6/27/2019 Morning Comments

Good Morning,

Moderate to heavy showers working across much of the Dakotas this morning where rain has fallen on and off the past several days.  After a fairly dry June, the Northern Plains are finally getting back in the wet cycle with most areas running above average over the last 7-days and 14-days.  The 30-day percent of normal precip map is right at average to a smidge below for the Dakotas and Minnesota.  Elsewhere across the Midwest, the 14-day percent of normal precip map has almost everyone above normal as would be expected.  With planting mostly complete, weather is much more about supporting vegetative growth than seeing dry weather for additional seeding.  7-day forecasted precip maps from the GFS show the Northern Plains continuing to receive rain during the next week while the Southern Plains are favorably dry for harvest.  The Midwest will see heavy rain in southern Minnesota and northern Iowa while the Eastern Corn Belt is mostly average on rainfall.  Extended maps from the CPC sees above normal precip for the entire Midwest while temps are split with normal/below temps in the Plains and west while normal/above temps dominate in the central and eastern corn belt.

Mostly higher markets overnight led by wheat with U.S. wheat markets leading the charge as Paris futures are up just 0.5-0.8%.  The strength in wheat despite what looks to be a wide-open week of harvest is a bit perplexing but also impressive.  Traders have remarked that momentum-driven funds were warming to wheat given the technical tilt it had been displaying.  This was exacerbated when Chicago wheat broke out to fresh seven-month highs, putting what was left of the managed fund wheat short underwater.  In addition, the StatsCan data from Wednesday was supportive as the early season dryness and smaller acreage has Canadian estimates coming down.  This also had implications for the SRW balance sheet which will be discussed below.  Otherwise, row crops are biding their time until Friday’s acreage and stocks report.  Based on the pre-report estimates, tomorrow could be a doozy, at least until the trade discards the data as old news and switches back to trading weather models.  Open interest changes yesterday corn down 25,440 contracts as the July continues to be liquidated ahead of FND.  Soybean open interest was down 8,760 contracts, meal down 9,156, oil up 599, SRW down 11,501 and HRW down 3,021.

StatsCan released updated acreage ideas yesterday with all-wheat area coming in at 24.595 million which was down from their 25.7 million April estimate.  Their updated figure is down from 24.734 million a year ago.  Spring wheat acreage was actually up 8.4% from a year ago at 18.772 million with the surprise drops coming in winter wheat (-25.0% y/y) and durum (-20.9%).  There was a fair amount of abandonment with winter wheat as acres seeded last fall totaled 1.346 million but acres remaining were just 929,000 acres.  Overall, the spring wheat portion of the acreage is the most important given that is the bulk of Canadian exports.  With the recent rainfall, we have a feeling CWRS production could still be sizable.  The durum balance sheet has the potential to get very tight, especially with the expected decline in acreage in the U.S. on tomorrow’s report.  In addition, the decline in winter wheat acres is due to a drop in SRW acres in Ontario.  This should mean increased imports from the U.S. at a time in which the SRW balance sheet is already expected to be the tightest in five years.  If memory serves, we won’t get an updated look at Canadian yield and actual production until August.

Weekly ethanol production declined 9,000bbls/day from last week to 1.072 million bbls but was the third week in a row above the needed level to meet the USDA forecast.  Four of the last six weeks have been above the level needed with production basically needing to run unchanged to down 1% through August to hit the USDA’s estimate.  The USDA’s current 5.450-billion-bushel target may have to be bumped higher slightly.  Ethanol stocks declined 46,000 bbls to 21.567 million, and are now the lowest in over a year.  Ethanol stocks have declined in 11 of the last 13 weeks, which is typical given the seasonality of ethanol stocks.  We remain cognizant of the fact ethanol, crude oil and RBOB gasoline prices remain well below the levels witnessed the last time corn ascended to these heights.  Ethanol/corn spreads are above the record lows witnessed at the end of 2018 and the beginning of 2019, but are still nothing to write home about.  With ethanol plants paying +20 to +40N in the Eastern Corn Belt, we have to wonder how long this will be sustainable?  It is our hope tomorrow’s stocks report sheds light on the situation so the market can better gauge whether the basis strength is the result of lower than expected stocks or whether farmer selling has dropped to such low levels due to the lack of planted acreage end users simply haven’t been able to pry it loose. 

Russian wheat crop estimates garnering a lot of attention the last couple days, mainly because of the spread that has developed between firms.  The USDA has remained steady around 78MMT.  However, Agritel and SovEcon have published numbers between 81.7-82.2MMT in the last couple of weeks.  Then, an unnamed tour went through much of the Russian wheat growing areas and returned a number around 73MMT.  A 8-10MMT spread in Russian wheat production at the end of June is incredible and probably means additional volatility is yet to come.  If we plug the 81.7MMT estimate into our balance sheet with USDA demand, carryout rises to 11.428MMT and would be the second largest since 2010/11.  If we plug the 73MMT estimate in,  carryout drops to 2.728MMT, the smallest since 2000/01.  Hence the expectation for volatility.  The most open interest in Black Sea wheat futures exists in the July, and that contract hasn’t done a whole lot as of late.  Settlements yesterday were at $198.50/MT which is still below the 6/3 highs of $202.50/MT.  These contracts along with Black Sea FOB offers should give us some clue as to the trend in Russian wheat production, but if feels as though the market was positioned for a crop size larger than the USDA which could be in jeopardy now.

Bottom Line: Export sales should help set the tone for the session heading into tomorrow’s reports.  Unfortunately, the only clarity we will get tomorrow will be on June 1 stocks as the acreage estimates will be dismissed quickly.  We would remind folks the acreage data tomorrow is based on a brand new survey issues in June, not a chance from the March Prospective Plantings report.  This survey and report are completely independent of findings in March which means getting another 3-4 million acre drop from the March number might be difficult, especially considering how the questions were phrased on this survey.  Producers were still asked about intentions as of June 1-10 which included a lot of acres which were still intended on being planted even if prospects were dim.  June 1 stocks should also clear up some confusion which arose around the March 1 stocks thanks to the government shutdown and the unusually large find back of bushels.  Do we “lose” those bushels on this report or does the market “find” even more bushels that were tucked away in producer bins until they were accurately accounted for at the commercial level?  Strap in.  It’s going to be a bumpy ride.

Good Luck Today.

Tregg Cronin

Market Analyst




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