8/29/2019 Morning Comments

Good Morning,

A mostly empty Midwest radar this morning with the latest round of moisture expected in the Southern Plains the next couple days.  Morning GFS models are showing 0.50-3.00” totals in most of Kansas during the coming week as percent of normal precipitation maps continue to run well above normal. With winter wheat seeding set to kick off in less than a month, the Southern Plains should have no issues getting a crop started. No damaging cold threats in the next two weeks, although plenty of mornings in the 40’s and 50’s in the Northern Plains which will be a little too close for comfort. Extended maps from the latest GFS show above normal precipitation and below normal temps through September 11. The saving grace for the Upper-Midwest might be the above normal precip as moisture can insulate crops against light frost damage.  Yesterday’s CFS models for week 3 and 4 as interpreted by Crop Prophet showed temperatures 0.4-1.8 degrees below normal weighted across the corn and soybean production belt. These kind of temperatures would not seem to suggest a killing event, especially considering the bulk of the below normal temps September 19-25 will be in the Eastern Corn Belt and US-SE. The Northern Plains actually looks to run slightly above normal which would be a welcome relief for all.

Mixed markets with row crops seeing follow-through buying from Wednesday’s impressive reversals while wheat markets continue to languish near contract lows.  Corn seemed to lead strength Wednesday as reports surfaced about the Whitehouse getting ready to announce a package aimed at boosting biofuel demand in an effort to “assuage” farmers upset about the trade war and small refinery exemptions (SRE) granted by the EPA.  Most think this could come in the form of an increase to the Renewable Fuels Standard, although until the SRE’s being granted ceases, we’re not sure how this creates a ton of new demand for corn and soybeans.  Ag Secretary Perdue was out in full force at the Farm Progress Show in Decatur, Illinois Wednesday, doing his best to calm farmers angry with the Administration.  Having to go out and answer for some of the policies coming out of this Administration toward agriculture would not be an enviable position.  Otherwise, the focus remains squarely on weather and when the first frost/freeze might arrive in the Midwest. When traders return from the Labor Day holiday it will give a good look toward the end of the month and potential for such an event.

StatsCan was out Wednesday morning with their latest outlook on Canadian wheat production, pegging the crop at 31.25MMT vs. the average trade guess of 32.3MMT and would be down around 3% below a year ago.  Many chose to focus on the overall wheat production number being down from the average trade guess and last year’s production but we think this misses the mark. Durum production was estimated at 4.42MMT, down 23% from a year ago and winter wheat production at 1.73MMT was seen down 31% from a year ago.  However, the much more important line-item of spring wheat production is seen at 25.11MMT, up 5% from a year ago and would be the second largest spring wheat production on record.  While durum and winter wheat production are certainly important, they don’t move the export needle in the same way CWRS does.  With that in mind, there should be no shortage of spring wheat in the 2019/20 marketing year, ensuring export competition remains intense with the United States.  Other notes of interest from yesterday’s report included Barley production at 9.64MMT, up 15% from a year ago while Canola was seen at 18.45MMT, down 9% from a year ago.

Other wheat data of note yesterday included French Ag consultant Agritel pegging that country’s crop at 39.2MMT which would be the second largest production estimate since 2004/05 if realized.  This would be solidly above the USDA’s current 38.7MMT production estimate and the largest since 2015/16’s 42.750MMT.  Along with their production estimate, Agritel also believes France will need to export just over 20MMT of wheat in the coming marketing year to avoid excessive carryout stocks.  We don’t have access to French export data at our fingertips but have to believe this would be up solidly from the last several years and keep export competition especially high for HRW in coming months. Paris Milling Wheat futures have been especially weak as of late which would seem to confirm Agritel-type estimates.  Overnight trade has Paris futures just off contract lows set on August 21.

Weekly ethanol production out yesterday morning and continuing recent themes.  Weekly production was reported at 1.038 million barrels per day, up 15,000 on the week.  While encouraging, this was still 3.0% below the same week a year ago, and continues the streak of six consecutive weeks running below year ago levels.  It looks all but certain USDA will need to reduce their ethanol demand for corn line item on the September WASDE by at least 25mbu.  Industry estimates of ethanol production margins remain poor as RBOB/Ethanol spreads run well below the 50/100/200-day moving averages.  Ethanol/Corn spreads remain just above negative territory and plants are barely or not covering their variable costs at the moment.  Ethanol stocks did see a 385,000 barrel drop form the week before to 22.982 million barrels.  This did push stocks below the same week a year ago for the first time in nine weeks, but stocks remain historically large and just under record levels for the week.  Gasoline demand remains strong.

Bottom Line: Frost.  Trade War.  Possibly Biofuels policy.  All there really is to trade right now, and even those events don’t have trade too excited as evidenced by volatility.  A lot of things have to occur in the next 60-days from spring wheat harvest finishing, winter wheat planting starting, row crop harvest commencing, trade negotiations and possibly more “pacification packages” from the Whitehouse.  The U.S. farmer is still undersold and will use any rally attempt to sell into.  Growers with ample on-farm storage would do well to sell carry as well as flat price on any post-fall low recovery.  Wheat markets look like they are headed for an export dogfight the next 3-6 months which will offer basis opportunities but might not result in the flat price rally so many are craving.  Record managed fund short in Minneapolis bears watching.

Good Luck Today.

Tregg Cronin

Market Analyst




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