Special Market Update
Grain Market Commentary
Monday, April 9, 2018
By Mark Rossol, Commodity Merchant, The Andersons
Corn, Soybeans & Wheat
Volatility has been rampant recently with the market trying to digest all the tariff and trade war rhetoric out of China and the Trump Administration. Obviously, it is tough to make a trading decision based off of all this noise, so I thought it might be good to go back and look at how the March stocks report is going to potentially impact the April WASDE. I still like trying to tie your trading strategy back to the fundamentals.
Post stocks report, the biggest change we should see in the April WASDE is a lowering of the feed and residual number in the corn balance sheet. Stocks came in larger than expectations and feed/residual is the USDA’s way to adjust. This could potentially add 50-75 Million bushels of corn to the ending stocks. The feed demand could show up later in the crop year but this could be fuel for the bears in the short term.
Ethanol may offset some of this as ethanol production has been indicating we might need to take up corn demand for ethanol from current USDA of 5.575 to something closer to 5.590 so this may offset some of the demand loss in Feed/Residual. This isn’t necessarily a likely scenario as ethanol margins have been under pressure recently and the export scenario to China is somewhat in question with the tariffs as well.
Corn exports are outstanding so far this year and look to remain so. This week is the first that export inspections have actually hit the needed pace for the USDA export number, but sales are certainly on pace if not a touch above pace. When it all boils down, I think what USDA does with Feed and Residual is going to be the biggest factor in this report and stocks would lean toward a lower Feed/Residual and a slightly higher Ending Stocks.
Bean stocks also surprised to the upside and should lead to a higher ending stocks number in the April WASDE as well. The past 6 weeks of export sales has been very strong and with strong crush margins. Perhaps the USDA decides to leave the balance sheet alone or net unchanged for this month.
The tariff chatter has actually been a boon for US export values as commercial companies are able to sell high priced brazil beans to China and cover non-Chinese destinations with much cheaper US beans. The math looks good on paper for all of this, but an issue is the USDA is already over estimating their US Exports based off a needed pace never accomplished for this time period. Especially considering the massive corn exports, we could be challenging the export capacity of the US to accomplish both corn and bean exports as the USDA currently has them. So exports look to stay unchanged or lower while crush may have a little room to go higher but we are getting close to maxing out crush as well.
While the stocks report would indicate a better ending stocks situation in the US, the USDA has a history of not always following the logic of stocks report in their subsequent WASDE report. So, this could stay volatile, especially as eyes will also be looking closely at the size of the Argentina and Brazil crops after the drought in Argentina this growing season. Beans are likely to remain volatile.
Stocks were almost exactly in line with expectations, and the USDA could potentially move ending stocks higher yet again as the pace of exports in wheat has been dismal compared to corn and beans. We have rallied prices way outside of global competitiveness and we already have a burdensome balance sheet. Even with lower acreage this year we still have a lot of wheat in the US and need a major production hiccup to change that situation dramatically.
Feed and residual could also come down after the stocks report as well, so I don’t see any story in wheat today. I think we saw some short covering in wheat today on the cold temps in Kansas but we have proven the last couple of years we can resurrect a HRW crop with late season rains so the forecast will be critical going forward.
If wheat doesn’t provide and bullish fuel in the coming weeks, I think the funds decide to keep a short position in wheat against length elsewhere especially if the roll carry stays as good as it has been the last couple of year.