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Macro Landscape | Trump’s first week of his presidency has led to key decisions for the Keystone XL pipeline, Trans-Pacific Partnership (TPP), Obamacare, and The Wall. Trump has also started the discussion about voter id, NAFTA, tax reform, and budget deficits.
Turner’s Take is not a political newsletter but we do have to look into what is going on at the federal level if we think it will material impact the markets. It seems likely NAFTA is going to be change in one shape or form. That could be a big deal for the grain and livestock markets. The US and Mexico are major trade partners when it comes to agriculture. Mexico is the 2nd largest customer for US pork (only Japan imports more pork from the US). After the news broke yesterday that Mexico cancelled their next meeting with Trump, April Hogs traded limit down. Hogs had been overbought and the charts suggested a reversal soon, and that new story was the straw that broke the camel’s back in a big way. The concerns about NAFTA ag trade combined with an improved weather situation in South America will probably drag the grain and livestock markets lower without any new bullish news.
CORN | We expect corn to be range bound between $3.40 and $3.70 until the Ag Forum later in February. US stocks are too large and the South American crop should still have a decent crop, just not as big as first through. A break below $3.6050 (20 day moving average) could send corn to the $3.48-$3.52 area in March. In the short term we think corn head lower but for the long term we like the July vs Dec Corn bull spread. If you would like to know more about our thoughts on those positions specifically please see Turner’s Take Market Alerts or the Turner’s Take Podcast episode. If you are a client of mine at Daniels Trading then please call 312-706-7610 or email firstname.lastname@example.org anytime.
July vs Dec Corn
SOYBEANS | Improving South American weather should drag soybeans lower as we get further into the growing season. The twenty day moving average is $10.35 in March and should provide support. If support is broken the next target lower is $10.00. The big question is how much soybean production was lost in South America. Largest estimates seem to be 8mm mt, which is about 300mm bushels. The general rule is half comes back to the US in the form of exports for beans and/or meal. Worst case scenario US old crop stocks are 270mm bushels.
Everyone I seem to talk to (farmers, bankers, loan officers, seed dealers, agronomists, and elevators) thinks we are going to see more soybeans. I had a conversation yesterday with a farmer in Indiana who used to split his ground close to 50/50 corn and beans and this year he is going all soybeans. He said he is tired of breaking even on corn. Loan officers and bankers are saying there is not enough credit to fully fund farming operations and that is leading the farmers to plant more beans because it has lower input costs. Seed dealers and agronomists are talking about an increase in demand for soybean seed and chemicals. Elevators are reporting a greater interest in pricing new crop beans above $10.00
In the short term I think old crop beans trades between $10.00 and $10.80. It will be interesting to see what the February Ag Forum has for acres and what the March Planting Intentions report shows. I think the Ag Forum will have 86mm acres beans and by the time we hit Planting Intentions it could be 88mm. That is my gut talking, but based on the recent conversations I’ve had I think we will add at least 3mm acres of soybeans this year, and it could be 5mm acres when all said and done. I think we could see at least a 4mm acre drop in corn this year and I would not be surprised if it ends up being a 6mm acre loss. So while I am neutral on the old crop right now, or maybe just mildly bearish, I can see new crop prices coming down by $2 in 2017 based on the acreage shift alone.
WHEAT | I still like new crop KC vs Chicago wheat. I think we will see KC trade 20 to 30 cents over Chicago in the new crop (July) by harvest. It has been almost two years since the SRW wheat issues started and after this crop season I think the protein differential between HRW and SRW will come back to the historical norms. During years with adequate supply and demand for SRW and HRW wheat, the HRW (kc) will command a 30 to 60 cent price premium over SRW (chi) because HRW has a higher protein content.
The Winter Seedings report was so bullish for HRW the spread got ahead of itself. It went to high and then it corrected. As long as there are no material issues with SRW this winter/spring we see HRW trading 20 to 30 over SRW in the new crop contracts.
July KC vs July Chicago Wheat
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