8/8/2019 Morning Comments

Good Morning,

Equity and currency volatility has been impressive this week against a backdrop of four major central banks reducing interest rates or planning to in the coming month.  Multiple economic commentators have made note of the slowing global economy and the opinion we may already be in global recession and not know it.  This has central banks intent on keeping the easy money flowing and the landing less hard than it may otherwise be.  This is causing treasuries to rally hard, equities to sell off and commodities to get dumped.  The Bloomberg Commodity Index hit the lowest level since early 2016 as crude oil sinks toward $50/bbl.  Crude has its own fundamentals to deal with but sinking prices on the back of softening demand speaks to the slow-growth mentality.  Difficult for managed funds to have a positive tilt toward grains if recessionary forces are being contemplated.

Heavy rain across the Southern Plains this morning which is bringing relief to dry patches in Kansas, Oklahoma and Texas.  Over the last month, this area had been running 25-50% of normal precipitation, a trend not desired less than 45 days out from HRW seeding.  Quite a bit of rain around the Midwest in the coming 7-day period, especially in the WCB/Northern Plains.  This rain is not welcome as the area attempts to harvest HRW and get started on HRS.  The ECB also looks to see moisture late in the weekend and early next week with 0.50-1.50” expected across IL/IN/OH.  This would be very much welcome for an area which has been especially dry since the Fourth of July.  Below normal temps/above normal precip are expected across the Midwest in the 6-10 but maps turn warmer and drier in the 8-14 which would be a welcome sight for most as we try to sprint to the finish on crop development.

Higher markets across the board, led by Chicago wheat and corn in what would appear to be somewhat of a relief bounce.  Consolidative trade has been the name of the game this week as we prep for the almighty August WASDE on Monday.  Farmers, brokers, funds and end users have an incredible amount riding on Monday with many having staked their reputation on one outcome or another.  While the volatility should be a sight to behold at 11:01am CDT Monday, we also think some could be setting themselves up for major disappointment if the USDA doesn’t offer the most sweeping changes in modern history.  While this year is indeed historic in many ways, it is worth noting the largest changes in corn acreage since 1970 in either direction are 2.0-3.0 million acres.  We’ve never seen a late planting year quite like this one, so records could be broken, but would still point out what the odds are for a 5.0-8.0 million acre change like some are touting.  In addition, average trade estimates for yield see corn at 164.9bpa vs. 166.0bpa in July.  This is hardly the 5-10bpa change some are suggesting, begging the question of what a bearish yield would look like and what a bullish yield would look like?  We discuss the average trade estimates a bit more below.  Corn open interest fell yesterday by 7,974 contracts, soybeans were down 2,051, meal was down 1,503, oil up 4,699, SRW down 9,829 and HRW down 10,040.

We’ve been writing about the lack of confidence by the trade toward the August WASDE for several weeks and the average trade estimates bear that out.  On planted acreage, the high to low on corn area is 89.8 million acres down to 83.494 million, a range of 6.3 million, or just shy of the entire state of Kansas.  On the Bloomberg average trade estimates, the high to low spread is 11 million acres, or the size of Illinois.  Imagine missing the USDA’s planted area number by a factor equivalent to Illinois!  Soybeans aren’t a whole lot better with the high to low spread of 83.5 million to 78.0 million equal to the entire planted area in Indiana.  What’s worse are “analysts” offering an acreage target but providing multiple caveats of why they could be wrong and why the USDA would then be wrong.  The fact is, no one knows what Monday is going to bring, and no one wants to be wrong.  While the supply changes will take center stage, we can’t help but think many will overlook what should be bearish cuts to demand in both 2018/19 and 2019/20 on corn and soybeans.  It is quite conceivable we could add 50-150mbu of supply to 2018/19 ending stocks/2019/20 beginning stocks via demand cuts.  We could also see huge cuts to new crop demand based on export commitments to-date, ethanol economics, the trade war, African Swine Fever, etc.  The demand changes should be overshadowed by supply changes, but we also wouldn’t gloss over them either.

Speaking of ethanol demand, weekly indicators remain putrid with production up 9,000bpd to 1.040 million bpd but this was still 5.5% below a year ago.  In fact, the deficit with a year ago was the largest in 19-weeks and makes achieving the USDA estimate next to impossible.  It is not difficult to see why run-rates continue to disappoint as ethanol/corn spreads remain in negative territory as spot ethanol fails to cover the cost of spot corn.  In the Eastern Corn Belt, these margins are most likely even worse considering those plants are still grinding through some very expensive corn purchased in June and July.  Ethanol stocks saw a historic drop, falling 1.351 million barrels to 23.117 million barrels.  However, even with such a large weekly change, stocks are still record large for this week.   Crude oil and RBOB prices at 2019 lows aren’t helping the situation especially as RBOB/Ethanol spreads fell to 20c per gallon yesterday, the lowest since June.  Discretionary blending is not seeing a boost with gasoline/ethanol spreads at those levels.

Bottom Line: Higher markets but we aren’t going anywhere fast.  Everything comes down to Monday and whether the trade gets the supply cuts they want.  A question producers should be asking is what they will do with a limit down move and what they will do with a limit up move?  Both could be real possibilities and would require opposing plans of action.  As we always find ourselves saying around this time of year, on October 1 or November 1 (pick your date), there will be no shortage of corn in the United States, regardless of crop size.  The question becomes what price range becomes fair value once this crop is in the bin.  Are the pie-in-the-sky price projections off the table, or are they still fair game?  How much work will basis and spreads have to do and how much will be on the board?  All things which should be easier to answer after Monday.

Good Luck Today.

Tregg Cronin

Market Analyst




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