Perspective: Mid-Day Commentary for July 29

By: Arlan Suderman, Chief Commodities Economist

Fri, 29 Jul 2022, 16:31

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

July 29 - Labor costs surged 5.1% year-on-year in the second quarter, reflecting lingering wage inflation problems. Yet, stocks are poised to finish the month on a positive note at midday, with the VIX at three-week lows near 21. The dollar index is trading near 106.0, while yields on 10-year Treasuries are trading at fresh three-month lows near 2.62%. Crude oil prices are up by more than 3%, while the Ags have a firmer bias as well. Soybeans lead the way higher for the Ags on weather concerns, with corn following. However, that's less of an issue currently for wheat, which has slipped into the red for the day as the first cargo of grain prepares to leave Ukraine. The protein complex erased early losses to trade mostly higher at midday, led by lean hog futures amid seasonally tight supplies.

StoneX is scheduled to release the first of its monthly customer-survey-based corn and soybean yield estimates on Tuesday. I have not seen any data from the survey, so do not read anything into my comments that are not there. But I'd like to look at the history of USDA's yield adjustments in August, along with some comments about where we go from here. First, the U.S. corn and soybean crops look good overall as we prepare to turn the calendar to August on Monday. Corn pollination is later than normal in most areas, and the soybean crop is small for this time of year, with many areas still trying to canopy, but the crops look good overall.

Commodity Weather Group reports that July rainfall was near normal for the Corn Belt. That's true, when you average it out across the belt. CWG also notes that it's difficult to find years when corn yields fell more than 1% below trend when July rainfall was near normal. But that was also an average of extremes this year. Nearly a quarter (24%) of the belt saw more than 125% of normal rainfall in July, with 12% above 150% and 3% above 200%. For example, the St. Louis area had a thousand-year rainfall event in the past week. But we also saw 30% of the belt see less than 75% of normal rainfall, with 9% below 50% and 1% below 25% of normal rainfall.

It's no secret that I have concerns about the crop if current weather forecasts for August verify. I'm not aware of anyone (myself included) expecting a crop failure with this forecast. But I do fear a 2% - 5% decline from trend if the forecasts verify, and that would be a threat to an already tight balance sheet, especially with exports severely restricted out of Ukraine. The graphic below shows USDA's track record for yield changes in the August WASDE crop report in the years that it has reported yields in July. The recent trend has been for USDA to increase its yield in August. I do not expect that this year. Nor do I expect a significant reduction in the August report. Keep in mind that USDA's August yield estimate is based on its farmer survey, satellite data and modeling. Actual field surveys are not taken into consideration until September, which is when I expect us to get our first handle on the impact of the anticipated August weather pattern. The recent pattern for soybeans yields has also been for an increase in August. If anything, I would anticipate USDA holding the line at a trend yield this month, with downside risks next month if the forecast verifies.

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