- Chicago futures are mixed at midday with wheat firmer and corn/soybeans slightly lower as large S American crops continue to be made by timely rainfall. We note that again better than expected precipitation fell across key Argentine crop areas overnight. 5-day precipitation accumulation across crop-heavy areas of Cordoba, Santa Fe and northern Buenos Aries range from 3.5-6.5″. A drier pattern is offered to Argentina, but nearby improvement in vegetation health will be ongoing. The message is that only exporter wheat balance sheets feature real fundamental tightness ahead of S America’s harvest.
- US wheat futures have found newer seasonal highs as most trade participants expect coming Chinese demand for higher protein varieties in 2020. And Chicago futures continue to act as a proxy for the major exporter balance sheet, which is the tightest in 6 years. It is tough to be bearish wheat into February, but new sales have been made as we are concerned over the return of Black Sea farmer selling while world trade seasonally slows.
- The US and China’s Phase One agreement has been signed to mixed market fanfare. Aside from wheat’s rally today, US ag futures, including dairy, have done little. The Dow is up 163 points. Crude is down $0.40/barrel despite a modest drawdown in US crude stocks last week.
- Most important will be Phase One’s enforcement mechanisms should China fail to meet its spending targets by 2020. There is also doubt that a Phase Two agreement will be reached anytime soon, with the US and Chinese press at odds as to when Phase Two talks will even begin. Phase Two is required to further ease US tariffs on Chinese manufactured goods. Phase One text is not yet available.
- US ethanol production through the week ending Jan 10 totalled 322 million gallons, up 9.7 million on the previous week and a record for early January. Cumulative weekly ethanol production sits at 5.73 billion gallons, down 1% from last year and in much better alignment with the USDA’s forecast. However, ethanol stocks were up another 23 million gallons to a 15-week high 966 million.
- US gasoline stocks last week were up 6.7 million barrels. US gasoline stocks at 258 million barrels are the largest on record for early January, and the further build has pressured US energy markets at midday. Spot ethanol is down slightly at $1.35/gallon. Futures-based margins sit fractionally above breakeven. Improved ethanol export demand, potentially to China, is needed to provide incentive to plants and blenders moving forward. So far in 2020, weekly residual ethanol disappearance, the best measure of exports, is down 36% from last year.
- The midday GFS S American weather forecast is wetter in Central Brazil in late January but otherwise unchanged. The GFS allows soaking rainfall to expand a bit farther southward Jan 23-30. Rainfall of 3-6″ will impact Mato Grosso, Mato Grosso do Sul, Minas Gerais and far northern Brazil in the 8-15 day period. This rain very likely provides enough to finish crops should it verify. Nearby, moderate rain impacts N Argentina and Southern Brazil in the next 48 hours before drier patterns are established there.
- Wheat’s rally is viewed as function of tight exporter stocks/use and a rising need for favourable Northern Hemisphere spring weather. Corn/soy balance sheets, however, loosen substantially with semi-normal weather in 2020.