6/13/2019 Morning Comments

Good Morning,

A few scattered showers across the Dakotas and a sizable system in Michigan this morning, otherwise the Midwest is mainly quiet.  Scattered showers across the Midwest until the weekend when the next big round of rain is set to arrive.  The main band will stretch from Oklahoma to Ohio with 0.50-2.00” totals quite common.  By mid-week next week, another round of rain rolls through the entire corn belt with moisture seen from Alberta to the Eastern Corn Belt.  Almost all of the Midwest will see measurable precip.  There will be mixed feelings about this as the crops in and out of the ground need rain while producers who are still struggling to seed soybeans will not appreciation the extra moisture.  Extended maps keep below normal temps and above normal precip in place through June 26 which will keep crop growth behind normal.

Firmer markets across the board this morning led by the corn market.  While the strength in futures is nothing new, the strength in corn spreads the last 24-48 hours has been an impressive feature.  The CN/CU spread rallied to -6.00c overnight, the highest trade since the end of March while the CN/CZ shot to -14.25c which is the highest trade since May 28.  The spread strength is certainly in-keeping with basis strength in the Central and Eastern Corn Belt as premier ethanol plants are paying as much as +45N in Indiana while the flagship plant in Decatur is said to be paying +14N.  The strength in spreads and basis is interesting considering the lack of new crop getting planted will obviously manifest itself on the back end of the curve, not the front end.  In addition, according to the March 1 stocks data, which is admittedly dated now, there should be no physical corn tightness in 2018/19, although we will be getting an update to that in a couple weeks’ time.  The physical corn tightness is most likely tied to producers who have little or no crop planted clinging tightly to remaining old crop supplies because basis levels in the Western Corn Belt can still be found around -30 to -40N.  Definitely still a distinction between supply and available supply.  Soybeans joining in on the party finally with a solid rally yesterday and overnight strength.  Concerns over final soybean acreage are growing, although still a long way from being dire.  Open interest changes yesterday included corn up 43,726 contracts, soybeans up 7,298 contracts, meal up 3,727, oil down 2,293 contracts, SRW down 3,476 and HRW down 1,422.  Corn open interest is now within 172,283 contracts of the all-time record set back in June 2018.

The soybean strength yesterday had many asking “what’s the deal with soybeans.”  The most logical answer is concern about the wet weather rolling into the Corn Belt the next week and change and an extended forecast which is cool and wet.  As of Monday, there were 30 million acres of soybeans left to plant, with around 3-7 million usually double crop after winter wheat.  Some analysts are beginning to slash their final soybean planted acre numbers, although we don’t have a great deal of confidence one way or the other.  Before this week, we were still of the opinion soybeans would gain acres from their March Prospective Planting estimate.  Now, we are probably closer to the actual March number to maybe a couple million below.  To get a good look at the soybean balance sheet, we axed 4 million acres from the March estimate, putting planted acreage at 80.617 million.  We left yields alone at 49.5bpa as there is no real reason to adjust soybean yields at this juncture in our opinion.  Total supplies with those ideas would be 5.044 billion vs. 5.000 billion a year ago.  For demand, we are using USDA’s estimates, although we have a hard time subscribing to their 1.950 billion bushel export forecast.  With African Swine Fever still running rampant, and a trade war which has no signs of being over, we aren’t sure we can count on the third largest export program in history with so much South American supply available.  Regardless, carryout would be seen at 849 million bushels which would be the second largest on record by a gigantic margin.  Stocks/use would be 20.26%, behind 2018/19’s 27.2%.  To bring the stocks/use ratio down to the second largest of the last 20-years at 18.7%, we would need to lose a total of 6 million acres from the March PP report.  We could also get to an 18.0% stocks/use ratio if yield fell 1bpa to 48.5.  Lots of balls in the air, but the soybean fundamentals are nowhere near corn’s, and this should be kept in mind when bulls attempt to paint a bullish S&D picture.

The focus in the corn market has been all about supply as of late but we received a welcome bump from demand on the ethanol front.  Weekly ethanol production surged to the third highest on record last week and was the highest week since August 2018.  Average weekly production totaled 1.096 million barrels per day, up 52,000 on the week.  Production is slowly, but surely, starting to run above year ago levels after running well below year ago levels for most of the winter and spring.  If current growth rates over last year can be maintained, it looks solid we can achieve the USDA’s 5.450 billion bushel target, and possibly even exceed it slightly depending on late summer run rates.  Ethanol stocks fell 751,000 barrels last week to 21.802 million, the lowest stocks figure since late last summer.  Ethanol stocks for this week are actually below each of the last two years after running at record levels from September through February.  All of this said, ethanol margins have improved, but are still not stellar.  In addition, crude oil prices maintaining weakness, along with gasoline prices trending lower will not incentivize discretionary blending or consumers to use high ethanol blends.

Bottom Line: The path of least resistance is still higher, especially in the commodities in which funds are still short.  Corn is driving the bus, but will pull soybeans and wheat along for the ride.  The story is not the same in beans and wheat, but their balance sheets can turn more constructive if the former loses acres and the latter sees demand pick up in the way of a major feed program.  Still feels like we are in the first few innings of this game, yet producers seem intent on waiting for the highs before entertaining the idea of marketing.

Good Luck Today.

Tregg Cronin

Market Analyst




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