Economic March News

U.S. lawmakers said on Tuesday they agreed to revise a portion of the new tax code that gave farmers a massive tax break for selling crops to cooperatives, in a win for private grain firms that were disadvantaged by the overhaul; the agreement, which lawmakers have been scrambling to reach for months, aims to replicate tax benefits that were available to farmer-owned co-ops that existed before Congress passed the tax law in December 2017, according to a summary of the agreement released by Republican senators from farm states. A joint statement by the National Council of Farmer Cooperatives and the National Grain and Feed Association corrects the 199A provision. The bill is expected to be attached to a spending bill that needs to pass by the end of the month.
The U.S. Environmental Protection Agency’s decision to grant a bankrupt Philadelphia refiner relief from the nation’s biofuel laws drew critics on Tuesday who say it sets a bad precedent; the EPA and the Carlyle Group-backed Philadelphia Energy Solutions refinery agreed on Monday that the refiner will have to satisfy only roughly half of its $350 million in outstanding compliance obligations under the U.S. Renewable Fuel Standard (RFS); the RFS requires refiners to blend biofuels such as ethanol into their fuel or buy credits from those that do; independent refiners, including some as large as Valero Energy Corp have long complained about the RFS standards, saying it has boosted costs as the price of credits rose from just a few cents in 2012 to more than $1 at times in 2013 and 2016; however, biofuels companies say the standards are critical to Midwest farmers and help produce cleaner, home-grown fuels like ethanol. Industry representatives were bothered by the EPA settlement, arguing it rewards a mismanaged company and represents a bailout.
Markets have traded mixed since the morning break with wheat, with little ground gained on either the up or down side across the complex. The potential benefit of this weekend’s expected Argentine rains continues to be debated, but they should at least provide some stabilization of conditions/yield ideas for the time being. The Argentine drought has been traded and traded some more, but will likely continue to act as support under the markets until real harvest indications begin to come in, and the real size of the soybean crop can be determined. The Southern Plains outlook remains concerning with no solid rain opportunities through the coming 10-day period at least. Rains from Kansas through Texas will begin to become much more critical in the coming weeks as the crop moves out of dormancy. Soybean harvest in Brazil is moving along at 46% complete versus 50% average. Safrinha corn planting is estimated at 83% versus 85% average. 00
March contracts go off the board today at 12:00 PM CT. NOPA will release their monthly soybean crush report for February data tomorrow at 11:00 AM CT. The average trade estimate of Feb crush among NOPA members is 149.4 million bushels, obviously down from Jan crush of 163.1 million bushels due to the reduced number of days in the month, but a solid 4.6% above last year’s Feb NOPA crush of 142.8 million and would be a new record for the month.
QUICK WORD ON OPEN INTEREST AND SPEC LONGS… Corn total open interest continues to surge and setting new records almost on a daily basis of late, with the 1.860 million contracts in OI, up another 22k contracts yesterday, while soybean OI of 850k contracts (mostly unchanged yesterday) is nearing its record of 896k set in April 2016. We touched on fund/large spec positions earlier in the week, but as a reminder, over the last 7-weeks we’ve seen money managers buy a total of over 900,000 contracts across the 5-major CBT ag contracts (a record amount by far – chart). In doing so, their overall positons have swung from heavily net short to a now sizable/ somewhat hefty net long (table).
The combination of a record fund buying spree, along with open interest now reaching record/near record levels, pushing funds long at a time of year when we enter a what is typically a ’shoulder’ period between the South American crop winding down and ahead of the start of the U.S. planting/early growing season is a bit unusual circumstance. While we’ve seen funds build longs at this point in the year (see 2012, 2014 on chart right), we’ve note seen this type of swing from large-short to largelong previously. It’s also a bit unusual considering the high level of global feedgrain and soybean supplies. Net/ net, we’d view this as a bit of caution sign for the trade.
SUMMARY/OUTLOOK… Ag markets likely to consolidate near-term, although limited downside today with expectations for big U.S. corn/soybean export sales tomorrow. Upside likewise somewhat limited as funds have aggressively raced to the long side of ledger ahead of the U.S. growing, pushing the bounds of historical open interest in what if far from a global crisis for grain/soy stocks. Additionally, trade has largely discounted incoming weekend Argentine rains as soy board holding quite well despite escalation in US/PRC trade friction. Steady gains in OI and managed fund longs which are unlikely to exit until US spring planting is well underway. Spring planting weather (especially in Dakotas) will be major driver of 2018 corn/bean area mix and whether 2018 prevent plant acres are below, at or above normal. Expect some choppy trade ahead.