We wrote about China and their stock indices yesterday, and there is more to talk about today. Overnight, China announced their Q3-GDP which came in at 6.5% y/y, marking the weakest quarterly growth figure since the 2008/09 financial crisis. The figure was lower than expected, but it did keep China on-pace for its full-year growth forecast of 6.5%. With the heavy losses witnessed this week, one would think the print would have encouraged a further selloff, but the Shanghai Composite rallied to close higher by 2.58%. The week’s selloff did not go unnoticed by data watchers, however, as China’s main stock index is now off more than 30% from its most recent 200-day high. This is the largest drawdown in two years. However, when drawdowns have been this large in the past, it didn’t necessarily mean further losses going forward. In fact, under all time frames, and especially 6-months later, the median return for the Composite was higher with the exception of 1-week later. This likely mean the worst is over for Chinese equities, if history is any guide of course.
Rains this morning in Texas, Oklahoma, E-Kansas, Iowa, S-Minnesota and Wisconsin. Once these showers finish up, however, the majority of the Midwest is still looking at a dry 7-day outlook. The southern plains and Delta are the two areas which remain wet the next week with Texas seeing another 2-3”. Oklahoma is also wet, but Kansas has only passing chances at showers which could allow the last bit of winter wheat to get in the ground. Unfortunately, extended maps from the CPC look wet for the entire Midwest with the 8-14 day turning above normal on precip for almost everyone. Temps will also gradually cool to normal/below for most in the corn belt. In other words, farmers would do well to take advantage of the next 7-10 days while the good weather lasts.
Weaker grains but a firmer oilseed complex this morning as traders get set to put a bow on a soft week. After the continuation of last week’s rally on Monday, trade this week has been disappointing and a bit disheartening. Technical indicators looked good early in the week, but the waning upside momentum combined with what are surely smaller managed fund short positions are limiting upside appetite. Harvest is back rolling in many areas, bringing with it increased hedge pressure, and when combined with a disappointing round of export sales, there isn’t much reason for bulls to throw their weight around. In addition, put/call ratios show way more upside bets than downside bets at the moment. Across the grain room, every commodity has more open calls than puts, with the largest spread belonging to KC wheat with 70.75% of all options open being calls vs. 29.25% being puts. Corn has 62% of the options being calls, soybeans at 58%, Chicago wheat at 62%, Meal at 59% and Oil at 55%. Open interest on yesterday’s selloff saw corn up 10,398 contracts, beans down 1,220, meal up 3,066, oil up 2,105, SRW up 431 and HRW up 696 contracts.
Other than the price action yesterday, the story was export sales. The only encouraging total was found in wheat, although it says a lot when we get excited about the weekly haul just barely hitting the level needed. All-wheat sales were 17.5mbu vs. the 17.4mbu needed weekly to hit the USDA forecast. Total commitments of 445.1mbu are down 18% from a year ago vs. the USDA calling for a 13% y/y increase. The commitment total is the smallest since 2015, and 17mbu above the lowest commitment total for this week on record. Commitments as a percent of the USDA forecast at 43.4% remains the smallest on record going back to 1990. Corn export sales were very disappointing at 15.0mbu, the smallest sales for this week since 2012 and well short of the 36.5mbu needed weekly. Total commitments remain strong at 828.7mbu which are the second largest since 2007. The slower sales could be a sign of more competitive Ukrainian supplies and very cheap Argentine supplies. Soybean sales were also weak at 10.7mbu vs. the 28.7mbu needed weekly to hit the USDA forecast. Total commitments of 765.7mbu are the smallest since 2011 while commitments as a percent of the USDA forecast at 37.1% are the smallest since 2008. In fact, other than the 2013 government shutdown when no data was reported, this week’s export sales were the smallest on record going back to 1990. This includes the pre-China era when sales were much more even throughout the marketing year.
Saskatchewan reported weekly crop progress last night, pegging spring wheat harvest at 72% complete, up 7% on the week but remaining well behind average. Spring wheat harvest for this week on the calendar is the slowest since at least 2014. Also on the report, the province reported declining crop quality due to lodging which is causing bleaching and sprouting. The Northwest district of SK remains the problem spot with harvest advancing just 1% to 45% complete on the week and compares with average progress of 91%. Weather forecasts are improved for the coming week which should help harvest advance. Other harvest notes, oat harvest is 72% complete, barley harvest is 83% complete vs. 81% last week, canola harvest is 67% complete vs. 61% last week, flax harvest is 46% complete vs. 36% last week and soybean harvest is 39% complete vs. 30% last week. Canadian FOB offers of spring wheat continue to be absent until January with capacity booked solid. Offers of CWRS are roughly $8/MT premium to US-HRW for 13.50% protein while 13.80% is carrying a $20/MT premium.
The soybean balance sheet remains the most in focus as it has the most potential for change in coming months, in our opinion. On the October WASDE, USDA said 2018/19 carryout will be 885mbu vs. 438mbu last year and the largest ending stocks on record. Supplies are what they are at this point, even if small changes to national yield or harvested acres adds or subtracts a few million bushels. It is the demand side of the ledger which is in focus, especially exports. As we wrote about above, export sales are way behind the needed pace, and we have been arguing for a while now the USDA’s current 2.060bbu carryout has a fair amount of Chinese demand built which is not likely to show up without a major trade deal. Looking at the situation very simply, current year exports are down 20% from a year ago, and if that pace is maintained, full year exports would be implied around 1.700bbu. We don’t think that is likely to be the case, but splitting the difference would have exports at 1.900bbu. That would push carryout to 1.047bbu and the stocks/use ratio to 25.5%, a new record by 7%. It’s difficult to see how prices north of the fall lows at $8.12 can be maintained without an improvement in export demand, or South American weather begins to decline. If drought conditions surface anywhere in South America this year, China would have little choice but to lift US soybeans, with or without the tariff situation. A friend of ours at www.agtradertalk.com threw out the idea of what would happen if a US/China trade deal does get done. Is China likely to take all of the soybeans they’ve bought from Brazil at +200-250X compared with US soybeans being offered at single digits over the November and January contracts? Unlikely. Sure, cancellations of Brazilian soybeans and purchases of US soybeans would correct the basis disparity, but Brazilian beans are likely to fall much more dramatically than US soybeans are to rise. The point of this paragraph is to start thinking about the current US balance sheet, and the potential for larger ending stocks, but also what would likely need to happen to improve US exports from its current situation.
Bottom Line: Disappointing week of trade for bulls with most of last week’s rally being given back. As harvest ramps back up, and over 50% of the corn and soybean harvest is still to be brought in, bulls will face an uphill climb. Wheat sales were encouraging, but as we’ve seen in the past, one week of good sales doesn’t mean much. Feels like the market is already looking forward to the South American growing season. Alberta crop progress will be reported after the close, giving further clues about the amount of grain left to harvest.
Good Luck Today.
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