7/25/2019 Morning Comments

Good Morning,

Trade war headlines will take a back seat for a day or two as media outlets continue to regurgitate the Mueller testimony, and in a week’s time we won’t know anything we didn’t know at the beginning of the week.  Depending on which side of the aisle one leans, they can get either optimistic about the trade war with China as goodwill purchases seem likely in the next week or two, or one can get pessimistic because nothing concrete has changed and this conflict looks sure to drag into 2020.  The European Central Bank will release post-meeting text later this morning with ideas they will set the stage for a 10-basis point cut at their September meeting.  This will precede the Federal Reserve meeting next week, at which the central bank is expected to cut their benchmark rate by 25-50bp.  The U.S. Dollar Index rose to the highest level since June 3 on Wednesday.

Rain across the Dakotas and Nebraska this morning with showers expected in Minnesota later today.  The rest of the Midwest is quiet.  Late in the weekend and early next week, maps turn wetter for much of the Corn Belt with widespread 0.50” totals expected east of the Missouri River.  NOAA’s Climate Prediction Center is still calling for mainly above normal temperatures in the 6-14 day outlook while precip returns are mixed with below normal in the west and normal/above in the east.  Crop Prophet’s (CP) interpretation of the models sees temps warming to 2.2-2.5 degrees above normal according to the Euro for week 2 (July 31-August 6), although the bulk of the heat is in the Northern Plains which would be welcome at this juncture.  Heat is needed to dry soggy soils and allow wheat harvest to begin.  CP sees close to normal precipitation for the week 2 forecast with much of the corn belt around 85-96% of normal precip.  It is difficult for us to see a lot of problems with this forecast as the heat is less severe than maps earlier in the week were suggesting, and there appears to be enough precip around to keep conditions from getting stressful.  Weighted by production value, the corn and soybean belts are still running 1.8-1.9 standard deviations wetter than average over the last 30-days which is a pretty incredible way to look at (shown below).

Mixed markets this morning with corn and wheat contracts lower while soybeans maintain slight gains.  Corn turned in a particularly disappointing session yesterday as prices rallied mid-session only to give up the ghost toward the close and finish with a near-doji settlement.  In our opinion, the price action shows a large amount of indecision by both bulls and bears at current prices with neither group willing to stake a meaningful claim in the short-term.  Bulls need confirmation from the USDA that acres are below the June survey and yields are at or below the July WASDE’s 166bpa.  Bears need to get through pollination and be able to say definitively the weather was beneficial enough to support current yield estimates or higher, not to mention get through September without an early frost.   Bears have poor corn demand on their side while bulls have the threat of needing to ration more supply than the market sees currently.  Interesting enough, corn volatility has not dropped the way we would have expected with December ATM vol settling last night at 27.5% vs. 27.7% a week before.

Demand continues to be a soft spot for the corn market with notices of ethanol plants cutting hours or closing altogether making the rounds across the corn belt.  Ethanol production last week fell 27,000 bbls/day to 1.039 million bbls per day, the lowest weekly production total in 11-weeks.  This was also over 3.0% below the same week a year ago which was the first y/y decline in 10-weeks.  It looks increasingly likely we will see a reduction in the USDA’s marketing year ethanol forecast of 5.450 billion bushels on next month’s WASDE.  Something in the neighborhood of 20-40mbu reduction seems likely.  Stocks have been surging as well, up 324,000 barrels last week to 23.689 million barrels, a record for the week and the highest outright stocks in four months.  We don’t like the trend stocks are projecting on exports either.  Ethanol margins are not pretty and are implying grind rates will slow further. 

A quick check on South American progress as their season wraps up.  2nd crop corn harvest in Brazil is estimated at 61% complete vs. 48% last week, 41% last year and 37% average.  The progress over the last couple years and average is impressive, although we aren’t sure if this is simply due to favorable harvesting conditions or if the crop is slightly smaller than last estimate.  Earlier in the month, the USDA called the 2018/19 Brazilian corn crop 101.0MMT, a new all-time record by 2.5MMT.  They are currently projecting the same production estimate for 2019/20 with back-to-back years of 34MMT+ exports.  No sense in putting the Brazilian crop for next year in the bin already but suffices to say current corn/soybean spreads will encourage plenty of corn acres to be planted this fall.  Argentine corn harvest was estimated at 76% complete vs. 72% last week, 86% last year and 73% average.  Not a lot to say about the Argentine corn crop which was estimated by the USDA earlier in the week at 51MMT, a new record.  Like Brazil, the high corn prices are expected to produce another huge crop in Argentina barring adverse weather with the USDA currently pegging 2019/20 corn production at 50MMT and exports of 33.5MMT vs. 35MMT in 2018/19.

Day 2 of the spring wheat crop tour wrapped last night in Devils Lake, North Dakota.  Day 1 found big yields and solid potential while Day 2 was a bit more variable.  The Day 2 average on 151 stops was 39.7bpa on spring wheat vs. 41.1bpa last year while the durum yield was seen at 29.7bpa vs. 44.6bpa a year ago.  North-central North Dakota saw a 60% increase in yields from a year ago, but a huge dip across west-central North Dakota pulled the tour average lower.  It looks likely we will see an average yield similar to last year when all is said and done which should be produce more than enough spring wheat based on current demand ideas.  Of central focus to us will be quality as we’ve seen back-to-back above average spring wheat protein.  With the mild temperatures and excessive rainfall across North Dakota, it would seem unlikely to achieve average or above average protein levels this year.  There is a lot of high protein laying around from last year, so unlikely we will see a protein crisis, but an improvement in spreads would be expected.  Early cutting of HRW in South Dakota is seeing below average protein but above average yields with test weights 60 pounds or above.

Bottom Line: The trade feels like we are in a hurry to do nothing, biding time until we get more concrete evidence of yield declines or acreage cuts.  The 30c decline from recent highs has obviously priced in a fair amount of beneficial weather, but also seems to be covering bases on demand cuts as well.  It certainly feels like we are rationing demand without having a good handle on potential supply cuts but there will be plenty of time to price both September forward.  The 4.40-4.50 level in December corn feels like it would generate a lot of farmer selling if we were to get back there as production ideas get more refined.  Keep that in mind if we have a recovery attempt.

Good Luck Today.

Tregg Cronin

Market Analyst




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