8/15/2019 Morning Comments

Good Morning,

Recession is the word of the week.  After disappointing growth figures in the U.K. last week, and Germany this week, investors sold equities hard on Wall Street Wednesday as fears of recession mount.  It should be pointed out a recession is two consecutive quarters of economic contraction and the U.S. does not even have one yet.  However, there are many signals which have preceded recessions in the past.  For starters, the yield on 30-year T-bonds fell to 1.96% yesterday, the lowest level on record going back to the 1970’s.  Yields on 30-yr U.K. Gilts fell below 1% for the first time on record.  As has been the case for much of his presidency, we should expect President Trump to try and jawbone the market higher or bully the Federal Reserve into keeping rates low or even cutting them.  If the U.S. does eventually head into recession, it will be difficult to point at anything more responsible than the current trade war with China.

Showers across Nebraska and North Dakota this morning while the rest of the Midwest is mostly quiet.  It will be a fairly active Western and Central Midwest storm track the rest of the seven-day period with heavy totals expected in MO/IA/IL to the tune of 1.00-2.00” and peripheral areas seeing 0.50-0.75”.  Moisture is welcome outside of the Northern Plains where wheat harvest is trying to make up ground.  Extended GFS models look favorable for late season crop growth as both the 6-10 and 8-14 day outlook sees above normal temperatures and above normal precipitation.  In another two weeks, maps at the end of August should be able to give us clues about any early frost potential.  While the longer the better, a frost-free period through the month of September will go a long way towards Upper-Midwest crops reaching some level of full potential.

Mixed markets this morning as corn and soybean prices are firmer while wheat markets are mixed to weaker.  Spring wheat continues to hold value relative to K.C. and Chicago as harvest remains delayed and managed funds retain their record net short position.  Quality is still very much up in the air for the HRS crop, but odds certainly point toward a lower than average protein level considering the above average rainfall and below normal temperatures much of the summer.  December corn continues to trade weakly, but did bounce off the 3.70 level late in the session Wednesday as light buying surfaced.  The discussion has shifted to yield and demand now that acres have been put to bed.  Plenty of movement can happen in either category but yield ideas aren’t likely to change materially until the October WASDE when more objective yield samples can be worked into the calculation process.  Demand will remain a bearish input until end users start reaching for U.S. origin corn and ethanol margins can lift a shoulder off the mat.  Against a backdrop of slowing global economic growth, certainly not a positive headwind.  Open interest changes during the session Wednesday included corn down 8,476 contracts, soybeans up 5,527 contracts, meal down 2,505, oil up 3,071, SRW down 5,211 contracts and HRW up 1,651.

There will be a great deal of yield discussion in coming weeks but we thought it worth taking a look at the scope of change from here through January.  In corn, changes from the August report can be sizable with the largest cut from August to January since 2000 occurring in 2004 at 11.4bpa while the largest increase occurred in 2010 at 12.4bpa.  The average change from August to January is 0.84bpa, highlighting the equal chances of an increase or decrease from this point.  In 1993, the year everyone is pointing toward as an analog year, the national corn yield fell 15.3bpa from August to January.  If something of that magnitude were to happen, supply would be cut 1.2 billion bushels from current ideas.  Possible? Yes.  Likely? No.  In soybeans, the average change from August to January is also around 0.8bpa with the largest decrease since 2000 occurring in 2005 at -4.4bpa while the largest increase occurred in 2003 at +5.5bpa.  Under those sort of yield changes, one would be talking about a supply swing of 300-400mbu.  So, large yield changes can still occur, but we aren’t sure bulls or bears should be hanging their hat on that alone to make their supply or demand projections “fit.”

Weekly ethanol production was released yesterday, increasing 5,000 bbls/day to 1.045 million bbls/day but was still 2.5% below last year’s same week production.  This was the fourth consecutive week of production below year ago levels when production needs to be running as much as 7% above year ago levels to meet the USDA’s marketing year forecast.  Despite the fact the USDA just cut their ethanol demand for corn line item on last week’s WASDE by 25mbu, it looks as though they will need to cut that figure by another 25-50mbu on the September WASDE.  Ethanol stocks surged by 766,000 barrels last week to 23.883 million barrels, rising 4% above last year’s same week stocks.  Stocks at this level are a record for the week and helped largely offset the huge plunge in stocks seen the week before.  The bottom line with ethanol production is margins remain under pressure as ethanol prices have fallen just as fast as corn prices.  Our simple measure of taking the price of ethanol multiplied by 2.85 (average ethanol yield from a bushel of corn) and subtracting the price of corn futures is showing a -9.9c per bushel.  This simple measure shows the price of ethanol is not offsetting the cost of corn and speaks to the negative operating environment currently experienced at many plants throughout the Midwest.  Until this relationship changes, it is difficult to see corn prices putting a foot in the ground.

K.C. spreads continue to be a focus with KW/W inter-market spreads hitting record lows on a daily basis.  The KWU/WU closed at -91.75c yesterday, the lowest close on record for the spot month spreads.  The spreads would seem justified when one starts looking at the two balance sheets in relationship to one another.  2019/20 SRW ending stocks as a percentage of HRW ending stocks is currently projected at 26.01%, which is the lowest since 2001/02.  SRW total supplies as a percentage of HRW total supplies stands at 31.05%, the lowest level since 1987/88.  A similar story is present in SRW/HRS as the ending stocks ratio is projected at 36.3%, the lowest since 2001/02 and the total supplies ratio of 47.90% the lowest since 1987/88.  SRW should retain sharp premiums over HRW and probably continue to eat away at the premium of HRS vs. HRW.  At record lows, hard to see why hedges shouldn’t go in Chicago if one is in the HRW market.

Bottom Line: Markets defended some technical objectives well yesterday with the 3.70 level being the downside target for the Head-And-Shoulders pattern dating back to mid-summer.  Yield ideas will continue to be batted around, especially with the ProFarmer Tour hitting fields next week.  Unfortunately, many private yield ideas will simply gravitate toward the 169.5bpa yield the USDA issued Monday.  Cash and spreads will still give clues about short-term direction but hopes for managed funds to come riding back in to save the day seem fleeting.

Good Luck Today.

Tregg Cronin

Market Analyst




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