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Thursday July 12th, 2018

September corn closed up 5 ¾ at $3.45 ¾ and December closed up 6 at $3.59 ¼. August soybeans closed up ¾ at $8.33 ¾ and November closed up 1 at $8.49 ¼. September wheat closed up 12 ¾ at $4.84 ½ and July 19 closed up 7 ¼ at $5.35. Crude oil closed up $.49 at $69.35.

Report Day proved to not be a complete bust. Even though there was no yield update, the elves at the USDA were busy in their workshops, making small tweaks to both old and new crop balance sheets. The corn market went stop-hunting shortly before the report, trading to new lows for the move shortly before the release. With mostly bullish data in the offing, the market was able to rebound, trading nearly a $.10 at one point before settling six cents higher. Managed Money traders were viewed net buyers of about 15,000 corn today, reversing their activities from Wed. CFTC data tomorrow will be welcome to tighten up their net positions (probably 50k net short?).

The July WASDE had mostly bullish feature, both in absolute terms and relative to expectations. As is usually the case, the USDA did not adjust yields in this report, leaving it at a trend-line 174 bpa, though we note that is a small victory given some rather aggressive yield expectations out there. They did increase acreage the expected 1.1 million from the June 29th report, but what was interesting is that a corresponding increase in demand completely swallowed up that extra production. The surprise, perhaps, was that a good portion of the demand came from the old crop, not the new, despite the small ‘miss’ from the June 1 stocks report. They increased 17/18 ethanol demand 25 MB, exports 100 mil, but did trim the feed/residual slush fund by 50 MB. This reduced old crop (17/18) ending stocks (and 18/19 carry-in) by nearly 75 million bushels to 2.027 billion. In the new crop (18/19), the USDA raised feed/residual by 75 mil bu, and exports by 125 mil, but cut ethanol 50 mil.  All in, the USDA actually lowered 18/19 domestic ending stocks 25 mil bu from the June report to 1.577 billion bushels.  The average analyst guess going in was 1.71 billion!

The world corn numbers were fairly unexciting by comparison but they also certainly were not bearish. The major change in the “old crop” was the reduction of full year Brazil crop estimates by 1.5 mmt to 83.5 mmt, which brought them into alignment with CONAB.  World 18/19 ending stocks were reduced almost 3 mmt, including the resulting 1 mmt reduction in old crop 17/18. The only other meaningful change in world production was a 3 mmt reduction in FSU corn production for the coming marketing year.  Note that world carryout excluding China is at the lowest stocks/use ratio seen since 12/13.

The soybean market shrugged off a bearish crop report to reverse out of new contract lows. A friendly corn report perhaps helped but the bean side of the report should have come with a disclaimer saying the following numbers project a scenario where no trade deal between the US and China is reached and if one is made you can rip up this forecast. That is pretty much how the trade handled the numbers where at sub $8.50 new crop beans, the risk reward to some favored buying this worst case scenario as presented by the USDA. While today’s reversal was very small and is not a clear signal that we are through breaking, this is the second time in less than a week that the soybean market reversed off of bearish news (trade tariff on Friday) and has the potential to be a building block, time will tell.

The USDA increase old crop crush by 15 mb and exports by 20 mb which reduced the carryout from 505 mb to 465. They left soybean yield unchanged at 48.5 bpa while applying the additional acres from the June 29th report which increased production by 30 mb from last month to 4.310 bb. The lower carry in to new crop along with a 45 mb increase in crush was not enough to offset a 250 mb reduction in exports so the carryout went up by 195 mb to 580 mb. The increased crush took soybean oil production up by 520 mln lbs which along with a 140 mln lb increased carrying more than offset an 500 mln increase in biodiesel and 100 mln increase in exports with the new crop carryout seen at 2.236 bln lbs.

In the world numbers, old crop carryout went up 3.5 mmt to 96.02 on increased supply in Argentina, Brazil and China more than offsetting the US reduction.  This carried into the new crop where carryout was up 10.25 mmt to 98.27 mmt.  They are projecting an increase in Brazilian plantings with a crop size of 120.5 mmt, up 2.5 mmt from last month.  The Chinese tariff is expected to cause higher prices for beans in China and slower protein meal consumption growth. Chinese soybean imports were lowered 8 mmt to 95 mmt.

According to Bloomberg, the US and China signaled they were open to resuming negotiations over trade after days of exchanging retaliatory threats, though Treasury Secretary Steven Mnuchin said Beijing must commit to deeper economic reforms.  Mnuchin told the House Financial Services Committee on Thursday that he and administration officials are “available” for negotiations, as he called U.S. tariffs imposed on China a “modest” step aimed at leveling the playing the field. “To the extent that China wants to make structural changes, I and the administration are available.

More EU production downgrades gave the Matif wheat market a little bounce, and that minor support spilled over to the US markets as we started the morning. Trade remained slightly better up until the crop report late morning, and the initial knee-jerk reaction to the data was an $.11 spike higher move. Although the rally was short-lived, price action did steadily firm over the latter half of the session and trade would settle not too far off its highs. The wheat complex has now seen a higher finish on 6 of the last 7 crop report days, but in a week in which we had already seen SRW wheat futures lose $.43, HRW wheat futures lose $.39 and Spring wheat futures lose $.33, it made it awfully difficult to get a bearish response to the USDA data. The reduction in SRW wheat production was definitely a positive influence, as well as 18/19 World carryout being lowered more than 5.0 MMT. Everyone was looking for a very large Spring wheat production estimate and we got it, but Mpls was still able to post modest gains.

The USDA said that starting August 1, the agency will no longer release data under embargo to the media, and will only release live data sets on its website starting next month. Meaning everyone will get the data at the same time. There will be no changes to its report later this morning.

What the Crop Report said:

We thought the headlines out of this report was going to be what type of reduction we see in harvested wheat acreage this year AND what the USDA will do as they plug in their view of what the tariffs do to US trade. Every SRW wheat state either saw their production estimates left alone, or they were taken down. HRW wheat states were mixed, some saw an increase in production estimates, and some were reduced, but at the end of the day, overall HRW wheat acreage saw a marginal increase. Spring wheat is a monster crop as we expected. We were looking for a slight increase in overall 2018/19 all wheat production based on that huge Spring wheat crop, and that is exactly what we saw, with the USDA projecting an overall wheat crop of 1.881 BB vs 1.827 BB from last month.

Anna Kaverman

anna@mercerlandmark.com

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