September 9 – This week starts on a positive note, with inflation data to be released later in the week expected to continue its trend closer to the Federal Reserve’s 2% mandate. Meanwhile, deflation remains a problem in China. That limits demand for commodities, and for global economic growth. The Federal Open Market Committee is expected to cut interest rates next week, but Wall Street is still debating the scope of those cuts following a plethora of jobs data last week that presented a mixed message on the economy. The VIX is trading near 21 this morning, while the dollar index saw more follow-through buying overnight, following a reversal higher off recent one-year lows on Friday, with the greenback trading near 101.6 at this hour. Yields on 10-year Treasuries are trading near 3.73%, while yields on 2-year Treasuries are trading near 3.68%. Crude oil prices are bouncing off of Friday’s 14-month lows, while the grain and oilseed markets are mixed to firm without clear direction once this morning.
China’s consumer price index remained near zero now for the past 16 months, with the August reading up 0.6% year-on-year, compared to 0.5% in July. China’s core CPI that excludes food and energy rose by 0.3% year-on-year, down from 0.4% in July. Prices for shelter, transportation, services, and healthcare all remain under pressure due to poor consumer confidence. The producer price index came in at -1.8%, remaining negative for the past 23 months. Deflationary pressures remain very real in China, reflective of its weak economy.
Brazilian farmers have planted roughly 4% of this year’s summer corn crop, mostly in far southern areas of the country where some rain has fallen in recent days. Planting progress is primarily limited to Rio Grande do Sul at this point, where 20% of the crop has been planted, down from 50% at this point last year. Meanwhile, soybean planters remain parked, waiting for the monsoon rains to return in the high-producing Center-West region of the country where it remains parched dry. Forecast models have been consistently calling for September to remain dry across Center-West Brazil, but they’ve also been consistently calling for those rains to start returning by the first week of October. That would be later than desired, but it would still be in time to avoid significant issues if it verifies. In fact, the models are calling for a typical La Nina weather pattern for the growing season that provides nearly ideal conditions for a big crop in Center-West Brazil. It may be on the dry side in southern Brazil, but it’s still unclear whether it will be dry enough there to reduce overall production.
USDA will weigh in on U.S. corn and soybean production on Thursday. It’s been sampling fields across the Midwest over the past 10 days or so, which includes weighing samples to assess kernel size. Thursday’s production estimates will be the first of the year for corn and soybeans that will include data from actual field sampling, in addition to satellite data and farmer surveys. Private surveys thus far have largely been confirming the August numbers, but there’s always a risk that the field sampling will find something not revealed in the private surveys that largely do not take seed size into account. The very cool August – for the most part – would argue for larger seed sizes that support higher yields, while the dry finish to the month would argue for smaller seed sizes. In reality, we’ll likely see some states surprise to the upside, while the opposite will be true for other states, depending on soils and moisture availability. Regardless, this year’s corn and soybean crops are expected to be record large. The primary debate remains over the scope of those records. Farmers will lean toward leaving the corn in the field to dry down to avoid drying charges at this year’s low crop prices, but the weather forecast suggests that we should see a warm fall with dry air that facilitates a rapid dry down, and therefore a rapid harvest once it starts, stressing our nation’s storage system, which will push more bushels onto the market.
It's really difficult for me to get too excited about the soybean market going forward. A big U.S. crop looks assured. Chinese demand is sluggish, and what soybeans that China does utilize, it’s favoring Brazilian sources for an increasing share of its purchases going forward. We have to assume that Brazil will have another big crop this year if weather forecasters are correct. Argentina is still a wildcard, with a dry growing season expected, but on significantly larger acreage due to its shift away from corn. California is working to limit soyoil use to generate green diesel production, with other states expected to follow, and the feds are doing little to reassure the market that it will counter that will strong production mandates. I’m not as sour on corn though, although its fundamentals are soft in the near term as we head into a record harvest as well. Storage will be a problem, which is expected to push bushels onto the market this fall. But then the focus will shift to demand. Low prices should support expanded use for feed, ethanol and exports. A smaller Black Sea crop this year, combined with a roughly 20% or more reduction in Argentine acreage for the coming growing season, along with drier weather, should improve U.S. exports in the last half of the marketing year. That offers the opportunity to at least stabilize the markets down the road.
