7/18/2019 Morning Comments

Good Morning,

Showers across the Upper-Midwest again this morning, especially in Wisconsin where the entire state seems to be getting rain.  There are also showers moving across Iowa which wasn’t supposed to be the case earlier in the week.  The totals haven’t been impressive but any rainfall will help headed into a dry 10-day stretch.  Iowa will see additional rain chances this weekend with much of Iowa, southern Minnesota and Wisconsin slated for 0.75-1.50”.  Extended maps from the CPC continue to point toward below normal precip and below normal temps in the 6-10 and 8-14 day outlook.  Crop Prophet sees the GFS pointing toward temps in the week 2 outlook around two degrees below normal, while the Euro is not quite as cool and closer to normal temps.  It is the precip outlooks which remain the concern with Crop Prophet suggesting the Euro is pointing toward 64-66% of normal precip July 24-29 and the GFS at 69% for the production-weighted belt.  Week 3 and 4 outlooks from the CFS according to Crop Prophet put things at 100-117% of normal precip, so a bit more favorable as we get into August.  Below we show the blended week 1-2 precip outlook for both the GFS and Euro models.

Weaker markets across the board this morning, led by corn as surprise showers in Iowa and Illinois yesterday, along with an active radar this morning are helping to pare bullishness.  The weather debates on social media are as lively as we can remember with seemingly every detail bringing out both bulls and bears in full force.  Warm temperatures are detrimental because corn is pollinating or close to it.  Cool temperatures are detrimental because this crop has no chance to finish before a first frost.  Rain is detrimental because so much of the corn belt is laboring under surpluses and additional rain won’t allow the crop to root down.  Lack of rain is detrimental because it’s a lack of rain.  There doesn’t appear to be a forecast which could be deemed favorable, yet somehow, the market hasn’t been able to hold strength at all this week and even the vaunted $4.40 level basis the December contract has given way this morning.  We are not discounting the fact that acreage and yield changes will still drive this market, eventually.  Until we get to the August WASDE, however, we need to trade what is in front of the market, and at the moment, that is a less threatening forecast.  Back to the precipitation anomaly discussion above, if the rainfall returns are that low by the end of the 15-day time frame, we doubt the market will still be trending weaker.  Corn open interest yesterday was up 6,297 contracts, soybeans were up 4,557 contracts, meal up 1,853, oil up 7,181, SRW up 2,355 and HRW up 2,167 contracts.  Interesting to see all the open interest increases on lower closes.

Demand indicators continue to be a point of weakness for row crops with weekly ethanol production coming in at 1.066 million barrels, up 19,000 barrels on the week, but missing the level needed at 1.100 million barrels per day.  This production level was essentially unchanged from a year ago, but this is short of the roughly 3% gain needed each week through August to hit the USDA’s objective.  To put this in perspective, the all-time weekly production record is 1.108 million barrels per day, so the next 6-weeks need to have record production to justify USDA’s estimate.  It looks increasingly likely USDA will have to come down 10-15 million bushels from their July estimate.  Weekly ethanol stocks surged 356,000 barrels from the week before to 23.365 million barrels which was the highest level in eight weeks and the second highest of the last 15.  Stocks are a record for this week on the calendar.  Ethanol/corn spreads have been trending lower as of late, and while ethanol futures have not traded today, the close yesterday showed a negative ethanol/corn spread, implying ethanol prices are not covering the variable cost of corn.  This environment does not give us confidence in the USDA’s 2019/20 ethanol forecast either.

Winter wheat harvest as of Monday was estimated at 57% complete and should be near 75% by next Monday with spring wheat harvest not yet started.  It is interesting to take a closer look at the Minneapolis wheat market structure, however, and see the managed fund short position within 500 contracts of their all-time record.  Their position accounts for 23.3% of total open interest, however, which is an all-time record by a fair margin.  Considering we have the entire North American spring wheat harvest still in front of us, this position would seem to be well-placed at the moment.  However, it is difficult for us to envision a scenario in which funds are able to add to this record short in any meaningful capacity, leaving one direction for them to go.  That said, the natural seller in this market has not been engaged for weeks.  The gross commercial short position stands at 22,746 contracts which is the smallest since July 17, 2018.  A year ago, the gross commercial short bottomed at 20,189 contracts the second week of July before rising to 36,859 by August 14.  Over that time frame from July 10 to August 14, December Minneapolis wheat hit a low on 7/12 at 5.42 ¼ before rallying to 6.56 on August 7 and then selling off to 5.60 ¼ by the middle of September.  Are we setting up for a similar trade this year?  Difficult to say but the composition of this market looking so familiar to a year ago bears watching in the coming weeks.

Bottom Line: With no weather able to be bearish, it is awfully interesting how the market has traded in one direction this week.  There is a huge contingent in this market who have staked themselves to the cross of sharply higher prices and a crop which won’t be enough no matter how good the finish is.  We are much more interested in trading the market that is front of us and not dying on any one particular hill.  If the crop is as small as what some suggest, then we will eventually realize it and the market is providing plenty of buying opportunities.  If the crop isn’t as small as what some want to believe, then there will have been ample opportunities to have sold 4.40-4.60 futures.  Pulling from the movie Joe Dirt in which he says “is this where you want to be when Jesus comes back?” we feel like applying that to grain marketing.  Is your current marketing position where you want to be if the opposite scenario for which you are positioned occurs? 

Good Luck Today.

Tregg Cronin

Market Analyst




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