Weekly Update – September 21, 2018

Corn struggled to find much traction early week coming off USDA’s surprise yield increase last week. The market expected a slight reduction in yield but instead USDA raised yield from 178.4bu/acre last month to 181.3 defying all the private estimates. Even if we accept this yield increase, US carryout still drops 250 million bushels from this year and world carryout still projected to be the tightest since the 1970’s. Low prices have done their job and helped spur demand. The market will be watching yield reports closely from here as harvest gets rolling. The next USDA yield estimate in October and it will use actual ear weights and some harvested yields so is regarded as a more accurate yield estimate. The corn market was able to gain some strength later in the week on strength in soybeans and good exports. Corn is trying to find a seasonal low and after rallying from new lows later this week, technicals are improving. The seasonals also turn in our favor this time of year. We have not talked much about the Chinese trade in regards to corn because we do not export much corn to China, but the trade issues have had a very negative effect of ethanol demand and ethanol margins have collapsed. Progress on trade with China would be helpful for ethanol margins.

There have only been a few minor supply issues to Southeast feedmills as a result of the storm so far. There could still be issues as hiccups and detours move through the supply chain so stay tuned. Harvest pressure has subsided and now rail basis will have more influence over bids.

The trade rhetoric continues with more of the same. Some analysts continue to write that the Chinese cannot survive without US soybeans and they are completely at our mercy and will give in to all our demands at any time. Other analysts (mostly Chinese) write that they can completely eliminate US imports if they use a combination of South American imports, substitutes and feed more efficiently. I suspect the truth lies somewhere in the middle. The market is still trying to decide what to make of all of it. USDA’s balance sheet shows a very sharp reduction of exports and on top of a big crop giving us a very big carryout. The market has priced that in so any signs of progress will be met by a significant move higher. This is the time of year China starts to shift from South American production to our soybeans so the market is staying carefully tuned. The news this week of China making significant new purchases from Argentina and Argentina making significant purchases from the US has helped breath life into this market. Argentina has changed some import/export taxes to facilitate this. It is a sign that China cannot eliminate their dependance as easily as they are trying to make out. The market is searching to try to find long term support, this week has been very positive for that. Any progress on trade or China finding a way to buy US beans will continue to push this market higher.

However even if we get the trade barriers eliminated quickly, we are still going to have to contend with a soft basis this year as the beans are already backing up in the Midwest rather than moving quickly down the Mississippi to the gulf. There are going to be a ton of beans backing up in the interior of the United States and it is going to pressure basis. Even after the storm, Eastern NC/VA still has a very respectable crop in most areas. In fields that the beans have not gone under water, the storm did not do very much damage as the winds were not that severe. There were areas that were losing yield due to dry weather before the storm and salt spray along the coast also did not do them any favors but overall we are looking for a decent crop.

Wheat has failed to move with much conviction either direction. Improving US weather, USDA raising Russian production, large fund long position, weakness in corn have all pressured the wheat market. However, unlike corn and soybeans wheat has not broken through the lows as we traded down here in July. Currently the US holds adequate stocks but there are weather problems brewing elsewhere in the world. It remains to be seen if Russia can export as much as they indicate and they have failed to get moisture to plant this years crop. If there are more hints at restricting exports, the market will react quickly. Australian weather continues to deteriorate. A dropping US dollar will make exports more competitive. Market has been closely watching Egyptian tenders as offers have come in quite a bit higher than last years. Argentina is becoming less competitive and the US is getting a lot closer to being the lowest cost supplier. New crop wheat can be back over $6 very quickly. Be patient on wheat.

The market failed to react to the monster storm bearing down on the Southeast and it seems to have done significant damage to the NC crop. The cotton market has been unable to get a daily rally more than 100 points for almost a month. Exports continue to be dismal. We were so far ahead of pace until this summer that we are still on pace to meet USDAs export target, but the market is very concerned about the absence of demand from China and Turkey. After a brutal hot dry summer in Texas, now they are getting rain as the cotton matures. This could cause additional quality concerns. A weakening dollar will also help support, if we can make progress on trade. Cotton would really benefit from some sign of progress on trade with China, otherwise look for continued sideways to lower trade.

7 Day Precip Forecast

The colors may be hard to see here, but the largest portion of the pie is US stocks. This is why it is important if US becomes the lowest cost supply of wheat, because we are the biggest holder.