The Dirt > October 18, 2019

October 18, 2019

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 temperatures (as of October 13th). That said several key corn producing states in the Western Corn Belt including North Dakota, South Dakota, and Minnesota reported “mature” percentages still well behind a year ago. North Dakota’s corn crop was just 42% mature versus 96% in 2018, South Dakota 52% versus 92%, and Minnesota 66% versus 97%. Following last weekend’s snowstorm and below freezing temperatures, which primarily centered on North Dakota however also affected sections of South Dakota, Minnesota, Iowa, and Wisconsin, trade analysts have estimated that approximately 100 to 200 million bushels of 2019 corn production were potentially forfeited. This in turn would suggest that as the market shifts its attention to the November 2019 WASDE report (released on 11/8/2019) a 2019/20 U.S. corn yield reduction of 1.2 to 2.4 bpa versus October is likely in play (range of 166.0 to 167.2 bpa versus the October forecast of 168.4 bpa).

 How “Bullish” are the crop losses in the Western Corn Belt? I would argue they’ll continue to act more as an underlying price support at or below $3.85 in December corn futures versus being the potential catalyst in rallying prices back over $4.05 per bushel. The reality is with 2019/20 U.S. corn ending stocks currently estimated at 1.929 billion bushels there is some cushion to accommodate minor production losses. Furthermore U.S. corn demand continues to disappoint in both the ethanol and export sectors. Thursday’s weekly EIA report showed U.S. ethanol production averaging 971,000 barrels per day for the week ending October 11th, 2019. This marked the 4th consecutive week U.S. ethanol production has failed to exceed 1.0 million barrels per day. The last time that occurred was over a 4-week period in April 2017. It’s becoming more and more apparent that the U.S. ethanol industry isn’t simply going to ramp back up to full production capacity even with margins improving substantially in the front-end over the last two weeks. The EIA’s most recent 4-week average run-rate of 959,000 barrels per day was down 67,000 bpd from the previous year, which is the daily production equivalent (2.814 million gallons) of ten 100- million gallon ethanol facilities not producing any ethanol. Ethanol values have rallied; however with an approximate 10-cent per gallon inversion between prompt and next month prices, there remains little margin incentive to restart shuttered ethanol facilities based on the forward margin
curve still hoovering undecidedly at cash positive EBITDA. Strong corn basis levels and the inability to source new-crop corn supplies due to continued weather-related harvest delays has also been a significant prohibitive factor.

As far as U.S. corn exports are concerned, Friday’s export sales summary showed weekly U.S. corn
export sales of just 14.5 million bushels. Crop year-to-date sales increased to 408.0 million bushels
versus 830.2 million a year ago, a deficit of 422.2 million bushels (or -51%). This is a HUGE problem
for supply-side Corn Bulls. Historically U.S. corn export sales are front-end loaded in the marketing
year, which as it relates to the current crop year runs from September 1st, 2019 through August
31st, 2020. Corn export competition from South America accelerates February forward with Brazil
harvesting its full-season corn in Feb/Mar with its “safrinha” corn harvest to follow during
Jun/Jul/Aug. Brazil corn exports will invariably start to displace U.S. corn exports during Q1 – Q2
2020 making it very difficult for the U.S. to “catch up” late in the marketing year. As of the October
2019 WASDE report the USDA was projecting 2019/20 cumulative Brazil/Argentina corn exports of
67.5 MMT versus 75 MMT in 2018/19, a difference of -7.5 MMT or -295 million bushels. Therefore
it’s possible the U.S. export situation performs better than it did a year ago Q2 2020 forward;
however I’m not overly optimistic…

On Friday, October 18th December corn futures closed down 3 ¾-cents per bushel, finishing at $3.91.

Two narratives in corn continue play out, leading to an elevated; however narrow trading range ($3.80 by
$4.02) with Specs and End-users alike unwilling to add longs or shorts at the extremes of the range.

Why no one is ready to buy CZ19 above $4.02?

 As I referenced above, both U.S. corn ethanol and export demand remains extremely sluggish, leaving the impression that even if the USDA lowers the U.S. corn yield as much as 2.4 BPA in the November Crop report, the USDA might be able to find a near equal demand offset. This means U.S. corn ending stocks likely won’t drift much below 1.85 billion bushels.

 From a seasonal price perspective, this isn’t the time for extended rallies in December corn futures.
With harvest progress likely to accelerate, Commercial hedge/sell paper will neutralize the real impact
of Spec/Managed Money corn buying. (Key Resistance = $4.01 ½; 200-Day Moving Average)

Why no one is ready to sell CZ19 below $3.80?

 Believe it or not, traders are still wary of some unexpected downward U.S. corn production adjustment in the November WASDE report. The USDA helped stoke those fears by announcing on Thursday they will resurvey harvested acreage in North Dakota and Minnesota due to last weekend’s massive snowstorm. Those changes will be reflected in the November report.

 Additionally, U.S. corn basis levels remain firm across the Corn Belt, offering a strong indication that U.S. corn supplies likely aren’t as robust at they appear on paper. This also implies that the U.S. corn harvest will be drawn-out. Therefore the market likely won’t feel/experience a “gut slot harvest” type sell-off. (Key Support = $3.77; 50-Day Moving Average)

The other ever-present wild card is a U.S. – China trade deal. No one wants to be on the wrong side of a futures trade prior to that deal being consummated. To be continued…

Farm, renewable fuel groups angered by EPA plan to replace lost demand for ethanol, biodiesel (Des Moines Register, 10/15) Iowa farm and renewable fuel groups say a proposal that the U.S. Environmental Protection Agency released Tuesday fails to keep President Donald Trump's promise to boost the sagging market for ethanol and biodiesel. “We had a deal with the president … but what the EPA rolled out isn’t that deal,” said Monte Shaw, the Iowa Renewable Fuels Association's executive director. Jim Greif, president of the Iowa Corn Growers Association, said his group "is outraged" that the EPA's proposal Tuesday doesn't reflect what the administration outlined "only 11 days ago."

On Oct. 4, the EPA said it would begin accounting for the reduction in demand for corn-based ethanol and soybean-based biodiesel that resulted when the administration granted some refineries exemptions from a federal mandate called the Renewable Fuel Standard. The law, known as RFS, outlines how many gallons of ethanol and biodiesel that oil refiners must blend into the nation's fuel supply each year. The EPA said Tuesday it plans to use a three-year average to account for the reduction in demand for ethanol and biodiesel resulting from the waivers, using the number of gallons that the U.S. Department of Energy recommends waiving. But the Trump administration earlier this month told farm groups it would use the average of the actual number of renewable fuel gallons that are waived, which is much larger. "Any proposal that does not account for actual waived gallons under the Renewable Fuel Standard fails to restore the integrity of the law," Greif said in a statement. The difference between the two is significant, said Monte Shaw, executive director of the Iowa Renewable Fuels Association. The energy department, which provides an initial review of small refinery exemption requests, most recently recommended granting waivers for 770 million gallons of renewable fuels. The EPA, however, approved waivers for 1.4 billion gallons during its last round of exemptions. Since taking office, the Trump administration has granted 85 waivers to oil refineries, freeing them from using 4 billion gallons of renewable fuel. The exemptions have killed demand for 1.4 billion bushels of corn used to make ethanol, industry officials say. "It's not a shock that the EPA is trying to water down" the plan the Trump administration announced earlier this month, Shaw said.

China Demands U.S. Remove Tariffs Levied During Trade War for Final Deal (Newsweek, 10/17) Hopes of a "phase one" trade deal between the United States and China have fluctuated since Friday, when President Donald Trump announced that the two countries would soon be signing a preliminary agreement. Even as talks
between the countries continue, as Beijing and Washington seek to iron out the details of the "phase one" agreement to end the 18-month trade war, China cautioned on Thursday that the long-running conflict won't end until the U.S. removes all tariffs levied since July 2018.
"The ultimate goal for the negotiations between the two sides is to end the trade war, cancel all additional tariffs. This is good for China, good for the US and good for the whole world," Ministry of Commerce spokesman Gao Feng said in a statement Thursday, the South China Morning Post reported. But China is willing to agree to a partial deal that would include "progress in the direction of canceling all tariffs," he said. Under the deal announced Friday at the White House, which officials from both countries are still discussing, China would agree to increase purchases of U.S. agricultural products. Trump has said that China's commitment was between $40 to $50 billion each year. In addition, Trump said that China would take action on certain intellectual property disputes. The president has regularly voiced discontent over China's policies on forced technology sharing, which he has said amount to intellectual property theft. In return for China's concessions, the U.S. has agreed to suspend a tariff increase set to take place this week.

China Third-Quarter GDP Grows 6.0% Year-On-Year, Misses Expectations BEIJING (REUTERS, 10/18) - China's economic growth slowed more than expected to 6.0% year-on-year in the third quarter, the weakest pace in at least 27-1/2 years, as demand at home and abroad faltered amid a bruising Sino-U.S. trade war.
Friday's data marked a further loss of momentum for the economy from the second quarter's 6.2% growth, likely raising expectations that Beijing needs to roll out more measures to ward off a sharper slowdown. "The Chinese authorities must be taking the economic situation quite seriously. The U.S.-China trade war has worsened China's jobs and wage situation and corporations also refrained from making capital investment."

** 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

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...
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 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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