Perspective: Mid-Day Commentary for March 1

By: Arlan Suderman, Chief Commodities Economist

Tue, 01 Mar 2022, 17:34

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

March 1 - The war continues to escalate in Ukraine, while political will for sanctions increases in the West as well, while the impact on the markets continues to rise. Stocks are under heavy pressure at midday, with the VIX trading near 34. The dollar is trading near 97.5, while yields on 10-year Treasuries fall to a nearly two-month low near 1.68%. Crude oil prices are up more than 10%, while corn and wheat contracts lock the daily limit higher, with edible oil prices hitting record highs. The market is pricing in lost trade coming from the Black Sea Region, but it hasn't yet started to factor in a year of lost production from Ukraine.

The West is taking steps to restrict - although not eliminate - energy imports from Russia. The European Union is reportedly voting on added restrictions today. Yet, the sanctions already in place are slowing movement of energy out of Russia. Even China is reportedly refusing to take liquified natural gas shipments from Russia, while other bulk tankers at Russian ports have reportedly not been able to load with crude oil due to sanctions on the finance system. Canada has already placed a ban on the import of Russian oil, although the United States has not yet done so. There has thus far been virtually no slowing of natural gas flow from Russia to Europe, but that may soon change.

Members of the International Energy Agency agreed today to release 60 million barrels of crude oil from reserves to cool the markets, with half of that occurring in the United States, but that has thus far done little to slow the escalation of prices. The reason for that is that 60 million barrels of crude accounts for less than one day of usage on the world market. A much bigger impact could be had if governments would take steps to open up and to facilitate drilling and production, eliminating some of the regulatory restrictions on the industry. Sixty million barrels will not go far in a crisis that looks to extend past this week; perhaps deep into the future. As such, the market is arguing for increasing output in all non-Russian production areas of the world. OPEC will do what it can, although it is thus far sticking to its quotas, but this tests the resolve of environmental movement in the West that is trying to reduce fossil fuel dependency. One way to do that is to drive prices higher, but this is the test on whether the consumer will accept that. The answer to that question also has significant implications for the future of the renewable fuels industry that now faces sharply higher prices for feedstocks.

It was a tale of two worlds. Center West Brazil saw good rains through the summer growing season of December, January, and February, while southern Brazil experienced its second driest summer of the past four decades, as shown in the Commodity Weather Group graphic below. Temperatures average a bit above normal in the north, likely due to elevated overnight temperatures due to high levels of humidity, while they were slightly below normal in the south of Brazil. Yet, the dryness in the south had a dramatic impact. StoneX Brazil will release its latest production revision tomorrow, based on its customer survey. Other private production estimates released suggest that we could see another 3 - 4% decline, but we'll have to see what the Brazil team's survey found. Nonetheless, that continues to tighten the global oilseed balance sheet.

As for Argentina, the past three months saw periods of extreme heat and dry, interspersed with periods of significant rainfall. Overall, the past three months averaged moderately below normal on rainfall, while it proved to be the third hottest summer of the past four decades, including periods of record heat. Crop areas again see rains falling this week, after the latest round of hot dry weather. It's still early enough for the majority of Argentina's corn and soybeans to benefit from these rains, although crop ratings have not yet shown much response to the moisture. Argentine and Brazil production estimates for corn and soybeans will be some of the most watched numbers from USDA next week.

Grains & Oilseeds

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