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Morning Outlook

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Overnight Highlights

·         The Shanghai Composite Index tumbled more than 6% overnight as the rout returned, sending the equity market to a three-week low. Global commodity prices also tumbled on fears that the Chinese government will not do enough to stimulate its economy, resulting in weaker demand for commodities.

·         Nearly everything from crude oil to soybeans paid the price for the bearish outlook. You’ll hear a lot of rhetoric about grain and oilseed prices under pressure due to the crop tour results, but the bulk of the weakness appears to be tied to China this morning. Frankly, I think corn and soybean prices are holding up well against the tide of bearishness toward the broader commodity sector in the overnight markets connected to China.

·         The Pro Farmer crop tour moves into its second day today. Once again, do not expect the tour to validate our yield concerns. The types of problems we see in a year like this tend to not show up until the combines roll. Unfortunately, it appears that the combines may begin rolling in a week or so in some areas due to pre-mature dry-down amid widespread stalk/disease problems. The quick “death” of the plants is not a good sign for yields, but we’ll be monitoring results. Keep in mind that a 5% reduction in kernel size due to disease/stalk/root/N problems has a big impact on the bottom line.

·         The Pro Farmer tour moves progressively into better crops as we move through the week, finishing with the best of the best in northern Iowa and southern Minnesota. It will be important to keep perspective. A 5% reduction in corn and soybean yields from USDA’s estimates has a significant impact on the balance sheet, but is very subtle and difficult to pick up at this point considering the methodology necessary on these tours, as well as that used by USDA. That is why both tend to miss the problems in years like this until the combines roll. It’s the nature of the problem.

·         Yields were good on the western leg yesterday, confirming that we will likely see some record yields. However, Monday’s results did not show the kind of exceptional yields needed to offset problems in the southern and eastern belt. Tour participants saw a wide variety of conditions there and not the type of consistency needed to produce the type of crop projected by USDA unless the west is quite exceptional.

·         Monday afternoon’s USDA crop progress report showed a stable soybean and deteriorating corn crop, although the deterioration was consistent with what we’d expect this time of year. The corn crop’s condition index score of 374 was down 3 points on the week, but still above the 10-year average for the week of 350. For some perspective, the 2010 crop rated a score of 380 in the same week, with USDA and all crop tours basically sounding the same optimistic theme as this year. I do not expect the same scope of collapse in yields as we observed in 2010, but still do expect a similar pattern of falling yields as the combines roll into September.

·         Big soybean bloom and pod set delays in Missouri and surrounding areas speak to the problems in the crop in that area. This week’s tour won’t see much of that problem area, or of the really late first- and second-crop soybeans in the southern Midwest. Yesterday’s FSA data also suggested a probability of additional cuts in soybean acres.

·         Thunderstorms continue to favor the western Midwest into Wednesday, with scattered activity in the east Wednesday into early Thursday, expanding across much of the South this time as well. Portions of the shallow-rooted eastern belt are at risk of missing out on needed moisture. The 6- to 15-day outlook is drier with showers limited more to northern areas of the belt. Temperatures are expected to warm, but not be extreme in the 11- to 15-day period. The 16- to 30-day outlook is wettest in the northwestern belt.

Commodity Weather Group Forecast

In the Midwest/South, thundershowers scattered across the region but favored central SD, western IA, eastern NE, central/southwest KS, northern IL, far northwest IN, central TN, northern AL, and eastern GA. Thundershowers continue in the western Midwest into Wednesday, with scattered activity also occurring in the east from Wednesday into early Thursday and expanding across much of the South this week as well (peaking late Wednesday/Thursday).

The rains will benefit late corn/soy growth in much of the belt, keeping moisture stress limited to only 10 to 15% of the Midwest this week. Parts of ND, eastern IL, northeast IN, and OH appear at most risk for linger stress (mainly to soy), although a weekend rain event does bring showers back to the western Midwest and could ease dryness in ND. Showers become more limited in the 6 to 15 day and tend to favor the northern Midwest, as corn/soy filling pushes closer to completion.

Temperatures may warm in the 11 to 15 day but should only bring highs in the mid-80s to low 90s for the Midwest. The 16 to 30 day outlook has not changed, with warmer/drier conditions favoring the OH Valley/South and wettest conditions in the northwest Midwest during early harvest.

In the N. Plains/Canada, showers were limited to the southern edge of the N. Plains spring wheat areas in the past day, with a few showers also in western Canada. Rains will pick up in western/far southern Canada and the far northern Plains from Friday into the weekend, with the northwest Prairies/N. Plains favored by occasional 6 to 15 day rains. While minor interruptions will occur to the N. Plains harvest, no serious delays are expected, and the pace is currently faster than normal. Frost on Saturday may still clip a few spots in northern Alberta canola, but models are a bit less aggressive today.

Morning Market Snapshot

 

All opinions expressed in this commentary are solely those of Water Street Advisory. This data and these comments are provided for information purposes only and are not intended to be used for specific trading strategies. Although all information is believed to be reliable, we cannot guarantee its accuracy or completeness. There is significant risk of loss involved in commodity futures and options trading and may not be suitable for all investors.

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Arlan Suderman | Senior Market Analyst
WATER STREET ADVISORY® | www.waterstreet.org
(316) 729-4599 | asuderman@waterstreet.org

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