Perspective: Mid-Day Commentary for May 24

By: Arlan Suderman, Chief Commodities Economist

Tue, 24 May 2022, 16:17

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

May 24 - Today turned into yet another "risk-off" day in the markets, with traders fearful of the impact of inflation on the economy, as well as the impact of the medicine needed to tame inflation via central bank policy. The selling is greatest in the tech sector on Wall Street, with many - not all - commodities feeling the downdraft as well. The VIX is trading near 30 at this hour as it rose back above that pivotal level today as fear rises on Wall Street again to trade above 31 at one point. The dollar index continues to slide lower to fresh four-week lows, with the greenback currently near 101.7. Yields on 10-year Treasuries are trading also trading at four-week lows near 2.74% as money floods into the Treasury market as a safe-haven and a no-confidence vote on the economy. Crude oil prices are modestly lower, while the Ags are mostly lower as well at midday.

Wheat and corn prices led the Ags lower this morning. USDA bumped its winter wheat ratings by 1 point yesterday to 28% Good to Excellent. That's still a poor number, with 40% of the crop rated Poor to Very Poor currently. Yet, this market needs to see strong export demand to sustain a rally, and that is not the case currently. Frankly, we don't have a lot of wheat to export. This week's winter wheat condition index score is 270, up from 265 the previous week. The graphic below shows that there have been four other years with lower condition scores at this point in May, and the yields that corresponded to those years. The Hard Red Winter Wheat condition index score is 262, which is a record low for this week in the growing season.

Corn received a triple-blow over the past 24 hours. First, last week's planting progress exceeded expectations. There are still many problems in the northwestern Midwest, but the market will worry about that another day. Second, the Reuters headline about the Biden Administration considering waivers on gasoline blending requirements reflects demand risks for producing ethanol. Third, Brazil announced today that it finally has a phytosanitary agreement to sell corn to China. It's been a mystery to me why this hasn't happened prior to now, but it has now happened. The above three factors made it difficult for corn prices to hold their strength in the midst of a broader market selloff. Near-term the Brazil-China agreement is merely rearranging the deck chairs on the sinking Titanic. Global exportable corn supplies are still tight, and they will remain that way until we see a large crop produced in either the United States and/or Brazil. The odds are certainly against that happening this year, although it cannot yet be ruled out. Long-term though, once the world returns to a surplus production situation, the agreement will create more competition meeting Chinese demand.

Ironically, one of the exceptions to the selling wave today came in the protein sector. Feeder cattle demand popped on the lower feed price outlook. Live cattle futures also saw some strength, led by the deferred contracts for the fourth quarter of this year when on-feed numbers are finally expected to start slowing due to contraction of the breeding herd over the past year and a half. Yesterday's cold storage report showed a build in both beef and pork supplies in the freezer, after stagnant product movement over the past several months as high prices lead to a cooling of consumer buying. Yet, we've already seen a lot of fund liquidation in these markets, and perhaps that's been priced in already.

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