6/12/2019 Morning Comments

Good Morning,

A band of showers stretching from N-TX to Wisconsin is present on radar this morning, otherwise the Plains are mostly quiet.  Forecasts come down to those who have crops planted vs. those who don’t as well as those with crops ready to harvest vs. those who don’t.  If your crops are in the ground, or out of the ground as it were, the forecast looks nearly ideal with below normal temps and mostly above normal precip for the majority of Midwest growing areas.  For those who do not have crops in the ground, an open window for seeding does not look promising.  The central and eastern corn belt will see several rounds of rain in the next week, especially early next week with 1.00-3.00” totals expected in OK/E-KS/MO/AR/IL/IN/OH/MI with lesser totals in NE/IA/MN/E-SD/ND.  In the Plains, producers with wheat ready to harvest in OK/TX/KS will see repeated rainfall chances which will delay harvest further and possibly compromise quality.  Further north, NE/SD/ND where HRW is not ready for harvest or HRS is still developing, weather looks solid.  Extended maps keep above normal pecip and below normal temps in place through the 15-day outlook.  This is not ideal for helping catch up late crops, but stressful weather is certainly not present into the end of June.

Mixed markets this morning with row crops softer while wheat contracts have seen both sides and are pressing green as we head into the 7:00 hour.  Yesterday’s WASDE had something for everyone with larger than expected cuts to yield and acres for corn, but precious little for bulls in either soybeans or wheat.  The cuts to yield and acres on corn were not unprecedented, although the severity of the cuts they made certainly were.  The market reacted as expected, although we have still not taken out the 4.54 high from 5/29.  It feels as though the corn market will need more confirmation on acres being lower or some hard signs the national average yield is slipping below the USDA’s 166bpa estimate.  Soybeans are now faced with the prospect of back-to-back billion-bushel-carryouts for the first time in history.  While some are already arguing the soybean yield should have been dropped on the June WASDE, that is not an argument that needs to happen in mid-June.  Similarly, the wheat market is facing another 1.00-billion-bushel carryout with the only route for a sub-1.00-billion-bushel carryout being an extraordinarily large feed program.  With the wet weather forecast for the southern plains, that is something which could certainly happen.  Open interest changes on report day saw corn open interest up 4,991 contracts, soybeans down 1,605, meal down 2,482, oil down 15,080, SRW up 2,795 and HRW down 2,368 contracts.

The corn balance sheet saw old crop exports reduced 100 million bushels, which many thought possible this month, but certainly not a guarantee.  2018/19 ending stocks were therefore projected at 2.195 billion bushels.  The new crop balance sheet took most of the focus with acres reduced 3.0 million to 89.8 million while yield was cut 10bpa to 166bpa.  Most weather-based yield models had the national average yield between 166-170bpa, so the market knew this was a possibility although few thought it probable.  Production was therefore reduced 1.350 billion bushels while imports were raised 15 million to cut toal supplies by 1.235 billion when larger beginning stocks were added in.  The USDA had to make some demand cuts, although we posit they did not make enough.  Feed/residual was reduced 300 million bushels, while exports were reduced 125 million.  We think exports could have been cut even further considering the increases which were made to Brazilian and Argentine production and exports.  Combined use was therefore down 425 million bushels which netted ending stocks down 810 million at 1.675 billion.  By the time we get well into the 2019/20 balance sheet, the USDA has a strong track record of reducing demand 0.868 bushels for every one bushel of supply.  In other words, if the USDA cut total supplies by 1.235 billion, they will try to cut demand by 1.071 billion, which would have left carryout at 2.321 billion.  However, they will not make demand cuts like that this early in the marketing year even though supply cuts they have more confidence in.  The point here is to not get complacent thinking ending stocks will sit at multi-year lows the entire year.  Demand will be rationed, and usually much more quickly than the market thinks.

Sticking with corn today, the USDA also increased the 2018/19 Brazilian corn crop estimate to a new record 101MMT from 100MMT last month.  This is up sharply from last year’s drought-reduced crop of 82MMT.  The Argentine crop was held steady at 49MMT, but exports for both countries were increased to 34MMT and compare with Argy at 22.5MMT last year and Brazil and 25.1MMT.  Total supplies of Argentine/Brazilian/Ukrainian corn for the 2018/19 marketing year now stand at 197.993MMT vs. 159.915MMT last year and the previous record of 178.061MMT.  This is a combined 38.078MMT of additional supply which was not available last year, or 1.496 billion bushels.  Granted, much of that Ukrainian supply has already been consumed, but early season prospects for next year are already solid.  Even if one wants to compare to the previous record, the three country combined supply is up 783 million bushels.  Yet, the USDA cut exports between the 2018/19 and 2019/20 marketing year just 225 million bushels.  Our point here is there is much, much more room to cut exports from the U.S. balance sheet if the market deems it necessary.  We could go down the same line of thinking when it comes to feed demand as the U.S. wheat balance sheet is staring at its fourth consecutive 1.00-billion-bushel carryout.

We will spend some time on the wheat and soybean balance sheets the rest of the week, but it was clear the focus yesterday was about corn.  The big focus in wheat the next several weeks will be additional delays to harvest and potential quality issues from excessive rains on mature wheat.  It is quite likely we will be looking at some of the slowest harvest paces for various HRW states on record, and with a front-loaded Q1 demand book, this could cause issues for exporters who are short boats.  In addition, the market will remain leery about developing dryness across the U.S. Northern Plains and Canadian Prairies.  Most of Saskatchewan is running less than 40% of normal precip over the last 30-days.

Bottom Line: The market got its desired cuts to the corn balance sheet yesterday, and now the onus is on bulls as to what they should do with it.  If December corn fails to take out 4.54, it could be a sign acres have been more or less priced in while the focus has shifted to yield.  We have lots of ways to ration corn demand from bushels outside the U.S. to a potentially large wheat feeding program.  The market isn’t required to go to any futures level, and producers who get complacent with their marketing waiting for a number they feel is deserved could be left holding the bag. 

Good Luck Today.

Tregg Cronin

Market Analyst




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