Perspective: Mid-Day Commentary for March 18

By: Arlan Suderman, Chief Commodities Economist

Fri, 18 Mar 2022, 15:50

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

March 18 - Today's action was split on Wall Street, with the tech sector continuing its bounce ahead of the weekend, following recent sharp losses, while the Dow Jones Industrial Average came under modest pressure. The VIX traded below 25 at its lowest level since February 16th. The dollar index firmed to trade near 98.4, while yields on 10-year Treasuries traded near 2.15%. Crude oil prices are modestly higher at midday, while the grain and oilseed sector came under notable selling pressure in this morning's trade.

The search for rational thought continues in the grain and oilseed sector when looking at hour-to-hour and day-to-day trade. Big price swings cause observers to search for a fundamental reason, which is often lacking. Chicago wheat has traded roughly a 50-cent trading range thus far today, which is considered a relatively calm day in light of recent volatility. The big price swings have chased many traditional traders out of the market, waiting for some common sense to return. That is best seen in the graphic below showing open interest for Kansas City wheat futures, which fell to 177,542 contracts on Thursday, which was its lowest level since June 2015. Chicago wheat open interest sat at 339,644 contracts, which was just above brief lows posted last year, and again in December 2015. The lower open interest leaves the wheat markets at the mercy of the Algo traders that push the market around on a day-to-day basis - often times trading no more than changing momentum signals. The markets are largely disconnected from the cash market as the war in Ukraine wages on.

I start virtually every presentation I do with a slide that says P = f (S * D) M. In other words, Price is a function of Supply and Demand as modified by the flow of Money. Typically that means that money flow in or out of the sector influences the level at which the market manages supply and demand. In this case, it suggests that the computers trading that money flow have contributed to so much volatility, that they've disconnected it from the cash and chased many ordinary traders out of the market, removing some of the logic of hour-to-hour and day-to-day trade. Headline reading Algos respond to a headline about cease-fire talks, turning trade in a certain direction, where the momentum-trading computers amplify the move.

In the end, supply and demand still matter. Global supplies of wheat, corn and soybeans are a concern over the coming year. The fundamentals still provide the boundaries for the range in which these computers trade, but that range is much wider than we are accustomed to seeing in these markets. End users are concerned, and they are stepping up purchases. For wheat, other alternatives still exist, such as Australia and India. For corn and soybeans, buyers are looking to the United States, with recent purchases nearly double the typical weekly rate for this time of year. In fact, known new-crop soybean export purchases currently sit at a record for this time of year at 308 million bushels, with China responsible for at least 217 million bushels of that total, while unknown destinations (China?) accounts for another 74 million bushels. New-crop corn and wheat sales are not yet at record levels, but they are pushing the upper level of what's normal for March.

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