Alpha Third Street Ag Investment's February 2019 Commentary

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.

For the second month in a row the U.S.-China trade talks dominated the headlines and captured much of the market’s attention.  As U.S. farmers face a final decision on their spring planting, the level of uncertainty is unusually high.  Farm debt is up and profitable options for this year are difficult to identify.

Outside of the U.S., lower world grain prices have been the theme.  Wheat has been the most bearish with most cash markets $20-$25/metric ton (MT) lower than a month ago.  Russia remains the world’s top wheat exporter and their prices moved steadily higher from November through early February as they shipped at an unsustainable rate.  They finally reached price levels where they were uncompetitive on two successive Egyptian tenders.  That “timeout” was all their market needed as their prices then dropped $15/MT in 12 days.  That allowed them to be one of four selling countries in the last Egyptian tender.

During Russia’s absence the U.S. was able to make sales in those two tenders.  This coincided with the U.S. government shutdown and the USDA just confirmed that the U.S. was able to sell 3.6 million MT (MMT) of wheat (all classes) in that six-week period.  That allowed CME wheat futures to trade $5.00-$5.30/bushel during all of January and the first half of February.  With world prices breaking the CME is now carving out a new range which we expect to be $4.50-$4.80, basis May futures.  For the month futures prices are down 11.5%.

Kansas City wheat has remained very cheap relative to Chicago, trading at a 10 to 30 cent discount.  Kansas City July futures have moved from $1.40/bushel over corn to only $0.75 over.  That spread will create good feed demand for Hard Red Winter (HRW) wheat in the southwest because of the wide cash basis advantage for local HRW versus rail corn from the Midwest.

World corn prices also moved lower during February.  Ukraine has been exporting at an exceptional rate and remains very price competitive.  Through yesterday they had shipped 15.8 MMT, up 6.2 MMT from a year ago.  They are well on pace to exceed the USDA’s 28.5 MMT estimate, which would be 10.5 MMT above last year.  At the same time, Argentine weather has improved and their crop estimates have grown.  They are the cheapest seller in the world for the late-summer positions.  In early January cumulative U.S. export shipments were 200 million bushels (MB) ahead of a year ago.  Today they are even with last year.

Corn continues to be mentioned as a possible beneficiary of any U.S.-China trade agreement, but to this point all rumors of China buying U.S. corn have quickly been discredited.  It is economic for China to import corn, and they have bought some from Ukraine, so it would appear to be a painless way for them to chip away at their balance of trade with the U.S.

We are seeing some price support from a usually aggressive buying program by South Korea.  In addition, it appears we’ll have some non-traditional buying from India and South Africa, two countries that are normally self-sufficient.

In the U.S., the ethanol industry continues to hope for export business for ethanol and DDG as well as new rules from the EPA allowing year around use of E15.  At this point it appears corn used for ethanol will fall 50-100 MB short of USDA estimates.  This has caused calendar spreads to widen, but December corn futures were only down 2% for the month.

In the soybean market, U.S. farmers and exporters benefitted from two rounds of “goodwill” buying by China.  That buying helped take May futures to a high of $9.45/bushel on February 1st.  Since then we’ve endured an endless barrage of headlines and tweets which are alternatingly optimistic and pessimistic about the prospects for a broad trade agreement.

Last Friday, at the White House, Liu He, China’s Vice Premier, said they would buy another 10 MMT of U.S. soybeans.  It appears this round of buying had less advanced planning and the markets have been disappointed.  However, 1.8 MMT of new sales to China did show up in today’s weekly sales summary.  Questions are now being raised about Sinograin’s ability to buy additional soybeans.  They manage China’s state-owned reserves and it appears they may need to sell some of their existing inventory before they can make new purchases.  That is probably more of a legislated limit than it is a physical limit.

The brightest ray of sunshine for the soybean market continues to be the domestic crushing industry.  Margins remain very strong, new crush records are set every month and domestic product demand is running well ahead of USDA projections.  We look for the USDA to increase its crush estimate by 20-40 MB in March.  To this point this has created an adequate offset to lagging exports and soybean futures were only 1-2% lower this month.

With the calendar about to turn over to March, attention is quickly turning toward U.S. production prospects.  At its Ag Outlook Forum last week, the USDA projected that corn acres would be 3 million higher than last year and soybean acres would be 4.2 million lower.  While that appears to be a reasonable starting point, we feel factors are at work which will reduce that shift.  Most importantly, weather last fall and currently has been very unfavorable for field work.  Last fall was cool and wet and farmers were unable to complete much of their normal fieldwork. Now the northern portion of the U.S. is extremely cold and has a large snow pack and the southern portion is extremely wet.  Everything is pointing toward delayed planting, which would favor soybeans.

Coinciding with this is a tightening of farm credit.  Some farmers are having difficulty getting operating loans and others are being forced to sell some of their old crop corn before they can receive additional funds.  Corn is much more capital intensive to plant so anyone in a tight fiscal situation will find it easer to plant soybeans than corn.  At the same time we are seeing the ratio of November Soybean futures and December Corn futures go above 2.4:1.  That is a good benchmark for soybean profitability to start to move above corn profitability.  The current balance sheet for corn is much tighter than the one for soybeans and we believe these three factors will reduce the acreage shift enough to tighten the corn S&D even further.

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