Perspective: Mid-Day Commentary for April 19

By: Arlan Suderman, Chief Commodities Economist

Tue, 19 Apr 2022, 16:43

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

April 19 - Stocks rallied today on good earnings reports, despite a surge in Treasury yields to their highest level since late 2018. St. Louis Fed President James Bullard argued Monday for the Fed to raise its benchmark rate to 3.5% by December, while traders expect something closer to 2.5%. Yet, stocks rallied today as optimism returns, and the VIX slips to trade near 21. The dollar index put in a new two-year high above 101.0 as yields on 10-year Treasuries traded to 2.93%. Crude oil remains 5% lower at midday in a pullback, while the Ags are generally firming off their early session losses, led by soybeans and Minneapolis wheat. Corn prices held a test of support at $8. Cash cattle traded at $141 per cwt in Kansas, up $2 on the week.

Monday's updated European model called for above normal rainfall to be the standard in the month of May for much of the primary corn and soybean growing areas from Louisiana north through Arkansas and Missouri, eastern Iowa and Wisconsin and points to the east. Areas to the west of that are expected to see below normal precipitation, keeping much of the Plains on the dry side. The model was influenced by atmospheric conditions that suggest that La Nina is strengthening as we head into the early part of the growing season. That doesn't mean that we won't see windows of opportunity for the crops to be planted in these wet areas, but it does suggest that we will need to take advantage of those windows when they occur. The correlations with the strengthening La Nina suggest that the dry shield in the Plains has risks for expanding east across much of the Midwest as we move through the summer. In the meantime, the models favor continued cold shots across the Midwest through the first week of May. All of this is based upon ocean temperatures staying cool in the Gulf of Alaska, off the U.S. West Coast, and to the southwest toward Hawaii. Change that, and the weather forecast changes as well. That could happen. It hasn't yet. I'll be monitoring it.

Corn and wheat are very interchangeable in many global markets, with price determining feed use levels of each. A shortfall in corn supplies increases wheat feeding, and visa versa. As such, I like to monitor global corn and wheat supplies from year to year. The graphic below looks at global combined corn and wheat supplies over the past five plus decades in terms of days of supply. Note that global supplies of the two commodities combined have been trending lower through the period in an overall pattern of demand rising at a faster pace than supply. There are two exceptions - one when USDA paid farmers to keep grain off the market in the mid-80s with the national grain reserve, and the second being back in November 2015 when USDA backwardly revised Chinese balance sheets for several years to upwardly revise Chinese corn stocks. We believe that the upward adjustment was warranted, although we also believe that USDA over-compensated by raising supplies by a third more than appropriate based on our boots on the ground in China. Nevertheless, the trend is still clear, that world stocks continue to trend lower for combined corn and wheat supplies. We've been moving in the direction of a rationing period as a result. The Russian invasion of Ukraine that blocked its ports simply moved that time forward. It's the market's job to bring supply and demand back into balance with prices that stimulate increased global production, with Brazil being the place with the most available land to increase output. Corn supplies are the tightest of the two commodities, with the balance sheet minus China showing just a 38-day supply, while wheat supplies minus China are at a 77-day supply.

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