Perspective: Mid-Day Commentary for February 4

By: Arlan Suderman, Chief Commodities Economist

Fri, 04 Feb 2022, 17:44

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

February 4 - Strong gains for Amazon helped to shift market focus away from fears of a hawkish Fed following this morning's robust jobs report, with the tech sector leading today's comeback. The VIX is trading near 24 at midday, after peaking above 26 following this morning's jobs report. The dollar index is trading near 95.4, after its rise to 95.7 earlier in the session. Yields on 10-year Treasuries are trading near 1.91 at midday, after approaching two year highs just below 1.94% earlier today. Crude oil prices are more than 2.5% higher on strengthening fundamentals, while the Ags erased early weakness to push higher at midday. Technical buying lifted wheat ahead of the weekend, while soybeans are higher on declining South American supplies.

Soybean prices were overbought following the recent sharp rally, so a period of consolidation was understandable. Yet, the fundamentals continue to provide support. Profit taking is one thing, but there's nothing here to indicate that the funds can justify a move to go short this market until more is known about the production losses in South America that could dramatically alter the U.S. balance sheet for both this and the next marketing year. I've previously focused on the drop in Brazilian production, with StoneX Brazil pegging the crop at 126.5 million metric tons, with other local estimates near that level or lower. The cash market now has exportable Brazil soybeans priced above U.S. supplies from May forward, giving some validity to the small production estimates. The question is, how far will USDA go on Wednesday? It pegged Brazil's crop at 139 mmt in January.

But what about other production areas of South America? USDA currently has Paraguay soybean production at 8.5 mmt, with Argentina at 46.5 mmt. Some local estimates are as low as 4 mmt for Paraguay and 42 mmt for Argentina. My global balance sheet currently has Paraguay at 6.8 mmt, but I think there is validity to estimates that it may fall below 5 mmt. Argentina imports a lot of soybeans from Paraguay to crush so that it can export the soymeal and soyoil and that may not be available this year. I have Argentina at 45.75 mmt. That's where we could see the other shoe fall, but I am wary of getting too aggressive in lowering my estimate in early February. The next six weeks are critical for pod set and pod fill for the bulk of Argentina's soybean crop, similar to August and early September for the Midwest. The graphic below shows this year's sharp decline in crop ratings due to record heat and severe drought. Most of the soybean belt saw soaking rains in the last half of January, but rains have largely disappeared over the past week, and the European weekly models are predominantly dry over the next six weeks. However, I also see La Nina rapidly weakening, so my confidence in those dry forecasts is low. Note that the current low crop ratings saw very little bounce from the late January rains, but they are still above final ratings for the last two years, when production hit 48.8 & 46.2 mmt respectively. I need to see how the forecast plays out before going lower.

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