By: Arlan Suderman, Chief Commodities Economist
December 8 – Stocks are poised to add to this week’s gains as Omicron fears continue to ease on Wall Street. The VIX slipped to a two-week low near 21 this morning, while the dollar index continues to consolidate near 96.1. Yields on 10-year Treasuries are trading near 1.50% in early trade today. Crude oil prices are modestly higher again this morning on the renewed Wall Street optimism about the economy as Omicron fears ease. However, the Ags were again mostly lower overnight on lower biofuel blending mandates and the upcoming WASDE crop report.
Washington averted another potential crisis, but it took some slight of the hand to do it. Last week’s focus was on keeping the government open with another continuing resolution, which has become the pattern for funding essential services, along with much of the rest of what government does. This week’s focus shifted to the debt ceiling. U.S. Treasury Secretary Janet Yellen warned that the United States would run out of money to meet its obligations by Wednesday of next week if the ceiling were not raised, while other estimates put the timeline later in December, or early in January. Regardless, Congress needed to act, and that’s been a problem of late.
The difficulty is in the Senate, where the rules require a 60-vote majority to end debate on a bill so that a vote can occur. Sometimes it is a good thing to slow down government action, as less legislation is sometimes better. Regardless, both parties see raising the debt ceiling as a toxic issue for voters in the current environment, but neither has done anything to fix the spending problem, so we need to continue to deal with the debt ceiling – think of it as the credit limit on your credit card. Congress simply keeps raising the credit limit, so to speak.
Democrats have the edge in the Senate, with Vice-President Harris providing the tie-breaking vote, but that means they would need Republican votes to get the bill to raise the debt ceiling to the floor for a vote. Republicans do not want to be associated with the bill, so that they can leverage it in next year’s mid-term elections. Doing nothing could result in defaulting on debt, which is deemed unacceptable. So, the two parties reached a compromise on Tuesday. An agreement was reached to pass a law allowing for a one-time raising of the debt ceiling to an amount specified by Congress – likely just over $30 trillion – that would just need a simple majority of both the House of Representatives and the Senate to pass. This short-term law would still need 60 votes in the Senate, requiring 10 Republicans to agree to it, but that is not expected to be a problem. As such, Congress can then pass the debt ceiling increase without a single Republican vote. This kicks the can down the road a bit further, likely requiring Congress to revisit the issue next spring or early summer, in a mid-term election year. It also allows Congress to go home for the Christmas break, where they will face their constituents.
The U.S. Environmental Protection Agency finally released its biofuel blending mandates yesterday afternoon for 2020, 2021 & 2022, although the 2020 numbers were a revision of previously released mandates. In the end, the revisions turned out to be one of the worst kept secrets in Washington, coming out pretty much as we expected. Total renewable fuel blending for 2020 was put at 17.13 billion gallons, with 12.5 billion of that conventional renewable fuel – primarily ethanol – and 4.63 billion advanced biofuels. Total renewable fuel blending for 2021 is 18.52 billion gallons, with 13.32 billion being conventional renewable fuels and 5.2 billion being advanced biofuels. Total renewable fuel increases to 20.77 billion gallons for 2022, with 15 billion of that being conventional and 5.77 billion being advanced biofuels. In the end, ethanol margins took a hit by seeing RIN values drop from $2 per gallon in May to near 80 cents recently anticipating this change. The EPA then reduced the biodiesel blending requirement to put more into the conventional to ease the pain for ethanol producers. The next question then is, do these changes do anything to slow the development of the renewable diesel and sustainable aviation fuel industries? The answer to that question is, no, probably not. Those industries are still expected to have a bright future, although it will take some time for the infrastructure to be developed to realize their impact on the edible oil sector.
Upward momentum for the Ags stalled recently amid Omicron fears and approaching USDA WASDE crop report and yesterday’s EPA release of new biofuel blending guidelines. Soybeans also face pressure as a big Brazilian crop approaches harvest that may steal exports. Yet, quality milling wheat stocks remain tight, and high fertilizer prices remain a risk for 2022 corn production, as well as for global wheat yields and protein content. Corn should find some support from a fresh 72.6-million-bushel sale to Mexico, with 29.7 million of that for next year’s crop.
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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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