May 07 | Commodity Week

cw260507

Panelists
- Garrett Toay, AgTraderTalk.com
- Mike Zuzolo, GlobalCommResearch.com

Todd Gleason: This is the May 7 edition of Commodity Week.

Announcer: Todd Gleason services are made available to WILL by University of Illinois Extension.

Todd Gleason: Well welcome to Commodity week I am Todd Gleason our panelists for the day include Garrett Toay from AgTraderTalk.com. He's out of Warren Illinois and Mike Zuzolo globalcommresearch.com and Atchison Kansas joins us as well. Commodity Week of course is a production of Illinois Public Media it is public radio for the farming world online on demand at willag.org w i l l a g . o r g. Gentlemen, let's start with a list of items that we should discuss for the day. Mike Zuzolo will begin with you, but if you could, could you outline what crop conditions are like in your area today first, please?

Mike Zuzolo: I would say here in northeast Kansas right along the river where it's mainly corn and bean country, Todd, we've been blessed with a very heavy timely rainfall pattern the month of April and most of the planting is done, crops are probably going to start shooting through the ground here in the next few days uh because we have started to warm up as well. But uh it it dries out very quickly uh as you get west of Topeka and as you go southwest it seems to get worse and worse where I'm hearing a lot of abandonment. You and I have talked about that on the program before and I I'm putting the abandonment at about 20% and in Nebraska where the wheat very poor poor conditions are probably closer to 70%, I wouldn't be surprised to see abandonment going upwards of 40% at this point if I had to guess.

Todd Gleason: In total, you mean across the whole of the hard red winter wheat crop?

Mike Zuzolo: Of the wheat in Nebraska. Yeah, they're about 90... Oh, you mean in Nebraska. Nebraska. Yeah, I'd say 20% overall but state like Nebraska may be closer to 40% if you ask me.

Todd Gleason: And I suspect that's something we ought to talk about but what is on your list we should discuss for the program today?

Mike Zuzolo: If we have to, no I'm just kidding. Um yeah I mean it's still a wheat weather driven market but we also have quite a few big issue big ticket items coming in next week that be interested to see what Garrett has to say about that as well.

Todd Gleason: Garrett Toay what are the conditions in your part of the world there I believe in northwestern Illinois?

Garrett Toay: Yes, we're up here in Jo Daviess County right up in the tri-state area and um you know after a wet start to April there was really no early corn planted up in our neck of the woods. Um we've had a period of about 10 days that um you know most of the planting is getting done. I think we're probably in the mid to 75% half of of planting up here. Um that is we're getting it done and we uh actually in fact was working on the planter this morning and trying to get some uh things dialed in on uh technical issues if you will. And uh got a little computers. But um uh the ground is very mellow and uh it's wet underneath um there's still some wet spots out there but uh the forecast has been beneficial enough that we've been getting to get get uh planting done. Um and uh the only thing that benefit us for is a warm up. We had we had uh white on the ground frost on Saturday morning and and lows coming in to work this morning we're 32 degrees as well. So uh warm up and temperatures I've told that there was some early planted beans that probably got nipped uh with frost and will have to be replanted but uh for the most part um we're we're looking in pretty decent shape right now.

Todd Gleason: And what is on your list we should discuss for the program today?

Garrett Toay: Well Mike alluded to it, we have the USDA report uh and then we have this uh Trump Xi meeting in China and whatever may come of that if anything. Um but I think um you know and obviously uh macros because it seems like uh the the ag markets are heavily influenced by what this crude market wants to do. Um and I think there's some underlying inflationary uh support here while fundamentals uh don't uh really support uh anything too bullish in corn and soybeans at the moment.

Todd Gleason: Mike let's pick up with the hard red winter wheat crop. Does it matter very much that Kansas Oklahoma Colorado are in trouble the primary growing region in the United States for HRW given the amount of wheat that is available across the planet in any given month of the year?

Mike Zuzolo: I think it does Todd and and I think you hit upon the key to going forward the next four or five months and whether the price action uh if we go down uh because the crude oil market and the wheat market lead us lower do we go down and that's a top or is it a correction and I'm in the mindset that this is a correction overall because the supplies in both wheat and crude oil are still going down. And what we're facing is a lag effect in the market of having ample if not near record supplies of crude on the water that we've now drawn down. I'm hearing numbers like 200 million barrels have been sucked up here in the last 60 days off the ocean and tankers that have been floating storage. Um I see a very similar pattern in the wheat and this goes back to when you and I talked back near Thanksgiving at the NAFB meeting in Kansas City where wheat and crude were the two leaders to the downside because of an oversupply mindset and and the market got jolted and shocked out of that mindset because of what happened in the Middle East but I would argue now because of the hard red wheat weather market it's starting to be that same type or similar pattern of supply falling faster than demand in the wheat market and I say that because I with hard red wheat making up 40% typically of the all wheat production if I'm correct and the all wheat yield is around 45 45 and a half bushels one of the lowest since 2021 2022 um that would put you at about a 1.6 5 1.64 billion bushel production number which would take you down closer to a 700 million bushel carryover. Um that was last seen since 2023 2024 marketing year and and we had an average price of near $7. And so I do think that the wheat still is the leader with the crude because of this supply glut now turning to supply tightness as we go forward the next few months.

Todd Gleason: Garrett let's continue this wheat conversation. Oklahoma took a look at its wheat this week and that number came in really, really low.

Garrett Toay: Yeah well below the 10-year average. Um you know I agree with Mike that wheat and crude are kind of tied to the hip together. Um you know and I it's the first week of May so we're not into harvest yet and there's still the supply questions out there. Um so I the timing wise of it though I'm a little concerned um because I don't believe that it would take much to ration demand. You look at world FOB prices um while Chicago and and Kansas City have been rallying um you know French wheat, Russian wheat, Black Sea wheat have uh moved very little um and the US wheat is you know 20 to 30 dollars a ton more expensive on the world front. We're not at the point where uh that's going to concern anybody at this point but uh it was interesting to me you know we just had first notice day for the uh May delivery cycle and even though we were in the throes of uh this hot money flow uh into the wheat market both Chicago and KC we had nearly 5 million bushel uh of wheat delivered against the May contract which um potentially you know uh creates some questions as far as you know what are the commercials thinking if we're having such a supply issue why are they willing to put you know 5 million bushel out on the street. And um you know now we do have uh some stoppers showing up at Kansas City but uh just definitely mixed messages. And when once we get into the delivery period you know sometimes that's when the commercials kind of you know take over control of uh the managed money uh you know maybe running with a bullish story the commercials may try to rein things in here a little bit.

Todd Gleason: Do you think that's what they were doing or do they actually have the supply?

Garrett Toay: Well that that's the thing is that it it sends the message that they have enough ownership and inventory that they're not necessarily concerned about the production issues there right wrong or indifferent but you know you know the commercials are running their own S&Ds and production estimates and and if there really was a big issue and I do believe that there is an issue uh you know I think they're kind of uh uh telegraphing that they are concerned about these demand sides down the road and that ultimately they'll be able to fulfill.

Todd Gleason: Mike can you help fill in where you think we might be headed for wheat given everything he's discussed?

Mike Zuzolo: Right I think I think he's spot on with what he talked about with the commercials. I I think it's gotten to the point where we just don't worry about the wheat being in tight supply until it is in tight supply and it just really does remind me a lot about the crude oil market and how you know traders back in February January February we were talking about how we could you know strike 30 35 dollars a barrel because we had so much excess supply and so little demand and what we have found in the old days I think we'll probably find again because we have higher interest rates that are going to last longer that means higher inflation that's going to last longer. I think our commercial system is going to have to adjust back to where it was back in the 80s and 90s when we had these same conditions in in money flows uh even with the algo trade and that is you better buy a little bit of extra here and don't just try and buy hand to mouth especially if supplies are on a trend to tighten up. So I do think it's a lag and I think Garrett brings up a great point because you know you got to know when you're right and when you're wrong when you're doing analysis and for me Todd a lot will matter about next week and whether we even have a meeting between Trump and Xi how the beans react to that and then going back to the wheat and the grains as a whole um does the trade recognize uh 60 days from now or 30 days from now um especially with the USDA giving us new 26 27 numbers next week and having lower acreage numbers going down below 44 million on all wheat is that the catalyst that gets them to change their mindset and say oh yeah we are tighter and it's just going to get tighter the next six months because the fertilizer prices are taking Australia's acres down Romania's acres down blah blah blah etc etc. So I think that's we're in the throes of that I think right now and we'll know pretty soon.

Todd Gleason: You mentioned a couple of decades the 80s and the 90s. I'd like some clarification. Did you mean those decades or did you mean the 70s and 80s?

Mike Zuzolo: Yeah I mean I I I was more talking about the 80s and 90s because I started in 95 and and I remember doing a lot of research when I first got into the business and when I you know had to take the brokerage test you know the the price of grain include it included storage and interest costs well that interest cost went bye-bye you know because of the 90s and into the 2000s and so yeah sure you can say 70s and 80s because that's probably more appropriate.

Garrett Toay: So may I ask Mike a question is with this wheat abandonment as a cattle feeder you know what do you is this going to be cattle feed or what will those producers do with those abandoned acres?

Mike Zuzolo: Yeah that's a good question Garrett because it it's going to differ I think Garrett because I I think there's going to be some that will go ahead and finish try and get crop insurance out of it but I do think that in southwest Kansas for instance I've heard some anecdotal evidence that they'll probably just not harvest it and take the full hit and get whatever they can out of it and abandon it and not really try and put anything into it. There are I think going to be some producers and and there's supposed to be some rains coming into Oklahoma uh some of the drier areas of Oklahoma that maybe will encourage them to rip up wheat and put beans in. That's something I'll be looking at.

Garrett Toay: Interesting thank you.

Todd Gleason: Garrett there are two events of importance next week as we've already alluded to the WASDE or world ag supply and demand estimate on Tuesday that will include USDA's first look at new crop corn and soybean S&D tables or supply and demand tables and then of course the President Xi President Trump meeting which is scheduled for Thursday. What are your thoughts?

Garrett Toay: Uh one's gonna probably have a bigger influence than the other. I'll let you guess which one that's it's going to be the Xi Trump meeting that that the market's going to be focused on. Um you know obviously with new crop uh production estimates they're they're largely all forecasts. You know I didn't see the trade trade guesses out this morning. I do see some you know it looks like some people trying to deviate from uh the USDA yields but you know as long as we're 50% planted by the 10th of May I don't see the USDA adjusting corn yield. Uh but uh we can get to the US report later. The big thing is this meeting between Xi and and Trump. Um you know if it's interesting to me we had the sell-off the these ag markets are all trading relative to crude you know crude was down hard ags were down hard. And the fact that this meeting at this point does appear to be still happening um you know I would think that soybeans would be a little bit more supported in here on optimism. You know we go back to February and that really was what put the that short-term high in the market was the fact that this meeting was delayed or it was going potentially be canceled and that's what kind of you know caused us to to break down there for 30 to 45 days and now here we are on the cusp of the meeting and you know we're you know 30 40 cents off the highs. So um you know where are we going to be at. Um you know the one thing that in the back of my mind that's very interesting is you know China is just staying hand to mouth on their soybean purchases. Um if the if the retaliatory tariffs went away today Brazilian beans would still be $20 a ton cheaper than US soybeans. Um and it it's not lost on me in the back of my mind I'm concerned that between the fertilizer issues and things of that sort um you know maybe some wet areas early on that if we bought additional soybean acres um you know last fall they they reported was that 12 million metric ton plus 25 25 25. They have not bought one bushel of new crop beans uh when this 25 million metric ton whatever marketing year is it's attributed to or whatever calendar year it's attributed to. Um you know we need to have some movement there some purchases and I don't know if that comes out of uh this meeting. Um you know I don't personally believe that you know soybeans are going to be the key topic of conversation. I know that there's some feed grain issues there with um you know they've been buying tremendous amounts of wheat on the world market. Uh they've had wetness issues in their corn crop and they've got quality issues that they're blending that wheat off with. Um you know and they've even made statements themselves that um you know they're willing to look at additional ag purchases but soybeans probably won't be it. Um which is kind of a direct uh counter statement to President Trump's social media post back in February that China was going to potentially buy another 8 to million additional tons which has not come to fruition. So um you know I think that sorghum may be on the market corn may be on the market you know other ag products but I wouldn't necessarily get hopes up on soybeans per se. But you know then now you throw the Iranian war in there and and it it maybe you know ags went from being the one of the top of the things on the list to talk about to probably being three or four or five down the list at this point. So.

Todd Gleason: Well that may very well be the case Mike I did make note that there has been a lot of chatter about US beef being exported to China however I made note too that Brazilian beef was at a record import level into the United States last month.

Mike Zuzolo: Yeah and you know it's interesting you bring that up because the Brazilians just hit their TRQ with China and we're starting to get more nervous in in the beef sector of seeing more even more Brazilian beef come to the United States because that's going to really cut back on what China is going to purchase hit that hitting that tariff rate quota. And I would say to Garrett's point you know we have seen the July beans essentially go when it comes to their premium their inversion to the new crop November since the middle of March from about 80 cents down to 20 cents. And so the spread is clearly said we're losing demand and and it is being soaked up by domestic demand with the bio diesel coming online slowly. Um but you know just on a supply demand standpoint with Brazil's excess capacity of of exports because of their big crop and um given that China is still trying to trim their hog production their crush margins in some areas like the Dalian area that I keep track of Todd um their crush margins are about negative 25 bucks a ton right now based upon the last numbers I've seen and that gets you down to some of the lows from 2025. And it it just doesn't add up that we're going to see um a lot come from China um when it comes to true supply demand. Will they fulfill their earlier obligations like Garrett was talking about maybe but that's if they meet and I think this is where this week and especially on Thursday um the the the the reaction time in the markets and the news coming out almost every hour on the hour about the conflict ending in the Strait of Hormuz. I've been under the working assumption that the meeting between Trump and Xi is not going to happen or it's a 50 50 chance if this strait stays closed. Why because most of President Trump's foreign policy whether it's Venezuela whether it's Iran pick your poison it's really been targeted towards China. And the market gets that but they aren't worried about that yet and it just seems to me they're a little bit they should be a little bit more nervous than they are. And and that's that's kind of what I'm waiting to see is even if this meeting happens if indeed as we're hearing late Thursday um there may be the resumption of not just the transit of the the ships going through the strait with the help of the United States Navy that opens up Iranian firing on the US again but also that the talk in some reports in Iran that there's actually some some conflict resuming at this point. So it it's so fluid that it just really makes me wonder why would President Trump go over there why wouldn't he just say look I can't go we're in the middle of this I thought it was over I thought I was going to get help uh there's news out there and I'll finish with this there's news out there that the UN resolution that the US was going to put out um was probably going to be vetoed by China and Russia talking about um demanding Iran halts its attack on uh non-military ships. And so it it's getting I think to such a point now uh that the market's really going to be I think so volatile we probably don't understand it at this point.

Todd Gleason: The United States military activities this calendar year have cut off the supply of oil from Iran and Venezuela to China. Do you think that that will impact their economy in such a way that they might see demand destruction there?

Garrett Toay: Well they have issues of their own with you know the housing crisis and things of that sort but as far as hitting uh China in their oil pocketbooks per se I don't think they're necessarily feeling it. I mean frankly their strategic reserves are some of the largest in the world. Um and they've they've uh adjusted uh to their import bare excuse me their export bans and they're allowing uh a little bit more flow. Um but you're absolutely right you know Venezuela two of the major uh oil suppliers to China have had military actions against them by the US in the last six months. Um you know Mike brought up a good point and it actually kind of jogged my memory how you know we've we've got this disconnect between futures markets and cash prices um you know crude's $90 a barrel on the on the NYMEX but gasoline is is almost $5 it's $5 here locally. Um and it kind of reminds me of like 2012 you know the 2012 corn market where the the futures market didn't reflect it but the rest was was made up in basis and in cash and you know maybe some oil traders are going to maybe learn this lesson about the difference between physical barrels and and paper barrels because um you know it's it's very difficult you know the the amount of volatility you know and you know headline driven trade where the market moves and then you see the headline out there you know you're I think you're going to get to a point where you're going to shake you know trade confidence where people just aren't going to trade it anymore because they don't know when the next you know fake headline or real headline or whatever headline comes out uh is is influencing this trade. But at the end of the day you know regardless of any headlines as long as this trade is closed uh that's that's bad news. You know this this strait has to open uh very soon or we're going to you know I don't want to be doom and gloom but we're it's kind of like Covid when you shut down a factory um you know and then reopen it um it you once you resume the production of that factory you have to produce X amount of widgets plus whatever widgets that you you lost the the shutdown and and to look at it that way I mean not only do we have to get resumption of flows of oil out of the region elsewhere but we have to replace that plus x amount to just replace what weve drawn down in world supplies. So um you know we're longer that this strait is closed uh the more pessimistic I am on uh crude prices or physical energy prices you know short term and then obviously the economy and and inflation and everything else it's it's all one big ball of wax.

Todd Gleason: Let's get a final word from each of you now Mike Zuzolo at globalcommresearch.com in Atchison Kansas I'll start with you.

Mike Zuzolo: Yeah very plain spoken English here Todd in in my mind everything you do if you need to do something uh because we lose technical support for whatever reason heading into the end of this week I I'm going to recommend doing paper positions again thinking it's more of a correction or than than a top in the price action. So I I that's how I would recommend it generally speaking is do as little cash as possible until we know a lot more.

Todd Gleason: And Garrett Toay of AgTraderTalk.com out of Warren Illinois your final word.

Garrett Toay: Uh we're in the same situation we made some cash sales now we're moving to paper. Um you know for producers who are uh still sitting here with old crop corn um you know the clock is I'm assuming we still have a large carry out and I feel the clock is ticking here as long as we the old crop seasonality is built in here into the middle of June uh once that carry out moves that may be more important than what the new crop uh crop is uh as we make positions or make storage available for that new crop. So um you know especially we've had some decent basis improvements here but uh new crop sales are being a little bit more patient but uh we're being a little bit more aggressive on old crop sales just because of the the size of the old crop carryout.

Todd Gleason: Commodity Week of course is a production of Illinois Public Media it is public radio for the farming world online on demand at willag.org w i l l a g . o r g. Our thanks go to our panelists this week including Mike Zuzolo and Garrett Toay. I'm University of Illinois Extension Todd Gleason.