Perspective: Mid-Day Commentary for December 7

By: Arlan Suderman, Chief Commodities Economist

Tue, 07 Dec 2021, 16:47

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

December 7 - Money continued to flow into the stock market this morning, as Omicron fears ease, and while President Biden and Russia's President Putin begin virtual talks to avert a crisis in the Black Sea region. Traders are growing increasingly comfortable with the risks presented by the Omicron variant of Covid, while they are happy to see Biden and Putin engaged in talks over potential threats of a Russian invasion of Ukraine. The VIX slipped below 22 as fears ease again on Wall Street, while the dollar index trades near 96.5. Yields on 10-year Treasuries are trading near 1.45% at midday. Crude oil prices are more than 4% higher on the renewed optimism building on Wall Street, while the Ags remain stagnant ahead of Thursday's USDA WASDE crop report, and ahead of an anticipated announcement from the Biden Administration that could impact the future of the biofuel industry. The latter particularly impacts corn and soybean trade, while wheat prices continue to define their trading range of value fitting to the current status of tight global supplies of milling wheat. The cattle market is stagnant as well, with trade participants split on whether this week's cash market will pull back, or remain strong for yet another week ahead of the holidays.

The U.S. Environmental Protection Agency is expected to finally put rumors to rest today regarding RVO's for 2020, 2021, and 2022. The latest rumors suggest that we will see the EPA make notable reductions to RVO's for 2020, using the pandemic as an excuse to do so, along with possible reductions for 2021. There continues to be a great deal of uncertainty over the 2022 RVO's, with that uncertainty hanging over both the corn and soybean markets. There's been some speculation that the Biden Administration may broaden the scope of products qualifying for creating RINS, adding to the uncertainty. That could include ethanol as a feedstock for the new Sustainable Aviation Fuels, which are considered advanced biofuels. For now, the market doesn't like uncertainties, making traders fearful of the direction of potential surprises from the Biden Administration.

Fertilizer prices continue to trend higher, as shown in the graphic below. Prices are rising for essentially all primary fertilizer products, including nitrogen, phosphorus and potash. The graphic below tracks the number of bushels of corn needed to pay for a ton of anhydrous ammonia. Note that the ratio continues to trend higher, even though corn prices continue to hold just below $6 per bushel. The job of the corn market is to make sure that enough acres are planted in 2022 - here and overseas. That means that prices must remain high enough to pay the fertilizer bill so that farmers continue to plant corn, and that fertilizer bill continues to grow. This also doesn't address possible shortages. Common sense would suggest that this is primarily a new-crop - or December 2022 - issue for the market, but money flow doesn't always differentiate if it is seen overall as an inflation issue. The corn market's work would be done if all of the fertilizer would be applied early, assuring that the acres will get planted. We've had a good fall application season overall, but I doubt that we'll see the work of the market done for awhile. That doesn't mean that the market is immune to sell-offs, as we've seen, but it does suggest that buyers are expected to emerge on the breaks as long as the high crop input price problem is with us.

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