The Dirt > November 1, 2019

November 1, 2019

Nov 25, 2019


Monday’s Weekly Crop Progress report showed the U.S. corn harvest improving to 30% complete as of October 20th, an 8% increase week-on-week, which compared to 48% harvested in 2018 and the 5-year average of 47%. More importantly the percentage of corn now estimated as “mature” (and therefore by definition no longer at risk from freezing temperatures) increased to 86% nationally versus 99% a year ago and the 5-year average of 97%. That said several key corn producing states still reported “mature” percentages well behind a year ago, which remains a significant concern moving forward due to the return of sharply below-normal temperatures for the entire Corn Belt into and through the end of October (see NOAA 6 to 10-Day Temperature Outlook on page 5). For example, North Dakota’s corn crop was forecasted at just 65% mature versus 98% in 2018, Ohio 72% versus 96%, South Dakota 74% versus 96%, Michigan 62% versus 94%, and Wisconsin 61% versus 96%. Those 5-states collectively were projected to produce 2.23 billion bushels of corn as of the October 2019 Crop Production report, accounting for 16.2% of total 2019/20 U.S. corn production. Current “mature” percentages would indicate that approximately 25% of that cumulative production figure is now likely to be negatively impacted by upcoming freezing temperatures, which invariably should lead to lower test weights and some anticipated yield drag relative to previous forecasts. That said…when I combine the bushels lost due to the recent snowstorm in the Dakota’s along with some additional crop losses now likely in the Eastern Corn Belt I’m leaning more heavily toward a 200 to 250 million bushel U.S. corn production decline in the November 2019 WASDE report (U.S. corn yield ranging from 165.4 to 166.0 bpa versus 168.2 bpa in October). For what it’s worth the largest October to November yield decline in the past 10-years has been -1.8 bpa in 2018/19.

In Wednesday’s EIA report weekly U.S. ethanol production was reported at 996,000 barrels per day for the week ending October 18th. This represented a 25,000 bpd increase from the previous week. That said this was the fifth consecutive week production has failed to eclipse 1.0 million barrels per day, which hasn’t happened since Sep/Oct 2016 (9/23/16 – 10/21/16). Meanwhile, U.S. ethanol stocks fell to 21.4 million barrels versus 22.1 million barrels the previous week and 23.9 million barrels for the same week a year ago.

Industry wide ethanol margins have improved of late due in part to the collective reductions in both run-rates and stocks (see Industry “margin” chart on page 5), which in turn has produced the intended effect of higher prompt ethanol values. At the end of August, Chicago Rule 11 ethanol was trading at approximately $1.38 per gallon. By October 11th Chicago R11 had rallied all the way up to $1.60 per gallon. Values have since corrected downward but have still managed to consolidate at or near $1.50 per gallon. And while December corn futures have also strengthened over that same time period, the gain in ethanol values has exceeded the recovery in corn prices allowing for a sizable improvement in the ethanol crush margin. That said as it relates to the 2019/20 U.S. corn S&D, I still remain of the opinion that USDA will likely lower its current corn-ethanol demand estimate of 5.400 billion bushels by at least 25 to 50 million bushels in either the November or December WASDE reports. The general belief is that the recent improvement in ethanol margins will prove short-lived with facilities currently running at less than 100% capacity likely to ramp back up production as new-crop corn supplies become more available. For this reason, the ethanol market continues to trade in approximately a 6 to 7-cent per gallon inversion even from October to November. Therefore the forward margin curve remains negative.

Corn futures traded sideways to lower for the better part of the week, eventually succumbing to 3 consecutive closes below the 20-day moving average of $3.901, which had been a key area of price support.

Is there a trade to be made at current price levels? With CZ trading in the mid-$3.80’s this is not an area where I’d make a pure directional play in corn futures (up or down). Ideally at this time of year, the preferred position is to utilize the seasonality, which historically lends itself to fairly narrow trading ranges. This suggests executing selling an options strangle at the perceived extremes of the current trading range (i.e. selling a $4.00 CZ19 call and a $3.80 CZ19 put); however with implied volatility trading sub-18% in December options there simply isn’t enough of a premium incentive to make this trade. Therefore I’m in a holding pattern until CZ19 either breaks below $3.80 or triggers some buy-stops above the 200-day moving average at $4.011.

From purely a fundamental perspective, the market (soybeans in particular) appears to be tiring of the China- U.S. ‘’phase one” trade deal narrative (note November soybeans closing down 13-cents per bushel on Friday). This week we essentially learned that at least for 2020 it’s now assumed that even if a deal is reached China’s U.S. agricultural purchases will likely reset to $20 billion, which is the equivalent of what China purchased in 2017. That’s still a positive but it’s far from the $40 to $50 billion purchase target President Trump initially implied would occur approximately 2-weeks ago when rumors of a potential trade deal first began to circulate. There’s also the unfortunate problem of African Swine Fever, which is still ravaging several Asian countries. This has greatly reduced soybean import demand in China with 2019/20 Chinese soybean imports currently forecasted at just 85 MMT versus the pre-ASF outbreak record high of 94.1 MMT in 2017/18. Meaning even if China returns to buying U.S. ag commodities on a consistent basis, the market isn’t as deep as it was 2-years ago for other non-tariff related reasons. Brazil also continues to export record volumes of soybeans further displacing U.S. sales.

Overall…with the November 2019 WASDE report still 2 full trading weeks away from being released, I expect more of the same in corn futures. I have no desire to force a trade at current price levels.

China offers tariff-free quota for 10 million tonnes of U.S. soybean purchases: BEIJING/SINGAPORE (Reuters) - Beijing on Tuesday offered major Chinese and international soybean processors waivers that  would exempt the companies from steep tariffs on imports of up to 10 million tonnes of U.S. soybeans, according to two people briefed on the matter. The waivers, however, failed to unleash a flood of immediate buying on Tuesday as U.S. prices remained too high, according to U.S. export traders. Market conditions have continued to determine Chinese buying in recent weeks despite U.S. President Donald Trump’s assurances of a wave of imminent sales. The quota to import U.S. soybeans was offered to state-owned crushers, privately owned crushers and major international trading houses with crushing plants in China at a meeting called by the state planner, said the sources, who were briefed by people that attended. The waivers were for U.S. shipments through March, two U.S. export sources said.

-Brazil could have 16 Corn-Based Ethanol Facilities by 2021 (Cordonnier): One of the major innovations in Brazilian agriculture in recent years has been the production of ethanol from corn instead of the traditional sugarcane. This new trend is certainly evident in the state of Mato Grosso where there could be 11 corn-based ethanol facilities by 2021. In all of Brazil, the number of corn-based ethanol facilities could reach 16 or more by 2021. There are currently 6 corn-based ethanol facilities in operation in Mato Grosso and 5 more are scheduled to be built over the next two years. According to the National Corn Ethanol Union (Unem), two facilities are in the final phases of construction and should be operational by the end of next year in the cities of Sorriso (central Mato Grosso) and Campo Novo do Parecis (western Mato Grosso). Three more are scheduled to be built by the end of 2021 in Nova Marilandia and two in Nova Mutum (all three are in the mid-north region of Mato Grosso). Of the current 6 facilities operating in Mato Grosso, three are stand along corn-based ethanol facilities and three are traditional sugar mills that have been retrofitted to utilize corn during the time of the year when sugarcane is not available (generally December through March).Corn ethanol production in Mato Grosso increased 66% from 2018 to 2019. In 2019, the state produced 1.1 billion liters (290.6 million gallons) of ethanol and that is expected to increase to 2 billion liters (528.4 million gallons) in 2020. Mato Grosso is the largest corn producing state in Brazil, so it not an accident that the state is also the largest producers of corn-based ethanol. The Mato Grosso Institute of Agricultural Economics (Imea) estimates that the state will produce 32 million tons of corn in 2019/20
and that corn production will continue to increase in the years ahead. The National Corn Ethanol Union also expects corn-based ethanol production to continue increasing as well.

Biofuel groups file petition challenging Trump administration's small-refinery waivers: Biofuels groups have filed a petition in the U.S. court of appeals in Washington against the Environmental Protection Agency, challenging the agency's process for granting refineries exemptions to the nation's biofuel blending mandates, the groups said Wednesday. The petition, filed by groups such as the Renewable Fuels Association, the American Coalition for Ethanol, and Growth Energy, challenges the EPA's process for granting waivers to 31 oil refineries for 2018. The biofuels industry has criticized the Trump administration for expanding the number of waivers granted in recent years, claiming the exemptions undercut demand for fuels such as corn-based ethanol.

China aims to buy at least $20 billion of agricultural products in a year if it signs a partial trade deal with the U.S., and would consider boosting purchases further in future rounds of talks, people familiar with the matter said. The $20 billion would take its imports of U.S. farm goods back to around the level in 2017, before the U.S. began imposing tariffs. In the second year of a potential final deal when all punitive tariffs are removed, those purchases could rise to $40-$50 billion, said the people, who asked not to be named discussing the private talks. The people did not say when the first year would start or when China would start counting agricultural imports toward the $20 billion. China has already started ramping up purchases to lay the groundwork for the signing of a phase one deal. Beijing issued waivers for 10 million tons of soybean purchases this week. It is considering approving an additional 4-5 million tons of grains, including wheat, corn and sorghum, according to the people, who didn’t provide specific volumes for each commodity.

** The information contained herein, or as an attachment, is gathered from sources we believe to be reliable, but cannot be guaranteed and should not be relied upon as such. Opinions expressed are subject to change without notice. Trading in commodity futures or options involves substantial risk of loss. Past results are not indicative of future results.**

Read More News

Oct 25, 2019
Monday’s Weekly Crop Progress report showed the U.S. corn harvest improving to 30% complete as of October 20th, an 8% increase week-on-week, which compared to 48% harvested in 2018 and the 5...
Oct 18, 2019
On Tuesday the USDA released its weekly Crop Progress report which showed 73% of the U.S. corn crop “mature” and therefore no longer in danger of being adversely impacted by freezing...
Oct 11, 2019
On Thursday the USDA released its much anticipated October 2019 WASDE report, which offered key revisions to both its previous U.S. corn and U.S. soybean S&D forecasts from a month ago.

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