July 21 – Stocks were generally mixed overnight as Wall Street continues to digest earnings reports for the second quarter while monitoring rapidly escalating geopolitical tensions in the Black Sea Region that could further challenge the Federal Reserve’s ability to hit its 2% inflation mandate. The dollar continues to firm this morning, trading at a one-week high above 101.0. Yields on 10-year Treasuries are trading near 3.82%, while yields on 2-year Treasuries are trading near 4.84%. Crude oil prices are pressing closer to another possible test of overhead chart resistance at the 200-day moving average, while the grain and oilseed markets sold off overnight, led by more significant losses in wheat.
Russia targeted Ukraine port infrastructure for a fourth consecutive night overnight, making it clear that it fully intends to stop movement of grain and other food products through the ports. Russia seems to be following a two-phased plan to do so. First, it is attacking the ports to disable them to the best of its ability, while second, it is creating fear among shippers to keep them from approaching Ukrainian waters. It’s doing so by stating that all ships moving toward Ukrainian waters will be considered as possible carriers of military equipment that would make them potential targets, but it’s also following those statements with reports that it is practicing targeting moving ships and training personnel on taking over ships. This is a clear escalation of the war that will be addressed in a special meeting of the U.N. Security Council today.
How does China play into this? I doubt that China wanted this escalation. First, it was a benefactor of the Black Sea Grain Initiative. It imported 5.26 million metric tons of corn from Ukraine last year, with year-to-date shipments at 4.3 mmt. Ukraine was traditionally a major supplier of corn to China, which would buy from the United States to supplement its needs when Ukrainian supplies ran short. Now China depends heavily on Brazilian supplies, with a new phytosanitary agreement expected to lead to increased imports from Argentina as well in the years to come. Year to date corn shipments from Brazil to China total 2.2 mmt, but China is expected to receive roughly 2 mmt per month from Brazil July through September. Year to date Chinese imports of U.S. corn total 4.7 mmt, with less than 0.2 mmt on the books for the remainder of the current marketing year and less than 0.3 mmt of new crop on the books to this point. That compares to U.S. corn shipments to China of 8.8 and 8.4 mmt per year in each of the two previous years. The bottom line is that China has alternative sources of corn in South America, allowing it to continue to decouple from U.S. trade. It would prefer to not see the Ukraine war escalate, although that does keep U.S. military assets tied up in Europe and focused less on Taiwan. That likely explains why it remains relatively quiet about the recent developments.
It is well known by Russian President Putin and other world leaders that the current escalation in the Black Sea has brought a fresh round of volatility to world food prices, with added support from India’s ban on rice exports. This raises risks for world food inflation once again, impacting economies around the world, in addition to impacting the ability of people to eat. This week’s developments are not immediately resulting in widespread food shortages, but they significantly reduce the safety net should something happen to reduce Russian wheat shipments. Coinciding with this, Russia will be reducing crude oil exports by 500K barrels per day starting next month on top of the 1-million-barrel reduction started this month by Saudi Arabia, on top of the reductions already in place by OPEC+. Slowly the energy balance sheet is turning over – with traders talking less about poor demand, but rather now talking about supply falling short of demand in a world where stimulating fresh supply may be more challenging. The food and energy commodities are intertwined, but the energy commodities especially have an influence on the food commodities. The 200-day moving average has been a point of significance for crude oil prices that bares watching.
Today’s Midwest weather forecast continues the recent trend of warming up and drying out – not totally dry, but it is definitely moving in a drier direction. Heat will be focused more on the western Midwest than on the east. There’s still a lot of uncertainty about the staying power of this trend. Forecasters do not currently see that happening, but they note that they can’t rule it out either. The next four to six weeks are critical for the development of the U.S. corn and soybean crops. The corn balance sheet has plenty of wiggle room currently due to extremely weak exports and soft feed demand. The soybean balance sheet has very little if any wiggle room due to lost acreage and strengthening domestic demand.
