President Trump’s pick to lead the Federal Reserve will get his first chance at moving markets tomorrow at the conclusion of the 2-day FOMC meeting. According to markets, betting odds say there is a 100% chance the Fed moves to raise interest rates by 25bp to put the fed funds rate at 1.50-1.75%. The Fed last raised rates at the December meeting, leaving rates unchanged at the January meeting. At the last meeting, the forecast for interest rate increases during 2018 was 72-75bp, or three 25bp rate hikes with another 50bp of rate hikes in 2019 and 37bp of rate hikes in 2020. Should that forecast hold true, we would be looking at a Fed Funds rate of 3.00% by the end of 2020, which would push regular borrow rates to consumers and businesses up by quite a margin. For the Ag community, this is an issue participants can’t afford to leave their head in the sand over.
Yesterday morning we only had radar returns and radar projections, but this morning actual weather station readings are available for the system which moved through Kansas. As the map below shows, a large swath received 0.50-1.50” with nearly the entire state receiving some measureable precip. The SW-10-15% did miss out where drought conditions have been the worst, but extended maps turned a good deal wetter yesterday afternoon as well. Well above normal precip is seen in E-TX and E-OK, and the SW-1/3 of KS should also see better precip prospects. The bullseye is still not on the western quarter of KS, but it is undeniable the pattern is wetter than it has been since October. Temperatures remain stubbornly below normal in the northern plains during the 6-10 and 8-14, which could keep snow cover lingering. The central and eastern corn belt remains wet this week.
Stabilizing trade overnight led by KC wheat which saw limit down trade late in yesterday’s session before closing off that level at 1:15pm. To say yesterday’s session in KC was impressive would be an understatement as total volume across all contracts hit a new all-time record of 149,921 contracts, besting the previous record of 148,457 contracts on January 30th. It’s not just the participation which has been impressive, but the price response has been equally impressive. After hitting highs for the move around $5.4850, we’ve dropped 79c at the lows yesterday, or nearly 60% of the entire rally from the December lows. The move yesterday was obviously fund liquidation as open interest fell 14,149 contracts, to the lowest level since October 4th. Back in October, we were still planting winter wheat and it was still raining in Kansas. Price also closed at $4.36 that day vs. $4.75 this morning. Still, the fact we just traded below the 50-day moving average yesterday, and are still above the 100 and 200-day, speaks to the strength of the previous rally. Price should find support around the previous consolidation area from February as we assess rainfall, acres and stocks at the end of the month and other Northern Hemisphere production prospects. Other open interest changes of note included corn down 4,393 contracts, soybeans down 3,224 contracts, meal down 3,167 contracts and SRW wheat down 11,629 contracts.
While the focus was on the HRW plunge, weakness in soybeans couldn’t be ignored either. While Argentina got needed rainfall, and prospects for more look good this coming weekend, the threat of a trade war with China was also on traders’ minds. Yesterday during the session, several media outlets announced President Trump was preparing to impose a package of over $60 billion in annual trade tariffs against Chinese productions, following through on promises going back to his campaign. The nervousness in Ag markets comes due to the fact soybeans are the largest US export to China in terms of dollar value. The US sends $15 billion in soybean exports to China followed by civilian aircraft at $8.4 billion, cotton third at $3.4 billion and copper materials fourth at $3 billion. Corn is ninth at $1.3 billion which is just ahead of coal at $1.2 billion. During a year in which China has already taken a much larger share of Brazilian soybeans than US soybeans, the worry is they could solidify this stance in a trade war. Most analysts would be quick to point out there is no way Brazil can supply China with all of their soybean needs given the country is expected to import 97MMT this year, and Brazil is slated to export around 70MMT. Still, forcing the US to diversify customers even further as opposed to supply the most reliable customer in the world would be a shift. The package of tariffs is expected to be announced Friday.
Export inspections during the session yesterday were supportive for corn, so-so for wheat and a bit weaker than expected for soybeans. Wheat inspections totaled 16.3mbu vs. the 17.8mbu needed weekly, but were a bit better than expected. Total inspections of 703.1mbu compare with 761.1mbu last year, a 7.6% deficit which is a bit better than the USDA forecast. Corn inspections were 55.5mbu, which were a new marketing year high, and better than the 51.9mbu needed weekly to hit the USDA forecast. Total inspections of 855.6mbu still lag year ago levels by 28.2%, but are making up ground each and every week. Soybean inspections totaled 18.0mbu, which were a marketing year low, and below the 22.0mbu needed weekly to hit the USDA forecast. Total inspections of 1.477bbu are down 12.2% from a year ago, and slowed from the level a week ago. Corn and soybean shipments the next 60-days will likely tell us whether the USDA export forecasts can be met. Corn has the best shot at achieving the lofty level, while soybeans have a fair amount of doubters.
The Kansas rains were the talker yesterday, but we also saw weekly crop conditions released by Kansas, Oklahoma and Texas. It is clear the rains were not reflected in the condition ratings, but should be next week. Kansas wheat ratings were 11% G/E which was down 1% from last week, and are down 27% from a year ago. TX conditions were down 3% to 10% G/E and compare with 34% G/E a year ago. OK conditions fell 2% to 5% G/E and are well below the 40% G/E from a year ago. US-HRW FOB offers continue to creep back toward competitiveness, but have more work to do. On a FOB basis, US-HRW out of the Gulf for April is within $1.00-2.00/MT from being equal to other origins, but freight still has us out the money by $7-11/MT. US wheat prices aren’t the only ones correcting as the Platts Black Sea swaps saw the most actively traded contract (September) close at $198.50/MT yesterday, down from the high-water mark of $209.00/MT on March 1st. Paris wheat futures are trading at €162.75/MT this morning, off from their highs of €168.75/MT on 3/1. Eastern Australia Wheat futures closed at $268.00/MT last night, off from their highs at $286.50/MT on March 7th. The correction in Paris/KC Wheat spreads has been impressive as well. The spread hit a low of $4.04/MT on March 5th, which was the lowest level for that spread since early July. It is trading at $26.24/MT this morning which is back above the 50-day moving average but just below the 100 and 200-day.
The selloff did produce some fear buying on the put side of the spectrum yesterday, especially in soybeans. For May options, volatility for 930 puts closed at close to 17.0% which is the same volatility settlement for 1090 calls. The skew still favors call buying, but the correction has been pronounced. A correction was also noted in KC wheat, although the skew is still heavily weighted toward calls, which suggests the selloff is more orderly than one might think. Also thought it interesting when looking at option open interest for new crop where bets were being placed. In December corn options, there are now close to or slightly over 20,000 call options open for the 450, 480 and 500 strike levels. On the put side, there are over 25,000 puts open at the 350 strike. The put/call ratio of 0.71 suggests still more folks betting on higher prices than lower. In soybeans, we found it interesting the put/call ratio drops to 0.54, suggesting nearly 2:1 calls open to puts. There are 25,000-1100 calls open, over 20,000-1200 calls open and over 12,000-1300 calls open. There are more 1300 calls open ($2.77 from the money) than there are 900 puts open ($1.23 from the money). Always good to keep track of where bets are being placed, but more importantly, where no protection or bets exist.
Bottom Line: Probably should see some claw-back today after the bludgeoning yesterday, although doubtful we move too far ahead of the end of the month reports. Pre-report estimates will be out later in the week to start the fruitless effort of trying to outguess the USDA. This correction is a great reminder of why producers cannot take a break from marketing when prices are rising. In the span of two weeks, we’ve wiped out two months’ worth or rally. We haven’t even begun the US growing season yet, but we’ve already seen premium erased. Each week day closer to April puts more focus on the US and less on South America. We’ve likely seen peak South American focus, so trying to rally markets on a dry Argentina is probably not money well spent.
Good Luck Today.
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