By: Arlan Suderman, Chief Commodities Economist
April 20 – Stock futures had an optimistic bent early this morning as earnings season continues, despite a steady rise in Treasury yields. Wall Street is developing a resiliency amid the higher inflation and yield expectations environment as earnings remind them that the economy continues to beat. The VIX is trading at a two-week low near 20 this morning, reflecting easing anxiety levels on Wall Street. The dollar index is trading near 100.5, after hitting a fresh two-year high above 101.0 overnight. Yields on 10-year Treasuries are trading near 2.88%, after hitting a fresh three-year high above 2.98% overnight. Yet, the high inflation expectations continue to support modest broad-based money flow into the Ag and Energy commodity sectors.
Russia notes that it has begun the next phase of its invasion of Ukraine. Its initial attempt to quickly take Ukraine was based on an expectation that Ukraine would quickly fold under pressure as it hit from many different directions at once. It thought that it could take over the capital city of Kyiv in a matter of a few days, leading much of the rest of the nation to lay down its arms. That didn’t work. The Ukrainian people fought as if their life depended on it, and it did. Russia was unable to take Kyiv, nor could it take any major city in Ukraine. As such, Russia pulled its forces from northern areas of Ukraine, including the capital city, and regrouped them for a consecrated resurgence on eastern and southern areas of Ukraine that are more rural in nature.
The more eastward focus of the war raises hopes that Ukrainian farmers to the west might have a greater opportunity to grow crops, although the challenges remain significant. The Institute of Agrarian Economics expects the production of nearly all types of agricultural products to decline this year, due to a lack of fuel, fertilizer, chemicals, and seed, along with some areas being occupied by Russian troops, while others have field mines that must be cleared. The Mykolaiv Oblast is a normally productive area in south central Ukraine near the ports. The institute expects the production of grains and pulses in this region to total just 41% of 2021 levels, with wheat at 40% and sunflowers at 34% of the previous year’s production. The Kherson Oblast is just to its east, and north of Crimea. This region is expected to see production levels of 49% of year ago levels, with wheat at 47% and sunflower seeds at 46% of the previous year’s production.
The situation is better in central and western areas, where production of grains and pulses could fall by 18 to 25% from the previous year, while sunflower seed production may be down 15 to 22%, meat production down by 8 to 18% and milk down by 6 to 18%. We continue to see these numbers on the optimistic side, but we hope for the best. Less than 20% of intended crop area has been planted to date, with farmers shifting to crops that are easier to cultivate, including barley, oats, peas, millet, sorghum, pulses and other niche crops. Corn production may be minimal in 2022. The focus is on survival with the resources that are available. However, exporting these commodities in any sizeable volume may prove to be an even bigger challenge, as I’ve previously outlined, with Ukrainian officials worried that they will run out of storage this fall due to the inability to export. It’s feared that the inability to export could limit farmer’s ability to plant crops next year, helping to make this a multi-year crisis.
Commodity prices found support again overnight as fund money continues to flow into the Ag, and intermittently into the Energy, sectors. The food-based commodities have been very attractive to fund managers seeking a way to hedge their portfolios against inflation, because they are considered essential, and in relatively tight supply in the world. Many of these commodity markets benefited from tight supplies prior to the Ukraine war, but the Russian invasion of Ukraine amplified the problem further. Add in weather and logistics challenges and you have the makings of a “perfect storm” – tight supplies and an abundance of money wanting to trade those fundamentals. Dryness continues to spread across the northern half of Brazil’s safrinha corn belt, ushing in an early end to the monsoon season the crop depends upon for its production. We are not expecting a major crop failure, but the drier conditions are expected to take some of the top off the crop. A cool wet start to the spring creates challenges in the United States. I’ve seen many challenging springs over the past four decades, and the corn crop nearly always gets planted, although later than preferred at times. However, spring wheat acreage could see additional losses if the current weather pattern holds a few more weeks, while we could see some modest shifting of acreage away from corn in the South. However, the greater factor will continue to be the type of weather pattern we see in July and August. There will be little to no margin for adverse weather in the growing season ahead.
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A strong super El Niño has started, but the crop damage that would lift food prices is still expected to land between September and December. Indian wheat area and Southeast Asian palm oil production sit at the front of the transmission chain, with Brazil the larger unresolved question.
Damage to Black Sea ports has stalled grain exports, but the more serious risk is now forming on the farm. Collapsed farmgate prices and a Russian fuel crisis have put part of the wheat harvest in question.
August 13 – The major stock indices traded quietly mixed overnight ahead of this morning’s weekly job numbers and producer price index data. Like Wednesday, this morning’s data was considered good as well, providing support for stocks while generally allowing Treasury yields to slip a bit lower. The VIX is trading near 14.4, which is just above yesterday’s new low for the year. The dollar index is trading near 99.8. Yields on 10-year Treasuries are trading near 4.64%, while yields on 2-year Treasuries are trading near 4.15%. WTI crude oil is trading near $81 per barrel, while Brent trades near $87 per barrel. Wheat prices again firmed overnight on geopolitical risks in the Black Sea Region, while corn and soybean prices pulled back modestly from yesterday’s big gains.
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