February 24 – Stock futures rallied overnight, bouncing from last week’s losses, while the commodities faced fresh selling pressure. To be sure, the overnight rally on Wall Street pales against the late-week selloff, but traders took comfort from the ability of the market to find some stability overnight. Nonetheless, we did see the VIX elevate modestly to trade near 18 overnight. The dollar index fell to a fresh 11-week low, before rebounding to trade again near 106.7. Yields on 10-year Treasuries are trading near 4.44%, as they hold for now above modest support at 4.4%, while yields on 2-year Treasuries are trading near 4.22%. Crude oil prices are modestly higher this morning after firming late, while the grain and oilseed markets were lower.
The Chicago Fed national activity index for January slipped to -0.03, down from an upwardly revised +0.18 in December. That means that the economy slowed a bit in January, but that it continued to grow at a slightly below trend pace during the month. We’ll get updated GDP numbers later this week, as well as durable goods orders data and inflation data on Friday. However, the biggest focus on Wall Street may be on the federal employee layoffs after letters went out to federal employees over the weekend essentially asking them to justify their jobs. Washington is bracing for possible significant additional layoffs, with Wall Street speculating over the anticipated impact that might have on the unemployment rate, and on the economy overall.
Wheat prices boasted the largest losses overnight, but the losses in corn set the tone. The spot corn contract failed to hold its probe above $5 per bushel last week, leading to some market nervousness following this winter’s notable price rally. Friday’s CFTC Commitment of Traders report showed another build of managed money longs in the corn market for the week ending February 18, leading to additional nervousness, with the speculative community owning near record large positions in late February. Additional nervousness comes from an increase in private estimates suggesting that we could see a 3 – 5 million acre increase in area planted to corn in the United States this spring, with some estimates quietly at 6 to 7 million acres. Finally, we’ve seen rapid planting progress of Brazil’s winter (safrinha) corn crop the past couple of weeks, bringing progress closer to normal for the region, and setting the stage for another big crop if the rainy season holds long enough. That’s still a big “IF” for the region, with some models flipping drier for the pollination and early grain fill phase in April/May, but for now, the corn bulls are lacking the fodder they need to remain well fed. Soybeans and wheat are struggling to sustain upward momentum in the absence of strength in corn prices. The long corn / short wheat speculative positions still leave some room for correction from an historical standpoint, but that can correct over time.
USDA’s annual Outlook Forum will take place on Thursday and Friday of this week. Rarely does this event reveal a new trend to the industry that it wasn’t already aware of prior to the event. The media will put a great deal of focus on USDA’s long-term projections that it releases, including its acreage and trend yield estimates for the upcoming growing season. The yield estimates will have significance, because we can typically expect those to be utilized in USDA’s May WASDE report for the new marketing year. The acreage estimates however are not a product of any producer or industry surveys, but rather the work of USDA’s economists sitting in their offices modeling what they think will happen. The more important number will be the results of its producer survey that will be released on March 31. Private survey estimates will be released in the weeks to come, setting the stage for that report. Nonetheless, the Algos can be expected to trade the numbers that come out of this week’s conference.
The next question will be what kind of growing season can we expect? La Nina appears to be dying, and that will likely remain the case over the next couple of months. There’s a bit of a bias toward warm dry conditions in the Midwest in growing seasons following a weak to moderate winter La Nina, but statistically we tend to overplay the ENSO cycle as determining our growing season in the Midwest. Eric Snodgrass did some good statistical analysis of what has the biggest impact on determining summer growing conditions in the Midwest. The strongest correlation was with water temperatures relative to normal in the Gulf of Alaska. Cool waters there in early summer tend to be reflective of an atmospheric wind pattern that yields hot dry conditions in the Midwest. Warm waters in the Gulf of Alaska at that time tend to be indicative of atmospheric winds that are favorable for weather in the Midwest. Those waters are neutral to warm now, but that can quickly change. And the models this time of year do a very poor job of projecting what water temperatures in that region will be in May and June. Snodgrass also found that just 30% of our Midwest corn yield loss comes from drought conditions, while 70% comes from excessive heat. That’s contrary to conventional thinking. In other words, we’ve seen years when it was dry, but also mild, that saw good crops. But the bottom line is, keep an eye on the Gulf of Alaska.
