Perspective: Mid-Day Commentary for December 20

By: Arlan Suderman, Chief Commodities Economist

Tue, 20 Dec 2022, 16:20

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

December 20 - Stocks pushed cautiously higher as we approached midday, as traders start to prepare for the approaching holiday break, in which many traders will be absent through next week. The VIX is trading near 22 at this hour, reflecting relatively calm conditions on Wall Street. The dollar index continues to fall, trading near 103.9 at this hour, and providing support for the broader commodity sector. Yields on 10-year Treasuries are trading near 3.68%, which is at a nearly three-week high. Crude oil prices are modestly higher, while the grain and oilseed markets are higher as well.

One can find fundamental reasons for justifying this week's moves in the grain and oilseed markets, but much of it is money flow tied to chart signals. Both end users and speculative traders are believed to be participating in today's rally, that sees the lead corn contract probing through the top of a descending channel on the charts that has held prices for the past couple of months. Meanwhile, buying in the soybean market pushed the nearby January contract back closer to the $14.90 area that has proven to be a major area of chart resistance over the past six months, while wheat prices are challenging the top of their descending channels on the charts as well. It will be very important for the bulls to get a strong close in these markets today if they hope to see follow-through buying. A weak dollar provides support, but it is not the only factor involved. This week's winter storm with bitter cold temperatures is also a factor, albeit a temporary one. Commodity Weather Group estimates that the cold will put one-third (45% worst case scenario) of the hard red winter wheat crop at risk of some winterkill. That said, livestock traders are largely unimpressed with this quick storm. Temperatures are expected to moderate by next week, allowing for a quick recovery.

La Nina appears to be making one final surge as a burst of easterly trade winds stir up cooler waters in the central equatorial Pacific. That reinforces an overall dry trend for Argentina, Paraguay and southern Brazil, while keeping areas to the north in Brazil's most productive areas wet, supporting good yields. The graphic below shows that forecast models expect things to start changing once we get past the turn of the calendar. In fact, the turn to the New Year is typically when we see the end to La Nina events. Water temperature anomalies are the lagging indicator for the change away from La Nina, with the trade winds providing our first indications. Forecast models are increasingly confident that we will transition to an El Nino by the Northern Hemisphere summer. It's not unusual for the atmosphere to flip to an El Nino following a strong La Nina event, so such a flip would not be a surprise. A lot of factors go into driving spring and summer weather patterns, but the ENSO cycle described above is one of the larger factors. If it verifies, the odds go up that we see the Plains drought finally break this spring, with higher risks of a wet spring in the central and eastern Midwest and an overall favorable Midwest growing season in the summer. We do sometimes see below normal rainfall focused on western areas of the Midwest, but that doesn't necessarily translate into a below-trend national yield. Remember that confidence in long-range forecasts is low, but this is the general direction we're headed currently.

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