Perspective: Mid-Day Commentary for October 22

By: Arlan Suderman, Chief Commodities Economist

Fri, 22 Oct 2021, 16:49

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

October 22 - Fed Chair Jerome Powell said this morning, "I do think it's time to taper; I don't think it's time to raise rates." That statement sent stocks lower, although it did not trigger panic selling. He went on to say that the central bank would act if inflation rises higher or lasts longer than expected. I would add that it has already done both, which Powell has previously admitted. Powell has been dragged reluctantly into the tapering camp. We'll see if the hawks on his policy committee drag him into the rate hike camp when they meet the week after next.

Stocks immediately sold off when he made the comments, but they are recovering at midday. The VIX is trading just below 16, after rising above it following his comments, but it remains low regardless. The dollar index rallied to trade above 93.7. Yields on 10-year Treasuries initially rallied, but then turned lower following his comments, with yields currently trading near 1.64%. Crude oil prices are up roughly 1% just below seven-year highs, while the Ags are mixed. A sharp move in Kansas City wheat spreads early today combined with the reduction of deliverable supplies indicating demand for milling wheat, lighting a fire under both the hard red winter and hard red spring wheat markets today. That helped support corn prices, while profit taking in the edible oils markets following recent sharp gains led to modest weakness in soybeans.

Sea surface temperature anomalies in the equatorial Pacific are cooling again, pushing us into a second consecutive year of La Nina weather conditions. The impact of this pattern on major crop production areas varies. Weather patterns correlate well in some areas, while not so well in others. For example, Argentina and southern Brazil have pretty good correlations with below normal rainfall during La Nina events, while the correlation is much weaker in central and northern Brazil growing areas. La Nina tends to leave the southern U.S. warm and dry through the winter, which fits with NOAA's latest winter outlook, while northern U.S. locations can tend to be cold, with a snow band between the two areas. We'll need to watch the central and southern Plains winter wheat belt for developing dryness issues through the winter that could hurt production in the spring.

The correlations are weaker with the Black Sea region, but that is another area to watch. It's turned quite dry across much of the winter wheat belt for Russia and Ukraine this month, as shown by the graphics below that compare October month-to-date precipitation versus the same period over the past four decades. Sixty-three percent of Russia's winter wheat belt received less than 25% of normal rainfall thus far this month, with 83% receiving less than half of the normal amounts, making it one of the drier October's of the past 40+ years, with the outlook leaning dry for November as well. The same can be said for Ukraine's winter wheat belt, which saw 66% of wheat receive less than 25% of normal precipitation this month so far, and 83% saw less than 50% of normal precipitation. Russia received good rains in September to help start the crop, while the rains were more spotty in Ukraine in September. We're not hearing any reports of problems with the crop yet, but that could change based on this month's pattern and next month's forecast. The market typically doesn't pay much attention to this region in the fall of the year, but this year's dynamics are much different, with major exporter supplies already at historically tight levels. Fertilizer shortages could add to the problem in the spring.

Month-to-date rainfall for winter wheat growing areas of Russia (left) and Ukraine (right). SOURCE: Commodity Weather Group

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