4/17/2014 Morning Comments

Good Morning,

Outside Markets as of 5:50am: Dollar Index down 0.1990 at 79.6280; Euro is up 0.00350 at 1.38540; S&P’s are down 3.25 at 1849.50; Dow futures are down 33.00 at 16,298.00; 10-yr is up 0.09%; The Nikkei closed unchanged at 14,417.53; The DAX is down 0.24% at 9,295.05; The FTSE is down 0.09% at 6,578.09; The IBEX-35 is down 0.58% at 10,208.50; Gold is down $5.10 at $1298.40; Copper is up $4.80 at $303.55; Crude Oil is up $0.34 at $104.10; Heating Oil is down $0.0024 at $3.0082; Paris Milling Wheat down €1.75 at €216.75, but still near 1-year highs.

World equity markets are somewhat subdued following a heavy week of data and ahead of the long 3-day weekend.  We’ll have weekly jobless claims today which will be looked upon with great interest after last week’s series fell to 300,000, which was a 7-year low.  Analysts are looking for a bump of 15,000 to 315,000.  Philadelphia Fed Manufacturing Index is expected to show a 1.0 increase to 10.0, adding to the sharp increase seen in March.  Vladimir Putin is finding out just how serious the West is with its sanctions after European companies warned Kremlin retaliation could cost them dearly.  Goldman Sachs pointed out yesterday after economic contraction of 0.5% in the first quarter, and the Ruble being at all-time record lows against the dollar, Russia has also witnessed $63 billion in capital flight in 2014.  Hedge funds are off to their worst first quarter since the ‘08 financial crisis with average fund gain of 1.23%.

Quiet across the Midwest, although the southern plains are expected to see moisture in some locales later today.  Totals varying from 0.10-0.24” are expected in S-KS/OK/N-TX today which would be welcome, although widespread it is not.  ND/N-MN will see additional moisture fall on Good Friday, while Saturday into Sunday sees 0.10-0.50” fall across NE/W-IA with additional chances for the southern plains as well.  The next heavy band of moisture doesn’t show up until Wednesday for the western corn belt in which SD/MN/ND/NE/IA are expected to see totals in the 0.25-1.50” area, with the heaviest in SW-MN/NW-IA.  Areas without the localized shots should see good chances for fieldwork next week, and farmers will be chomping at the bit, so still no overt planting delay concerns as of yet.


Soybeans continue their winning ways overnight, rallying as much as 14c at one point but still holding 6-8c gains as we move into the last trading day of the week.  Wheat and corn are tagging along, somewhat reluctantly, although this morning’s export sales report will be looked at closely, namely for soybeans.  Any positive sales, however, small, is bullish and more than the current balance sheet can support.  There were lots of reports around about weak South American soybean basis thanks to heavy SAM farmer selling on yesterday’s rally.  Reports of -65K trading were common (FOB PGA).  This should keep soybeans headed towards the US in a fairly regular fashion.  Yet, these still aren’t cheap enough to hit upriver crush plants in IL/IA or S-MN processors.  North Dakota soybeans with no PNW program still work cheaper into these locales.  Still, the chatter of China washing out 12 soybean cargoes, 10 from Brazil and 2 from the US-PNW, has some traders nervous.  The more cancellations China makes from Brazil, the more likely those soybeans are going to find a home in the US.  The soybean rally is about the tight US, not the Chinese at the moment, but headline-based downdrafts can and will happen.  Imports will continue, but the overall health of the Chinese buying program should be judged on their continued new crop buying which remains the highest of the last 5-years when factoring in the “unknown” category.  I’ll attempt to put more light on this subject with a weekend comment.

Corn had its own round of bullish news yesterday with weekly ethanol production rising to 939,000bbls/day, the highest since June 2012 and the fourth highest week on record.  This is up 13% y/y, and what’s more, stocks actually dropped 455,000bbls to 15.952 billion barrels, highlighting the heavy demand for ethanol as we head into the driving season.  Ethanol plants are taking advantage of strong margins, and based on the ethanol demand pull, those margins could be around well into summer.  With slowly improving rail performance for both hopper cars and tankers, this should lead to some localized basis improvement.  The corn market wasn’t able to respond in kind, however, as it does appear the best of the old crop tightness has been priced in for the time being, and the market is much more concerned with improved planting weather next week.  The old crop balance sheet has tightened considerably the last 5-months, but as noted, much of it has been priced in.  No feed demand update will be issued until June, and this analyst isn’t sure we can sustain another leg higher on weekly ethanol and export headlines.  We need good headlines to sustain the cuts the USDA gave us last week.

Wheat markets are bouncing a bit into the weekend despite prospects for rainfall several times the next week.  Russia/Ukraine tension remains a front-page issue, but the US still has yet to pick up any notable business from it.  The underlying Russian economy seems like more of a story than any disrupted exports to date.  Still, one thing worth pointing out to any spring wheat farmers looking at selling new crop is the discount of new crop Minneapolis wheat to KC wheat.  At current, September/December/March Minneapolis wheat is trading at a 18-22c discount to KC wheat thanks in large part to the southern plains weather and expectations for a small crop.  I would point out, however, that rarely does KC not give back this premium and more heading into and out of harvest, regardless of the size of the HRW crop relative to the HRS crop.  In looking at tight balance sheet years of the past, and using December futures, I constructed the chart below (which is also available on Twitter).  It shows the current KC/Minneapolis spread in black at +25.75c.  As you’ll notice, however, in 2013, 2011, 2009, 2007 and 2002, KC relinquished that premium substantially heading into May and June harvest.  2009, 2011 and 2013 saw that spread trade all the way down to 70-80c discount KC.  The “cheapest” discount KC traded to MPLS was in 2002 when we hit -15.75c in late May.  Something to stay abreast of as we head into spring wheat planting.

Export sales estimates for today include 75-400TMT wheat, 625-950TMT corn, -200/+100TMT soybeans, 120-250TMT meal and 0-10TMT soy oil.

There were 44 soybean certs canceled last night leaving 82 outstanding.

Bottom Line: Watch the export sales report for short-term direction, but be mindful of the long weekend ahead with chances of rain for the southern plains and open fieldwork for the Midwest next week.  Booking profits going into the Easter weekend wouldn’t be unreasonable.

Good Luck Today.


Dec MW-KC Seasonal 4-17



Tregg Cronin

Market Analyst






COMMODITY TRADING INVOLVES RISK AND MAY NOT BE SUITABLE FOR ALL RECEIPIENTS OF THIS POST. Neither the information presented, nor any opinions expressed, constitutes a solicitation for the purchase or sale of any commodities. The thoughts expressed in this email and basic data from which they are derived are believed to be reliable, but cannot be guaranteed due to uncertainty about future events and complexities surrounding commodity markets. Those acting on the information are responsible for their own actions.

Railroad problems…

As winter moves to spring and the eternal winter finally loosens its grip (someday hopefully), the hopes of the North American grain industry is that we can finally start to see a sense of normalcy regarding rail transportation. All winter long, northern railroads have been blaming extreme cold weather for the inconsistent rail movement that has raised BNSF shuttle freight values to $3,500+ per railcar and forced the CP Railway and CN Railway to fall 60,000 railcars behind on grain movement. On the surface, cold weather is most certainly a valid excuse. Saskatoon experienced their coldest February in 20 years, Minneapolis its coldest winter since 1979, etc. Nothing works well in the cold. Engines don’t start, water doesn’t flow, hands get cold. It’s self-explanatory, we all get it.

Where does the railroad go from here however? Is warmer weather the magic bullet that allows the railroads to catch up? Or will warmer weather unveil a mask to reveal the bigger problems surrounding rail transportation in the Upper Midwest? What will the “warmer weather” bring?

One thing we will certainly see with warmer weather – Construction season will once again start on the major rail lines in North Dakota and Saskatchewan. BNSF’s double track expansion from Minot to Williston forced major maintenance of way delays on their northern line last summer. With only one third of this project completed, and other construction projects ongoing, delays will undoubtedly occur once again.

On the other side of the spectrum, crude oil production in North Dakota is hovering around 950,000 barrels per day, roughly a 180k bpd increase from 2012. Over the past 3 years Bakken oil production has increased by an average of 202k bpd year over year. One thing the Bakken has failed to do is disappoint. Most estimates are for North Dakota production to cap out around 1.2 – 1.3 mbpd at some point in the upcoming 2 – 3 years. The escalation in production has been nothing short of amazing, given the constraints to working in frigid western ND, infrastructure limitations and labor shortages. The oil industry has and is still managing to produce at an outstanding pace.

With all this, it is hard to imagine how the railroads will begin to catch up back to “normal” freight movement. Any short term increases in oil production in the Bakken are basically all forced to move to market via the railroad. Tapped out pipeline and refinery capacity doesn’t offer much of a solution. A 150 kbpd increase in production in 2014 to 1.1 mbpd means an extra two crude trains per day will be required to move out of North Dakota. Adding 2 more trains to an already tapped rail system means that an extra two trains per day of some other commodity (intermodal, grain, etc.) will need to be replaced or oil production will have to slow. I’m not going to bet on the latter. Take the same conditions and spread them to the CP and CN in southern SK and what you end up with is a rail system that is, for the moment, over capacity. All the relief valves for more efficient grain movement come in the form of ongoing rail construction projects and pipeline expansions. Neither of which will be an option in the short term.

The reality of situation is that the railroad is going to prioritize moving its most profitable products. Grain traffic will have to compete from a price and efficiency standpoint with oilfield products including crude, sand, LPG, pipe, etc. Legislation regarding mandated grain car movements undermines the commitment that the rail lines have made to the energy industry. Unfortunately for the grain industry, this likely means that the transportation nightmare that has unraveled over the past 6 months will likely persist for much longer than the cold weather does.