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Perspective: Mid-Day Commentary for October 28

By: Arlan Suderman, Chief Commodities Economist

Perspective: Midday Commentary
 
Arlan Suderman
Chief Commodities Economist

October 28 - The tech sector pushed to fresh record highs in this morning's trade, with much of the rest of the equity market following, despite disappointing third quarter GDP growth. Yet, the money continues to flow via stimulus, feeding the equity and commodity markets. The VIX is trading near 16 as we approach midday, while the dollar index fell notably to a one-month low near 93.3, as yields on 10-year Treasuries trade near 1.56%. Crude oil prices are modestly lower, after hitting a two-week low earlier in the session, while the Ags are mixed to higher again today, following overnight weakness. This week's cash cattle market developed nearly $2 higher on the week at mostly $126, but the board had already priced that in, leading to profit taking today. Lean hog futures saw chart short-covering on good weekly sales to Mexico in this morning's USDA sales report.

 

The grain and oilseed sector came under modest selling pressure once again overnight, and buying quickly erased those losses in the day session, once again. Then things settled down to trade the varying fundamentals between the individual assets. These markets had been getting outside support from the rise in crude oil prices to seven-year highs, but this week's pull back in crude oil took upward momentum out of the soyoil market as well. The correlation between soyoil and WTI crude oil prices over the past 30 days is 0.92 - a very strong correlation as focus shifts to the new renewable fuels made out of edible oils. Weakness in crude oil resulted in profit taking in the soyoil market. We used to correlate soybean prices with soymeal prices, but soyoil has had a growing influence in recent weeks. Weakness in the soyoil market allowed traders to focus on corn/soybean spreads. The focus shifted toward shrinking global corn acres in 2022, versus rising soybean acreage.

 

Crop input costs continue to surge higher, with actual availability a concern as well for some products. Fertilizer prices garner most of the headlines, but other crop inputs are in the same situation. The graphics below focus on to crop inputs vital to corn production, both in the States and globally - anhydrous ammonia and urea prices. Ammonia prices are already at record high levels in some Midwest markets as farmers fall apply fertilizer for next year's crop, fearful that adequate supplies may not be available at affordable prices later in the winter or next spring. This is not just a problem here in the United States, but it is a global problem. Phosphate and potash prices are also rising rapidly. Historically, these prices do not stay at these high altitudes for long, usually because the high prices ration demand rather quickly. They do so by changing planting decisions to less input-intensive crops and by reducing application rates. Lower application rates do not guarantee lower yields, but they do increase the risk of lower yields.

 

Minneapolis led the wheat complex higher again on today's buying, although prices here have also pulled off their session highs. Kansas City December wheat managed fresh contract highs before prices pulled back in profit taking. Global quality milling wheat supplies remain tight among the major exporters. Many mills still need to buy on price pull backs. This market will remain tight until global supplies can be rebuilt. Those concerns are somewhat elevated again with half of Argentina's grain belt currently dry, while dryness is also expanding in the Black Sea region, as well as portions of the U.S. Southern Plains. Weather in these regions will be watched more closely this year, due to the tightness of milling wheat stocks in the world.

 

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Rising fertilizer prices increase corn production costs for 2022. SOURCE: Argus & NPK Services/StoneX

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