Perspective: Morning Commentary for December 21

By: Arlan Suderman, Chief Commodities Economist

Wed, 21 Dec 2022, 14:32

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

December 21 – Stock futures were cautiously higher early this morning, following a better-than-expected earnings report from Nike. The early-day optimism helped the VIX slip below 21 for the first time in two weeks, although traders continue to be wary of economic risks going forward. The dollar index is trading near 104.1 this morning. Yields on 10-year Treasuries are trading near 3.64%, after spiking to a fresh three-week high overnight, while yields on 2-year Treasuries are trading near 4.21% as the inverse continues to narrow. Crude oil prices are 2% higher this morning on an anticipated decline in crude oil stocks when the government data is released later today. The grain and oilseed markets saw follow-through buying from yesterday as well.

China is open, but few people are traveling within the country, as Covid spreads rapidly through the population. It’s impossible to get good data on the spread of Covid in China. Many of the anecdotal reports about how the virus is impacting the country are contradictory, likely reflecting the personal experiences of those in different regions, or even in different areas of the same city. Some reports suggest that the impact of Covid on vulnerable groups may be more severe than first anticipated, but that’s difficult to confirm. Local media is reporting a surge in demand for funeral homes and crematoriums in Beijing, so we can only imagine what the impact may be in rural areas where the healthcare is much less developed, and where the population is much older. The government allows people to travel where they wish, but many cities are quiet, as most people are either sick with the virus, scared to go out due to fear of acquiring the virus, or are busy taking care of infected family members. That translates into fewer workers to keep factories operating as well, with supply chains slowing to a halt in some cases. In fact, some authorities are asking people with mild Covid symptoms to return to work, which is a total 180-degree flip from the policy of one month ago.

Chinese officials still expect Covid to peak across the country by the end of the Spring Festival – Lunar New Year holiday. That would then lead to expectations of life returning to normal around the end of February or the beginning of March. That would be very positive for a relatively quick rebound in China’s economy, with significant implications for the rest of the global economy, and for demand for commodities. However, we must continue to caution that there remains a lot of uncertainty yet over how this virus will impact the country – especially among its 500 million rural residents who lack access to good healthcare. Meanwhile, there are unconfirmed reports in the Hong Kong media that China will ease entry rules for international passengers to just 3 days of home quarantine starting January 3 as officials seek to jumpstart the economy. However, a rising number of embassies are suspending visa approval for Chinese travelers leaving the country, fearing that the current variants could be exported to other countries. Nonetheless, we anticipate that we will see a full return of international travel with all restrictions lifted at some point in the first half of 2023.

The loss of power and water infrastructure creates significant challenges for Ukraine’s ability to sustain a flow of grain to ports, and then to load that grain onto boats. Furthermore, Russia continues to slow-walk inspection of ships heading to Ukraine ports for loading. Roughly 90 ships are said to be in the que this week waiting for the opportunity to go into Ukraine’s approved ports. As such, export shipments are slowing. Ukraine reports that the country exported 20.601 million metric tons of grain and pulses this year, as of today. That includes 2.718 mmt thus far in December. That compares to shipments of 30.122 mmt year-to-date in 2021, with 4.016 mmt in the first 21 days of December last year. The year’s total to date includes 7.647 mmt of wheat, which is roughly half the 15.619 mmt shipped a year ago. Barley shipments this year total 1.551 mmt, down from 5.111 mmt a year ago. However, corn shipments total 11.321 mmt, up from 9.062 mmt the previous year.

The drought continues in Argentina, but that doesn’t mean that it is totally dry. There are times of showers. It’s just that those rains have not been enough to sustain crops amid some of the extremely heat the region has experienced. This overall dry pattern is expected to continue over the coming weeks, although they should get a break from the heat over the coming week or so. Here in the States, lower snowfall forecasts mean that more of the winter wheat crop will be vulnerable to winterkill. Currently, Commodity Weather Group expects that vulnerability to stretch across a third of the hard red winter and 15% of the soft red winter wheat crops. Yet, the market will likely not care too much about that beyond the next couple of days until we get to spring and re-assess the crop.

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