Third Street Ag's January 2019 Commentary
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.
Washington, D.C. continued to play an important role in our markets during the month of January. The U.S.-China Trade Talks remained the dominant factor for short-and long-term price direction. In addition, the 35-day partial shutdown of the Federal Government created a significant backlog of agricultural data. Some weekly reports will not be up to date until March. Thus Washington was responsible for creating a majority of the unknowns this month.
With politicians “driving the bus” one might have expected our markets to be more volatile than usual, but the exact opposite was true. With the exception of soybean oil, none of the agricultural markets had a trading range wider than 5% or a net change greater than 2.6%. The fact that there was no January World Agricultural Supply and Demand Estimates (WASDE) report certainly helped as a major government report can move markets further than that in a matter of minutes.
As the month came to a close the U.S. and China are concluding two days of trade talks. President Trump’s comments on the negotiations had been generally positive and he invited Vice Premier Liu He, the leader of the Chinese delegation, to the White House. At that meeting the Vice Premier surprised the U.S. delegation by offering to buy another 5 million metric tons (MMT) of U.S. soybeans. The President also said he would need to meet with Chinese President Xi Jinping before a deal could be finalized. The market has responded very positively to the offer of additional purchases and is anxiously awaiting details of a Trump-Xi meeting. Definitive confirmation of a scheduled meeting between the two Presidents will further support our equity and commodities markets.
In the wheat market we are finally seeing a changing of the guard. Russia has been the low price setter and the dominant seller this entire crop year. However Russia was shut out in a General Authority for Supply Commodities (Egypt) tender earlier this week, with France and Romania splitting the business. It was the first time in 18 months that France has sold GASC and it came about due to Russian prices rallying rather than French prices breaking. U.S. Soft Read Winter (SRW wheat) was the cheapest Free On Board (FOB) price, but it was uncompetitive on a delivered basis. As has been the case most of the year, U.S. futures will have to drop back close to $5 before we will capture any cheapest wheat business.
Captive SRW business has been enough to keep our cash basis firm and our calendar spreads narrow. The Variable Storage Rate (VSR) mechanism is about to trigger another reduction in the storage rate for delivery warehouses. We will then be at the statutory minimum of five cents per month. It will be the first time in 2.5 years that we’ve been that low.
Along with Russia, Ukraine is the other major Black Sea wheat exporter. At the beginning of this crop year the government and the exporters agreed that they would not export more than 8 MMT of milling wheat and 8 MMT of feed wheat. While the shipping statistics don’t yet show it, the government told the exporters 10 days ago that they had already sold 85% of their milling quota.
In the corn market exports have certainly been the highlight on the demand side. In their last WASDE report the USDA projected that exports would end only 12 million bushels (MB) above last year. We are currently 300 MB ahead and we have become price competitive again to several key destinations. Much like wheat, we became competitive when the dominant Black Sea exporter had a strong price rally. In the case of corn, Ukraine is the dominant Black Sea shipper. Ukrainian ROB prices have rallied $24/MT in five months. A majority of the credit for that increase can be given to the EU whose imports are running 80% ahead of last year.
The disappointing demand category for corn has been ethanol. The combination of the trade war and the EPA “hardship” waivers have taken a toll on that industry and cash margins are at 10-year lows. We started the crop year close to the necessary pace, but quickly fell off. The USDA reduced projected ethanol grind by 50 MB in December and they should cut it another 50 MB next week in the February WASDE. The one bright spot for ethanol is that the EPA continues to say that they’ll have E15 regulations in place for the summer driving season.
The soybean market was the beneficiary of 5 MMT of Chinese “goodwill” purchases during December and is starting February very strong due to the off of a second tranche. As everyone expected, Brazil’s shipping season is off to an excellent start and the U.S. is not currently price competitive. With Argentina also producing an excellent crop there is no change the U.S. will meet its export project unless China buys a considerable quantity of U.S. soybeans regardless of price. Our expectation is that other buyers will react accordingly and the U.S. will still end up with a billion bushel carryout.
This creates an interesting acreage scenario for the U.S. The price support levels for Federal Crop Insurance are set in February. The current ration for November Soybeans versus December is 2.4:1. At that ratio only a few million acres will switch from soybeans to corn or from soybeans to other grains. That will create a scenario where our soybean carryout will continue to grow and our corn carryout will continue to decline. Once the February WASDE is behind us we will view that ratio as a major trading opportunity.