/KS/NE/SD/MN/WI/IA/MO/IL/WI.  There is some discussion about the pattern shifting a bit drier past the 7-day, but no real warmup seen through June 4.

A mixed bag in Ag markets this morning with grains weaker while soybeans try to cling to small gains.  Yesterday’s session was all about the rumors surrounding the next round of Market Facilitation Payments (MFP).  Late in the session yesterday, a Bloomberg reporter said he was hearing from sources that the Trump Administration was readying another aid package which would pay $2 per bushel on soybeans ($1.65 last year), 4c on corn (1c last year) and 63c on wheat (14c last year).  There was no mention of what those payments would be based on as planting is still occurring and 2018 production was not a record for every farmer by a long shot.  The news helped support corn and wheat slightly but soybeans sold off sharply with near 10c losses after trading mostly higher throughout the session.  The bottom line for a $2 MFP payment on soybeans would be disastrous in our opinion.  The market is clearly signaling it does not want soybeans planted, and if the Administration incentivizes production anyway, the oversupply situation could reach incredible levels.  When combined with the African Swine Fever situation in China, it would appear likely the global soybean balance sheet would reach a level of oversupply not seen since the 1980’s.  Coincidentally, the 1980’s were the last time the government paid farmers to produce and store grain the market was signaling it did not want.  Fun times ahead.  Open interest changes yesterday included corn up 18,371 contracts, soybeans up 9,986, SRW down 11,690 and HRW down 8,168.

As Twitter pointed out yesterday, analysts are busy running thousands of different acreage scenarios to illustrate absolutely every outcome possible.  Brokers are in-turn devising option strategies to combat any and all market moves, including triple long corn re-ownership with futures running to $5 per bushel. We will leave those to smarter folks than us.  What we spent time on yesterday was looking at the major exporter balance sheet, specifically Argentina/Brazil/Ukraine.  If the United States is going to lose 3-9 million acres of corn as is being thrown around in the trade, can this be made up anywhere else?  We made a combined balance sheet for ARG/BRAZ/UKR, and for the 2018/19 marketing year, total supplies are being projected at 196.9MMT vs. 159.9MMT a year ago.  The combined supplies would also be sharply higher than the previous three-country record of 178.0MMT in 2016/17.  The 37MMT of additional corn supply vs. a year ago would be the equivalent of 1.454 billion bushels.  To help put this “extra” supply in perspective, if we divide a national trend line yield of 176bpa into that 1.4 billion bushels, we get 8.2 million acres of corn.  Several prominent analysts have been touting 6-9 million acres of prevent plant which coincidentally is nearly the exact amount of extra corn sitting in South America and the Ukraine.  This is not to say higher prices are not justified, simply that it would appear bushels exist to help compensate for any actual losses in the United States.  If the U.S. ends up sharply below trend, then the equation obviously changes but yield is not something we can have confidence in forecasting on this date.

The heavy rains impacting the HRW and SRW belts continue to get attention with FHB and vomotoxin concerns ramping up.  We always track deliverable stocks each week, but it would seem those supplies are becoming even more important because of the disease concerns.  Last week, SRW deliverable stocks fell another 944,000 bushels to 36.943 million bushels which are down 23.2 million bushels from a year ago.  SRW stocks are at multi-year lows heading into what looks to be the smallest crop in several years and it could also have quality issues.  This will be a situation to monitor closely.  HRW deliverable stocks dropped 90.394mbu vs. 92.250mbu last week and 102.721mbu a year ago.  These are still historically large deliverable supplies, so if the HRW crop is also hit with quality issues, the bright side is we should have plenty of blending stock as the 2018 crop was of superior quality.  The other discussion being had about wheat is whether the 63c MFP payment, if it happens, would encourage farmers to sell their production quicker or hold on to it longer?  With carries likely to widen in the 2019/20 marketing year, and if armed with a payment amounting to almost 15% of the current spot price, producers could be content to sit tight until the marketing year is a little bit older.

We will get weekly ethanol production later this morning, although grind rates are not yet factoring in the corn rally.  Estimated gross ethanol margins have been declining rapidly with the rally corn price, even as ethanol attempts to keep pace.  According to RJ ‘O Brien, estimated gross ethanol margins are seen at $0.43 per gallon vs. $0.49 last week and $0.69 last year.  According to their graphs, these would be the lowest ethanol margins since at least January 2014, and are likely the lowest margins since the mid-2000’s.  This sort of profitability cannot sustain the grind rates necessary to achieve current USDA forecasts.  This is another factor to consider when analysts want to talk about nothing but prevent plant and lower yield ideas.  Exports are likely coming down due to competition from ARG/BRAZ/UKR while ethanol margins are some of the worst in 10-15 years.  That leaves livestock and feed demand which has consistently underperformed estimates the last several years despite rising livestock populations.  Do not get quick to dismiss the demand portion of the equation.

Bottom Line: Would appear traders want more information about any potential MFP payments as well as updated forecasts through the end of the month before pressing any higher.  Would imagine funds are still short some level of corn, beans and wheat but they are obviously much smaller than a week ago.  The jury is out on whether funds have the appetite to push their positions to net long.  As we’ve seen dozens of times the last several years, producers would do well not to turn on the blinders when it comes to marketing for this year and next.

Good Luck Today.

Tregg Cronin

Market Analyst




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