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Alpha Summer Trends In Agricultural Markets

Wheat, Soybeans and Corn

by Jessica Darmoni

Hehmeyer Trading + Investments is home to a plethora of experienced and knowledgeable managers.  One of the reasons we launched this blog was to create a space to share their expert insight and observations.  This week we are featuring commentary from Chad Burlet of Third Street Ag Investments.  The opinions and views expressed in this commentary are that of the author.  Hehmeyer Trading + Investments may not necessarily agree with the opinions of the author.

Two themes that have been in place most of the summer are that the world situation for wheat has continued to tighten and that the world situation for soybeans has continued to become more burdensome.

The world wheat story has been dominated by a steady drumbeat of disappointing crops around the world. Europe and the Former Soviet Union (FSU) countries were the first to sound the alarm, but Australia and Canada have now followed suit. Of the eight major wheat-exporting countries, only the U.S. has the capacity to increase exports. The other seven are facing minimal carryouts despite export projections well below last year.

On paper, total world stocks do not appear alarming, but that is distorted by the 55%, which are held in China and are not available to the market. China is slowly working to reduce those stocks, but it will take time. Last fall they reduced the price they would pay to put domestic wheat into government reserves, and starting in September, they have said they will reduce the minimum sales price at the auctions where they sell those stocks back into the market. The old price was close to $10/bushel and the auctions were a complete bust. Just as they did with corn two years ago, they will need to make a budgetary allocation so they can write down the value of their wheat.

In early September, the Russian Agricultural Ministry met with exporters to discuss their wheat market. In August, there were indications that they might impose export taxes once their wheat exports reach 25 MMT or total grain exports reach 30 MMT. The September meeting had a more relaxed tone and taxes or restrictions don’t appear imminent.

Next week we’ll get a crop estimate from Australia and the U.S. will update their assessment of world supply and demand with their September WASDE report. Those reports could tip a market that is precariously balanced.

Meanwhile, the world soybean situation has been growing more bearish by the week. The two dominant features here have been the U.S.-China trade war and the extraordinary U.S. crop.

There have been fleeting moments of hope in the U.S.-China negotiations, but a majority of the news has been disappointing and almost everyone is more pessimistic than they were a month ago. The odds of a protracted trade war appear high. Some have felt that a trade war would only lead to a realignment of trade flows, but we have always felt that it would lead to demand destruction. Soybeans are losing demand via changes in formulations in China, i.e. less soybean meal and increased use of other proteins, and by increased use of other oilseeds.  The updated “Party line” from various Chinese spokespersons is that they can get by with 10 million metric tons (MMT) fewer imports than last year, 86 MMT versus 96 MMT.

While that story has been developing on the demand side, the U.S. has been producing a change of similar proportions on the supply side. Estimates of U.S. yields have exploded from 50 bushels per acre (bpa) on August 1st (Informa), to 53.8 bpa on August 30th (FCStone). Those additional 3.8 bushels on 88.9 million harvested acres will give us an additional 338 million bushels or 9.2 MMT.

The U.S. cash soybean market has embraced this reality more quickly than have the futures. Cash basis levels in North Dakota are as low as $1.80/bushel under November futures, and the delivery calculation off September futures shows the entire Illinois River is more than a dollar per bushel below delivery equivalents.

Despite those near-record dislocations, futures prices continue to send the wrong signal. Brazil is on track to increase soybean acres by 3.2% this fall. Next door, Argentina has responded to its financial crisis by imposing a 10-11% export tax on wheat and corn while leaving soybean taxes almost unchanged. That will clearly encourage more soybean acres. Even in the U.S. the response does not appear adequate. Farm Futures recently completed their farmer survey on 2019 planting intentions. Their results showed soybean acres down only 2.3%, corn acres up 1.9%, and wheat acres up 1%. Those changes appear reasonable based on current prices but with normal South American weather we’ll need switches that are at least three times that large. We thus have a strong bias that soybean prices will drop significantly relative to corn and wheat prices.

With wheat prices well supported and soybean prices decidedly bearish, corn prices are somewhere in the middle. We’ve written for several months how the corn balance sheets for the U.S. and the world are historically tight, particularly when Chinese stocks are excluded. With record U.S. corn yields now a virtual certainty, the corn situation has become less volatile. We still expect prices to work higher, but they will lag wheat prices.

The primary reasons we are friendly to corn prices is that: they are cheap to world wheat and we expect an increase in world feed demand; U.S. corn is cheap relative to other exporting countries, leading to record exports; and China has renewed its commitment to a national E10 program.

After two years of proclaiming their commitment to draw down their massive by increasing domestic industrial use, the Chinese government had gone silent for 11 months.  The market was questioning their commitment to that program, but they restated their plan this month and the first stations are now offering E10 to the public.  They plan to have ethanol in 15 provinces by next year and to be national by 2020.  They’ve also sold over 152 MMT of government reserves and domestic prices have stayed close to $6/bushel.

While the fundamentals in all three markets appear to strongly support our market views, there is a long list of things, which disrupt prices with little notice.  That list includes currency degredation in South America; export limits in Russia; headline risk in US-China negotiations; court cases for truck freight in Brazil and dicamba in the U.S.; U.S.-Canada trade talks; China’s program of reducing stocks; and, as always, weather.

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