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A complete in-depth look of what is ahead of us this week in grains and livestock


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February 10, 2019

Commentary

It has been months since we have seen the USDA crop reportand based off Friday's action for pricing and closes, you would've never thought we had a report. Data adjustments that could have been considered bullish or bearish in each category was offset by another number in that group that tamed it out. So, here's what we had seen yesterday.

USDA's Feb WASDE held few net changes in corn supply/demand.US corn stocks were lowered 46 Mil Bu as lower final yields across most of the Corn Belt more than offset reduced ethanol & feed use. Final US corn yield of 176.4 Bu/acre, which is below the prior year. Total production in 2018 of corn was over 400 million bushels less than total demand. We've known this all along which is why there is a large drop from old crop new crop when we moved into the 2018/2019 crop year. But today's report heightens the need for increased corn acreage for 2019/2020 and good weather to produce trend line yields of near 180 BPA, or we will have heightened pricing for corn next fall if production is the same as this year. This is in spite of Argentina's crop increased by 3.5 MMTs because of favorable weather after a drought year. Add to these potential purchases of corn by China in the coming month or two because the trade negotiations in the background are looking favorable. Corn will continue to find strength on breaks in the 370-375 range for May corn which is soon to become the spot contract.

December 1st US quarterly soybean stockswere reported at 3,736 Mil Bu, up 576 Mil Bu (18%) from a year ago, the largest Dec 1 stocks figure on record. The stocks figure was 50 Mil Bu above expectations, which had CBOT soybean futures under pressure initially from the report's release. The USDA slightly increased their estimate for the US planted acres to 89.2 Mil acres, but lowered the estimate for harvested area to 88.1 Mil. The increased abandonment was related to the late western harvest which also had a drag on yield. The US soy yield was lowered .5 BPA to 51.6 BPA. The USDA raised their estimate for the US soybean crush by 10 Mil Bu, to 2,090 Mil Bu. Exports were cut by 25 Mil Bu to 1,875 million. Year-end stocks were projected at a record large 910 Mil, but were 45 Mil Bu less than December.

Total Chinese demand was lowered from 90 MMTfor the year to 88 MMT. For new crop production, the USDA made expected cuts to the S American crop. Brazilian production was lowered 5 MMTs, while crops in Argentina and Paraguay were each reduced by 500,000 MTs. Total S American production was reduced by 6.3 MMTs. Expectations are that even if the Argentine crop improvement in the next report, it's likely Brazilian yields will be lowered by a like amount because of ongoing dryness.

The USDA's wheat data is mixedand viewed as neutral in the short/medium term. USDA added to US wheat supply via a sizable reduction in feed use. However, this supply was quickly taken away by NASS's new crop winter wheat seeding number. Old crop US wheat end stocks were put at 1,010 Mil Bu on a 30 Mil decline in feed/resid disappearance. This change was made following lower than expected feed use in the Sep-Nov quarter. Total acreage was put at 31.3 Mil down 1.2 Mil from the prior year. With 750,000 acres lost in the southern and central plains. Without record above trend yields crops, US supplies will be in contraction.

The US/China trade talks will be the focus this coming weekwith the USTR Team traveling to Beijing this weekend. Both the US/China need to declare a win in the trade and the negotiations are expected to plow ahead. Expectations are that enough progress will be scored to delay a new round of US tariffs with negotiations continuing into spring. However, in doing so, China will be demanded to secure additional tonnages of US ag & energy. This could be supportive for corn, wheat, and meats into spring.

February bears are upon us,with lower closes noted this past week and corn and wheat with soybeans barely holding near steady on the week. Seasonally downward pressure stays in place till Valentine's Day, if not till options expiration which this month is on the 22nd. The last week of February and the first part of March should start seeing supportive pricing, especially as the Chinese trade talks reveal success even if there have to be extensions on holding back the doubling of trade tariffs.
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Corn
Friday's trade data has March corn right on topof the uptrend line going back to the September low. Breaching that could cause corn to head back down and challenged the major horizontal support on the price association value in the 367-369 range.

The constant rumors that China will be in for cornto keep trade talk appeasement high needs to be met with some factual purchases soon. February bear grain selling as needed for farmers is intensifying right now and could keep corn weak into options expiration near the 22nd of the month.

May corn should run into heavy buying influence near 375
and lower and still pull off a rally into the March 31 acreage report where increased acreage will need to be found for 2019 over last years crop. We would still target spot corn having the ability to trade in the 390-400 range sometime this coming spring.

Beans

Spot soybeans held well above trendline support which is just under 900,and Friday soybeans bounced off of a 908 low that was made right after the USDA crop report. If soybeans can survive this coming week on any selling that materializes for February, and can hold the trendline, that it will imply that optimism is high for Chinese trade negotiations and that there will be further purchases again soon, displacing Brazilian business which has garnered Chinas attention more than the US interest over the last decade.

Brazil has increased soybean production area over the last decadeequivalent to the size of the country South Korea. China has taken every one of those extra beans grown. Over the last decade, all soybean demand growth from China has been absorbed by Brazil while the US has just maintained the same sales quota while losing out on total percentage beans purchased by China.


Hedge alert:
Last week we used the 920 range in March beans to reward sales that are needed in this valuation.

New Crop:We are looking for a new crop sales strategy again via short-dated options, but there's still too much time price value to work through. A possible March rally could occur with a Chinese trade settlement which the odds are increasing by the week as likely. This could help push new crop beans into the 970-990 range where we will do a new crop hedge strategy.
Wheat

Fridays acreage data which was more friendly than anticipatedand was met with a yawn, as the USDA chose to lower feed usage on wheat. That could be considered surprising as the premium on wheat was not that strong compared to other years that would have justified that.

Better than trend line yields are needed on this year's cropwith such a low acreage number, which you have heard is the lowest acreage planted in 110 years, as trendline or less will quickly have a carry out back under 800 million bushels. Unless we see overseas acreage increases or optimum production for weather now in the Black Sea region this spring, even world supply numbers will continued reduction to supply. There is a bullish story in the wings for wheat pricing, but it sure taking a long time showing up.

Wheat is the one commodity that can be sensitiveto a weakening US dollar into March-April, and with the seasonality of wheat rallying from late February into April very high, the prospects of Chicago spot wheat making it the 550-560 range is likely. Its not exciting, but its something, and this should also help the Minneapolis wheat contract to get up into the 595-610 range.


Live Cattle and Feeder Cattle
After last weeks sharp reversal lower,the cold weather theme and of course the obviously reduced production helped cattle recover all week and allowed April cattle to retest the major resistance value again just above 128.00. Late Friday no live cattle trade in the South was reported yet, whereas the North had seen the dressed price two dollars higher at $200. Once we hear that information on Monday, that will dictate the start of the week.

Something thats been obvious on the trading side for cattleis that when they're down on pricing into Friday, by Monday, they turn and head up the next week. If they are up into Friday, by Monday, they turn and head down into the end the week. Well see what cash data we hear on Monday and if that will follow suit again next week with resistance so strong just above the market.

If it were not for the friendly news story of cattle being sold light
right now and at least 10 pounds lower than last year at this time, we would not be looking at a spot February contract trading near 127 which is what feedlots were asking, or even April trading near 128. It is this present news that has us here, and without China stepping in and buying beef from its failed 2017 deal, it's going to be hard to get cattle to run through the highs made a week ago Thursday when that major reversal on record volume occurred.

Cattle prices are working through their high watermark price rangeas of now and we had waited until mid to late January for these elevated prices that we suggested were possible and were hedgeable.

We are now neutral to negative on pricing at current valuationsand anticipate that June cattle are carrying a strong premium for what will be a large cattle run when we get to the summer. June cattle will have a hard time getting above 120.00.

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2018 Hedge Recommendations
Corn
Sold 30% of 2018 corn at 409 on the December contract.
Sold 20% of 2018 corn at 421 on the December contract.


Wheat
Sold 30% of new crop HRS wheat at 628 on Sept MN or 638 Dec, depending on need.
Sold 20% of new crop HRS wheat at 630 on Sept MN or 642 Dec, depending on need.


Sold 30% of new crop HRW wheat at 532 on September KC wheat.
Sold 20% of new crop HRW wheat at 570.4 on September KC wheat or 570.4 on Dec.


Beans
Protected 100% of new crop 2018 beans by purchasing the July $10.20 short-dated new crop bean put for 26.2 cents.These were cashed in for $1.14 profit.

NOTE: All trades will be entered in the electronic markets unless otherwise noted. Hedge recommendations and Trade recommendations are totally separate, and may sometimes conflict with one another. It is strongly suggested that Spec trades and Hedge trades be done in separate accounts.

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About the author


Eugene Graner is the founder and President of Heartland Investor Capital Management Inc. As a veteran commodity analyst, broker, and CTA that eats, sleeps, and breathes commodity futures, his priority is to bring clients the latest and most useful information of the markets along with uncannily accurate futures predictions. By balancing risk and reward, Eugene uses his proprietary trading strategies to develop the best possible trading approaches for his clients. He has 28 years of experience in the industry and his voice has been heard around the United States. He is heard on multiple radio stations throughout the day, also has been featured on CNN, Bloomberg, Wall Street Journal, and The New York Times, and is the go-to guy to for multiple TV network stations for interviews about market news weekly.
 
Contributing author since 1/3/2019 

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