Perspective: Mid-Day Commentary for October 8

By: Arlan Suderman, Chief Commodities Economist

Fri, 08 Oct 2021, 15:26

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

October 8 - Stocks were stagnant on Wall Street this morning as traders digested the monthly jobs report data that provided a lot of mixed signals, while also monitoring re-emerging fears of default from China's Evergrande Group. The latter risk is primarily to off-shore investors in Evergrande, as many observers expect China to take care of onshore investors. It's still a risk for onshore investors, but they are currently receiving priority treatment as payments are made. The company faces nearly $150 million in offshore payment obligations next week, according to Reuters.

Yet, the VIX continues to trade between 18 & 19 this morning, suggesting no signs of panic on Wall Street. The dollar index is trading near 94.0, while yields on 10-year Treasuries are trading at four-month highs near 1.61%. Crude oil prices are trading nearly 2.0% higher, while the Ags are mostly higher as well. Soybeans led the grain and oilseed complex higher in today's trade, supported by strength in the edible oils market, with palm oil making new record highs and canola oil close behind. Minneapolis wheat continues to push to new contract highs on tight supplies of quality milling wheat, with Kansas City following, and corn prices supported by declining yields and expectations for declining acres next year. Live cattle futures were steady to mixed following yesterday's strong gains on firming cash trends.

Sea surface temperature anomalies in the Nino 3.4 region of the central equatorial Pacific sit near -0.6°C, and they continue to trend lower. That puts us in a weak La Nina category. Climatologists originally thought that the upcoming La Nina would be weaker than the one experienced a year ago, but now they're wondering if this one might be stronger than the previous version? Extended weather models are picking up on the La Nina signals as well, with the graphic below showing this week's run of the monthly ECMWF (European) Seasonal Outlook for November through February for South America, covering the bulk of their summer growing season.

The pattern projected is very much what one would expect from a classical La Nina pattern. The greatest concern is for the dryness projected for Argentina and for southern Brazil. The pattern also moves progressively drier from month to month for Brazil's primary crop growing areas, but that doesn't mean that overall production will be curtailed. Many areas of Brazil saw rainfall below 50% of normal during last year's growing season, but the country still produced a relatively normal soybean crop. Rains were timely with sufficient coverage to maintain production potential overall. Other La Nina years saw lower production when that was not the case. The bias at this point is that Brazil's soybean crop should be fine, albeit it with some risk that things could change, while Argentina's soybean crop will likely see both lower yields and lower acreage. Argentina's corn crop will be at risk as well, while it is far too early to project the potential impact on Brazil's safrinha corn crop. Argentine & Brazilian corn exports typically account for 30 - 40% of the world's export market share. The wide range is reflective of volatile production totals impacted by weather cycles. USDA currently anticipates that the two countries combined will export 79 million metric tons, or 3.11 billion bushels of corn in the coming year, although that's subject to change, depending on how this La Nina plays out.

ECMWF South American Seasonal Outlook. SOURCE: Commodity Weather Group

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