8/1/2019 Morning Comments

Good Morning,

Despite getting the expected outcome, equity markets did an about-face following the conclusion of the Federal Reserve meeting Wednesday after language from the Fed Chair suggested this was not the state of a new monetary easing campaign.  The FOMC cut benchmark interest rates by 25bp, but Jay Powell seemed to lower the chances of another cut at future meetings.  In response, the U.S. Dollar Index rallied to the highest level since mid-May 2017. With no country wanting to be the first to transition off easy money, Brazil’s central bank cut its benchmark interest rate for the first time in over a year as their economy continues to flounder. The IMF recently trimmed its forecast for GDP in South America’s largest economy to 0.8% for 2019 from 2.1% previously.

A sizable system along the KS/MO/OK/AR border this morning, otherwise just a few scattered showers in the Dakotas and southern Ohio.  Dryness concerns remain prevalent across Iowa, Illinois and Indiana with much of those states running less than 50% of normal precip over the last two weeks and a large chunk in IA/IL running less than 25% of normal. If one looks at the 30-day percent of normal precip map, the deficits become more widespread with KS/OK/TX showing meaningful departures from normal with another winter wheat sowing campaign just around the corner.  More pressing are the moisture needs for pollinating corn and pod-setting soybeans which is occurring in the central/eastern corn belt.  Unfortunately, there is little to nothing in the way of moisture prospects for IA/IL/IN/OH in the next 7-days according to the overnight GFS model.  Temperatures remain non-threatening through August 14 with widespread below normal temps outside of the Southern Plains.  The GFS does want to keep putting more moisture into the Midwest during week 2 of the forecast but much of that, if it verifies, could come too late for those crops in the Eastern Belt.

Crop Prophet’s take on the overnight models agrees with the temperature outlook as the average temperature departure from normal should be less than one degree the next two weeks.  Crop Prophet also likes the week 2 forecast turning wetter for the central/east corn belt with the Euro suggesting 127-130% of normal precipitation over the production-weighted corn and soybean belt while the GFS sees 136-140% of normal from August 8-August 14.  Moisture during August will help. Period.  It is just a matter of what stage that crop is in from a reproductive standpoint as to how much the moisture will help.  Another 7-10 days of dry weather heading into that stretch could make the rainfall less curative than were it to fall this week.

Mixed markets with grains higher but soybeans still clinging to small losses as we round out the overnight session.  Wednesday’s price action was demoralizing for bulls after gaps were closed and there still proved to be no buying interest on the part of the bulls.  December corn sank to $4.09 ½ on Wednesday, the lowest level since May 24 and essentially wiping out the entire late-planting rally and erasing remaining risk premium.  It is hard to believe the market has become totally comfortable with the current supply outlook but it is difficult to fight the tape after a 50c shellacking and the August WASDE still two weeks away.  Bulls remain steadfast with their call for lower yields and lower acres, but bears are armed with the opaqueness of this year’s USDA reporting and the fact we might not know the actual supply situation until well after the August WASDE.  In addition, bears have a steady stream of negative data on the demand front as rationing of U.S. corn appears to clearly be taking place both domestically and internationally.  On Wednesday’s break, corn open interest was up 23,581 contracts, soybeans were up 12,274 contracts, meal up 4,116, oil up 2,419, SRW up 8,567 and HRW up 2,583 contracts.

The negative data train rolled on Wednesday with weekly ethanol production falling to 1.031 million barrels per day, down 8,000 mbpd to the lowest average weekly production since late April.  This week’s production was down 3.1% from the same week a year ago which is well below the 5-6% increase from a year ago which would need to be seen to support the current USDA estimate.  It looks certain the USDA will be forced to trim their marketing year ethanol estimate after production rebounded in June and made the estimate look doable.  Ethanol stocks shot higher by 779,000 bbls to 24.468 million bbls which is a new all-time record.  Considering production has been less than stellar the last several weeks, the build in stocks would seem to indicate soft domestic demand and potentially a rough patch in exports.  We will receive June export data early next week.  Export sales are due out later this morning, and not expected to show anything solid, putting over half of the U.S. demand base at risk of cuts on future WASDE reports.  The supply situation does look as though it will tighten but we clearly do not have the demand base at the moment to support current and higher future prices.

A sign demand was turning soft has been the weakness in cash markets across much of the corn belt and at export centers.  CIF corn has eased 3-4c over the last 7-10 days, while major ethanol plant basis has softened as much as a dime.  The narrative during much of the rally was the old crop corn stocks were overstated and the corn simply wasn’t out there.  More astute observers noted the areas with the strongest basis levels were also spots with higher incidence of prevent plant.  More likely were farmers clinging to remaining old crop stocks until they had more confidence in what was actually planted.  It would appear growers in many areas now have more confidence in new crop supplies and have begun parting with these phantom bushels.  The CU/CZ calendar spread would certainly agree with this assessment and basis as it has been flattened from -3.75c on July 22 to a low of -10.75c on July 29 before recovering to -9.00c the last couple sessions.  Unless the USDA was completely off base in their June 1 stocks data, projections told us we would still carryout 2.2-2.3 billion bushels of corn on September 1, regardless of how small new crop prospects were.  Combine that with awful export and ethanol demand the last two months as well as one of the strongest wheat feeding campaigns in recent memory and it isn’t difficult to see the market having taken its rationing job seriously.  The question now becomes whether the market recognizes the error of its ways and begins to encourage demand, or whether we continue rationing it until more clarity is allowed on the 2019/20 supply situation?

Export sales estimates for Thursday morning’s report show wheat sales at 300-500TMT, corn at 400-900TMT, soybeans at 200-750TMT, meal at 100-350TMT and oil at 5-25TMT.  We would lean on the lower side of most of those numbers given the lack of prospects during the reporting week.

Bottom Line: Markets want to bounce a little today which is warranted after the rout yesterday.  Bears are in control, and there doesn’t seem to be any demand data out there willing to support current prices, especially after another round of poor trade negotiations in Shanghai.  The trade conflict isn’t going away anytime soon.  Bulls seem to be pinning their hopes on the USDA releasing a bombshell on the August WASDE which puts them back in control and allows a run at summer highs.  Anything is possible, but the trend in price would seem to suggest the entire market place is wrong, or there is enough supply in the United States to produce a comfortable S&D in 2019/20.  Time will tell.

Good Luck Today.

Tregg Cronin

Market Analyst




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