7/1/2019 Morning Comments

Good Morning,

Rain across the Upper-Midwest this morning as well as Illinois in what looks to be a wet week for much of the corn belt.  After a hot weekend, temperatures will generally cool across much of the Midwest into the 70’s and 80’s for slightly below normal temps by the 4th of July.  While the crops are behind, it is difficult to argue with current conditions from a stress standpoint.  That said, until corn reaches the pollination phase, generally hot weather would be welcome to push the crop through the vegetative stage.  Updated GFS models put heavy rainfall across the Dakotas, southern Minnesota, Iowa and Wisconsin in the coming week while extended maps keep things wet and cool.  From a production standpoint, the Crop Prophet weather suite says the Euro model is showing corn and soybean production areas as 2.4-2.5 degrees above normal.  The GFS is 1.8-1.9 degrees above normal while the Northern Plains are mainly cooler than average.  The GFS sees 2.8” above normal over the next 15-days for corn and soybean production areas while the Euro is 2.1-2.2” above normal.

Weaker markets as we get ready to kick off the day session in this holiday-shortened week which is a bit surprising considering the stronger open last evening.  Soybeans opened as much as 10-12c higher but are barely above unchanged while corn prices have given up 3-5c gains to trade 1-2 lower.  It was the general belief the market would shake off Friday’s unusual USDA report and instead trade more on the anecdotal and physical evidence present across the corn belt.  That said, analysts are also starting to pose additional questions about what the scope of the acreage cut can be and when we might actually know?  Unfortunately, even with an acreage resurvey which will be available on the August WASDE, we will have to trade the current numbers for the next 45-days.  Even then, a resurvey still might not do a great job of picking up actual planted acreage, nor will it give us a sense of acres elected for prevent plant.  The Farm Service Agency will not begin releasing certification data until the end of August which will be our first glimpse at prevent plant.  This data set is parceled out from August to December, becoming more complete which each passing month.  With the late planting season, odds are high the data set will take even longer than normal to become “complete.”  In the meantime, markets will have to do the job they always have to do at this time of year which is predict yield.  Unfortunately, key pollination weather will not occur until the end of July or even into August, so it could be another couple weeks before model-to-model changes really start driving prices.  Open interest changes on Friday included corn up 15,342 contracts, soybeans down 588, meal down 12,082 contracts, oil down 2,503, SRW up 3,674 and HRW up 4,590 contracts.

A few quick notes on the acreage numbers received Friday.  Soybean acreage at 80.04 million was a major shock, the largest bullish surprise for this report on record.  We are currently using a 47.5bpa national average yield which would be the lowest since 2014/15 given the abbreviated growing season.  The crop produced would be 3.766 billion bushels which would be the smallest since 2013/14.  However, because of the gigantic carry-in, total supplies of 4.857bbu would be the second largest on record behind only last year’s 5.000bbu.  If you use USDA’s export forecasts, 2019/20 carryout falls to 662mbu from 1.071bbu this year and would be the second largest on record.  However, we still think 2018/19 exports could prove smaller and definitely feel 2019/20 exports have downside from 1.950bbu until ASF gets better or the trade war is resolved.  If we cut exports to 1.800bbu for 2019/20 which would still be 100mbu larger than the current year, carryout rises to 812mbu which could hardly be described as supportive.  As always, this balance sheet will come down to yield which there is no strong evidence on as of July 1.

In corn, few are adopting USDA’s 91.7-million-acre whole-hog, but for illustration purposes, we will plug it in.  With a 166 yield, would give us a crop of 13.974bbu which would be the smallest since 2015/16.  Leaving demand unchanged, carryout falls to 2.019bbu vs. 2.195bbu in 2018/19.  If we cut acres back by 6 million, which we feel is pretty common for estimates, production falls to 13.212bbu, and carryout slips to 1.257bbu which the market is not reflecting today.  However, it is very easy for us to dice up the demand side of the balance sheet by way of lower feed/residual demand as well as paring ethanol demand back.  Exports at 1.800bbu vs. 2.2bbu is probably fair for now, but competition will remain cutthroat from South American for the next several months.  If yield falls from 166bpa, things get bullish very quickly.  The trick the next several weeks will be staying objective on yield potential.  With the current forecast, crop conditions will be improving as moisture and heat are received.  Does this mean yield ideas are rising from 166bpa?  Not necessarily, but it will also be difficult to cut yield ideas further at this juncture.  Areas which got crops planted look strong, but everyone knows the prospects for corn which will not be knee high by the 4th of July.    

The other area of interest for us was spring wheat acres on Friday’s report.  “Other Spring” wheat acres totaled 12.43 million acres which would produce hard red spring planted acreage of around 11.95-12.00 million.  We are using 12.0 million acres in our balance sheet for the time being.  Assuming USDA is correct in their 2018/19 ending stocks of 313mbu, we see a crop of 535mbu assuming a national average yield of 46.0bpa.  Yield ideas could be even a bit higher as weather is very conducive to filling heads and adding bushels.  Our demand estimates see 285mbu of domestic demand which is a hair above the 5-yr average.  Exports are currently pegged at 290mbu which would be the largest in four years and the second largest since 2010/11.  Total demand of 575mbu is the largest since 2014/15.  Current ending stocks would be around 334mbu which is the largest since 1987/88.  Taking a step back, it is difficult to get bearish supply from our current estimate in our opinion.  Weather looks good and we are running out of time to cut production.  On the demand side, one could argue for higher demand, but this will require staying competitive with Canadian export offers as well as keeping spreads tight with HRW to incentivize blending.  Neither of those happen with sharply higher prices.  Based on this look at the HRS balance sheet, we feel $6.00 futures will be a good value should we be able to sustain strength from current prices.

Bottom Line: It may take some time for our markets to shake Friday’s USDA reports, especially if conditions improve on this afternoon’s crop progress report.  Funds got longer corn going into the report than most had anticipated, which could keep liquidation the name of the game for a spell.  Yield is still what matters, and we haven’t gotten any assurances it will be higher than the 166bpa the USDA used in June.  However, it will be likely the WASDE board will have to adopt the NASS acreage numbers on the July WASDE which could look bearish to the computer trade which now makes up 50% of trading volume (h/t @MisterCommodity).  We have to change the narrative, but USDA might be the only group that can do that.

Good Luck Today.

Tregg Cronin

Market Analyst



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