March 4 – It’s jobs week on Wall Street, as the focus shifts to the health of the employment sector, and its influence on the Federal Reserve’s monetary policy. The VIX is trading near 14 again this morning, while the dollar index is trading near 103.9. Yields on 10-year Treasuries are trading near 4.23%, while yields on 2-year Treasuries are trading near 4.59%. Crude oil prices are trading modestly firmer this morning following early morning profit taking, after pushing to fresh 16-week highs on Friday in anticipation of the OPEC+ move to extend production cuts into the next quarter. Meanwhile, the grain and oilseed sector traded mostly higher overnight.
OPEC+ announced yesterday that it will extend its voluntary oil output curbs totaling 2.2 million barrels per day into the second quarter of this year, providing support for prices. The anticipated move pushed WTI crude oil prices solidly above $80 per barrel on Friday for the first time since November 7th, although profit taking dragged prices back below that benchmark in trade earlier today. Crude oil prices have been quite choppy over the past several months, but the overall trend has been higher, supported by rising geopolitical risks in the Middle East. So far, those risks have focused on the transportation of crude oil through the Red Sea, rather than the actual output of oil. The fear is that continued escalation could eventually impact the infrastructure needed to produce crude oil. Yet, gains remain limited by a soft global economy, including lingering problems with China’s economy. Gains were also limited by continued rising output from non-OPEC countries, reducing the cartel’s leverage on the market.
Russia needs to maintain elevated oil prices to fund its war effort, and therefore it offered to cut output by an extra 471K bpd in the second quarter, on top of the 500K bpd cut it announced last year that is set to extend through this calendar year. Total OPEC+ cuts since 2022 actually are much larger, amounting to 6.5% of estimated daily world demand, bringing OPEC+ market share down to just over 40%. Yet, the International Energy Agency expects the overall supply of oil on the world market to reach a record high 103.8 million bpd this year, driven by rising production in Brazil, Guyana, and in the United States. The ongoing challenge for OPEC+ will be to maintain the discipline of its membership if crude oil prices start to fall once again. They’ll likely remain true to the cuts if prices continue to trend steady to higher, maintaining overall revenues, but the temptation to cheat grows if prices break lower again.
Nearly every farmer I met at last week’s Commodity Classic in Houston asked if we were close to confirming a bottom in the corn market, because he had a lot more corn to sell. The Brazil farmer is even more under-sold than the American farmer, in both corn and soybeans. Friday’s CFTC commitment of traders report showed managed money easing back on record to near-record large short positions in the grain and oilseed sector in the week reported, while give-up cash selling by the farmer appeared to offset some of that speculative short-covering. The 5-Year Breakeven Inflation Rate continues to slowly rise, suggesting acknowledgement of rising inflation risks going forward that I’ve been expecting, but it has not yet confirmed a breakout to higher levels. I do expect a return of inflation pressures, but I think it’s still a bit early for that to be supporting commodity prices, based on our historical analysis. Rather, I believe that managed money is nervous holding such large short positions due to seasonal factors at play, as we head into the Brazil winter corn growing season, and as we approach the U.S. Midwest planting season, along with USDA’s March 28 quarterly stocks and planting intentions reports known for their surprises. However, any attempts at a sustained rally in corn prices may be limited by increased farmer selling near-term, as well as the fact that Black Sea wheat prices continue to trend lower, led by Russia. Cheap Russian prices weigh on European prices, which weigh on U.S. prices when arbitrage opportunities start to open the door for imports of European wheat into the U.S. market.
StoneX Brazil’s March customers survey pegged its soybean crop at 151.55 mmt on Friday, up from 150.4 mmt the previous month. That’s significant for a couple of reasons. The number itself is in the range of other private estimates, but the significance is in the fact that the estimate increased from the previous month. Producer surveys tend to overshoot crops in good years, before pulling back a bit at harvest, while they tend to do the opposite in years when yields have been hurt by adverse weather. This month’s bounce doesn’t rule out a lower number in next month’s survey, but it does suggest that we’re getting close to having a handle on the size of the crop, and that handle is well above levels needed to boost U.S. exports this marketing year, assuming that the weather continues to cooperate for Argentina’s growing season. That shifts the focus to Brazil’s winter (safrinha) corn crop, where planting is proceeding on a relatively normal pace, with 91% of Mato Grosso’s crop planted as of Friday. Rains have been below normal over the past 30 days in Center-West Brazil, but normal for the period is more than 10” of rainfall. The weighted average over the past 30 days was closer to 6.5”. Forecast models suggest increased risk for those rains dropping off quite a bit in late March and in April, which would increase risks for the crop, but confidence in a forecast is low that far out. It’s something that we’ll need to watch.
