7/12/2019 Morning Comments

Good Morning,

Some light showers in the Dakotas this morning, otherwise the Midwest is mainly quiet.  Morning GFS models still show a decent amount of rainfall in the Northern Plains the next 7-days while the Southern Plains will be dry for continued harvest efforts.  Much of the corn belt will also be dry, although the tropical storm in the Gulf will shove moisture up the Mississippi River into southern Illinois and southern Indiana.  Delta states are expected to be pounded with rain with some totals approaching 10-20”.  Extended maps look a bit concerning with above normal temps seen the next 15-days with precipitation expected to slowly drop to below normal across the Plains and Midwest.  The 15-day outlook from both the GFS and Euro see temps 3-5 degrees above normal through July 24.  The precipitation anomalies for the same period see 59-77% of normal precip according to Crop Prophet which would not be favorable heading into the key pollination window.

Softer grain markets following the impressive rally posted Thursday, especially in wheat which is a rarity for a July WASDE.  The fact wheat was the focus yesterday says a lot about the current state of our corn and soybean markets.  Clearly, traders had their minds made up before the report was released with a huge contingent of the market still betting on sharply reduced acres.  Yield is a completely different story, and still very much up for debate, so we will not go down that path just yet. Still, the fact supplies rose on the corn balance sheet, and also saw demand cuts, yet managed to rally says the market is looking ahead to the August WASDE.  Not to take the focus off the wheat market, however, the USDA made sweeping cuts to major exporter supplies with additional cuts possible in subsequent WASDE reports.  The USDA also tightened up the U.S. balance sheet by way of increased wheat feeding and exports, counting on a strong second half program once major exporter stocks have been depleted.  This was the same strategy employed last year, but it never came to fruition with export limping to the finish.  The difference this year could be the strong start we are off to as importers await refreshed supplies in the FSU/EU.  Corn open interest was up 4,395 contracts, soybeans were up 1,436, meal up 323, oil 2,893, SRW up 3,211 and HRW up 1,685.

We aren’t going to spend much time on the corn and soybean numbers given everyone seems to hate the USDA’s estimates when it comes to these two commodities.  Wheat stole the show, and for good reason.  On the world front, USDA cut Russian production by 3.8MMT from last month to 74.2MMT which would be up from last year’s 71.865MT but still well below the 80-83MMT estimates from a month ago.  Combined with a 3-yr low on carry-in, total supplies are at a 3-yr low as well.  USDA sees Russian wheat exports at 34.5MMT which are down from 36MMT this year and the lowest since 2016/17.  To us, the lack of participation in this week’s GASC tender speaks to exporters apprehension toward getting too aggressive too early in the season.  USDA also cut Ukrainian wheat production by 1MMT to 29MMT but would still be up from 25.1MMT a year ago.  In addition, USDA reduced Australia to 21.0MMT from 22.5MMT last month and Canada down to 33.3MMT from 34.5MMT last month.  The European Union was also cut to 151.3MMT from 153.8MMT last month but would still be up sharply from 137.2MMT a year ago.  The risk is USDA makes additional cuts next month to some of these key exporters, further wiping out any exportable surplus above and beyond a year ago.  Still, we remain wary of inking all of this additional U.S. export demand this early in the season after the way 2018/19 ended.

On the U.S. side, the USDA increased 2018/19 feed/residual demand by 41mbu to 91mbu and cut exports 14mbu.  Along with some other minor changes, ending stocks were reduced to 1.072bbu from 1.102bbu.  On the new crop side, planted acreage was reduced 200,000 acres while harvested was dropped 600,000 to 38.4 million.  USDA increased the all-wheat yield to 50.0bpa, the second highest on record, but total supplies still fell 12mbu thanks to a smaller carry-in.  Feed/residual demand was increased 10mbu to 150mbu while exports were bumped higher by 50mbu.  Ending stocks are not projected at 1.000bbu vs. 1.072bbu last month.  Some feel the feed/residual demand item can go higher than 150mbu with some up around 200-220mbu.  There is definitely wheat feeding occurring, but we wonder now whether HRW and SRW needs to be pricing itself into feed bunks if the export demand is expected to grow vs. a year ago and quality could be at a premium?  Much of the wheat balance sheet depends on the corn balance sheet and how much demand corn needs to ration so keeping feed and exports way they are for a couple months would do no harm.

We also had export sales yesterday morning which were another disappointment in our eyes.  All-wheat sales totaled 10.4mbu vs. the 14.3mbu needed weekly to hit the USDA forecast.  Total commitments are up 23% from a year ago, but will not want to rely on a large early deck for too long if the same pitfalls from 2018/19 are to be avoided.  Corn export sales totaled 19.9mbu and were close to the level needed to achieve the USDA’s reduced export forecast.  Cumulative exports are still only at 1.733bbu, leaving a large shipment obligation with only eight weeks left in the marketing year.  New crop corn sales of 127.0mbu are down from 183mbu at this time a year ago which is not an encouraging sign.  Soybean sales totaled 4.9mbu with commitments now up to 1.785bbu vs. the USDA’s forecast of 1.700bbu.  The soybean export program comes down to whether China takes all of their beans, and with trade negotiations looking rocky at best, we are not holding our breath.  Cumulative exports are only 1.415bbu with 2-months remaining.  New crop soybean sales of 95.7mbu are down sharply from 303.2mbu a year ago.

Bottom Line: We were told on social media yesterday the close after a WASDE is the only thing that matters, not any trade between 11:00am-1:14pm.  So, we’re not sure what that means for the day after a WASDE report and whether this has any meaning at all?  Model-to-model changes will take on increasing importance as we move through July, especially with forecasts looking less than ideal for pollination.  The most important takeaway for corn and soybeans yesterday, considering supply wasn’t really addressed, is demand matters.  If the forecasts keep rolling warmer and drier from here, corn has a shot to move above 4.50 and toward 4.73 but otherwise we see rangebound trade persisting.

Good Luck Today.

Tregg Cronin

Market Analyst




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