Perspective: Mid-Day Commentary for September 12

By: Arlan Suderman, Chief Commodities Economist

Mon, 12 Sep 2022, 16:40

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

September 12 - Fears are slowly easing on Wall Street, with stocks slowly working higher from recent lows, while the VIX trends closer to the pivotal "20" level - trading near 23 currently. The dollar index is trading notably lower today near 108.2. Yields on 10-year Treasuries are trading near 3.31%. Crude oil prices are more than 1% higher on this morning's optimism, while the Ags are responding to big surprises in today's USDA monthly WASDE crop report.

U.S. railroads are moving resources around preparing for a possible nationwide strike on September 17, just as the 2022 harvest ramps up. The potential strike comes at a time when supply chain disruptions are a major concern for voters ahead of the election, and when a rail disruption could add to the problem - even a short strike. As such, we may see Congress step in to block a strike, although that puts many elected officials in a predicament as well. Negotiations for a new contract have been tense since the current labor contract was froze at 2019 levels, but it's all coming to a head now. Regardless, any agreement reached is also expected to notably increase prices at a time when inflation is already near 40 year highs, which is another reason why labor is seeking the pay increases. This will be a story to monitor as we move into the harvest as grain tries to move toward export terminals. However, rail transportation will also be needed to move corn from surplus production areas in the eastern belt to big deficit areas in the west where feedlots are expected to be quite short this year.

USDA pegged the U.S. corn crop at 172.5 bushels per acre, which matched trade expectations. However, USDA surprised the trade by slashing 1 million acres off harvested acres, dropping the crop to 13.944 billion bushels, down 415 million bushels from the last report. Traders will assume that a small crop gets smaller, which means that this balance sheet will likely get tighter in future reports. Nonetheless, USDA had to account for tighter supplies. It assumes that high prices will ration demand, even though it only raised its marketing year projected cash prices by a dime. USDA cut both feed use and export demand by 100 million bushels each, while also cutting ethanol demand by 50 million bushels. That puts projected ending stocks at 1.219 billion bushels, essentially matching the average trade estimate of 1.217 billion, and my estimate of 1.216 billion, but doing so by slashing demand. Prices are going to have to do that work of cutting that demand. Globally, USDA lowered ending stocks to 304.53 million metric tons, down from 306.68 mmt the previous month, but still above the trade at 304.53 mmt. My estimate remains down at 301.70 mmt.

But the greater surprise was in soybeans, as I started warning late last week, and again earlier this morning. USDA cut the yield by 1.4 bushels to 50.5 bushels per acre, below the lowest of the trade estimates. It also cut 600K off soybean harvested acres. This cut production by 153 million bushels. USDA assumes that crush demand will be cut by 20 million to 2.225 billion bushels, while exports are cut by 70 million bushels to 2.085 billion. USDA's export target is still 85 million bushels above mine, assuming that weather is "normal" for Brazil's upcoming growing season. That's still a big unknown. Regardless, soybean ending stocks fall to 200 million bushels, or a 16.5-day supply. That doesn't leave any room for additional yield cuts, and more will be expected by the trade. Small crops tend to get smaller, particularly when the reason for the problem is tied to adverse conditions during the grain fill stage when seed size is being determined. Brazil can still help global supplies recover if it has normal growing weather over the coming year, but that's still a big "IF." Until then, end users will be quite nervous about how tight things might get before Brazil has the opportunity to harvest another crop, and then one must ask, "What if" Brazil has La Nina related weather problems?

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