August 1 – Headwinds pressured both stock futures and commodity prices overnight, as Chinese economic data disappointed and earnings reports were mixed. The VIX edged higher to trade above 14 as stock futures slipped lower and the dollar followed Treasury yields higher. The dollar index firmed to a three-week high 102.3, while yields on 10-year Treasuries traded near4.02% and yields on 2-year Treasuries traded near 4.90%. Crude oil prices pulled back modestly from yesterday’s 15-week highs, while the grain and oilseed sector was mixed to weaker.
China unveiled an extensive plan designed to stimulate consumption today, as it tries to make the shift from an export focused economy to a consumption-based economy. However, it was short on details on how it would do so when consumer confidence in the economy remains weak amid worries about jobs. The plan included nothing that would restore confidence in the jobs market or the related income questions. However, China did work a deal with Argentina, offering to provide the dollars needed to make its dollar-denominated debt payments if Argentina would pay it back in yuan, further expanding the number of countries doing business with it in yuan.
The “Russian blockade” has been penetrated in the Black Sea. The unofficial blockade had shippers fearful of entering Ukrainian waters following the Russian strike on the Reni port along the Danube River on July 25. However, an Israeli ship left its home port openly proclaiming that it was headed to Ukraine, and it led two other ships from Greece and from Turkey/Georgia through the troubled waters to the Danube port, arriving yesterday evening. Four more vessels have either anchored or will anchor in the Danube in the near future. The next question then is, how will Russia respond? Ukraine managed to export 2.1 million metric tons of grain in July – mostly over land routes to the west. Ukraine announced a deal with Croatia yesterday that would allow it to use its ports, although it is reportedly seeking freight subsidies from the European Union to facilitate movement to alternate European ports. Ukraine fears that its farmers will reduce winter wheat plantings by one-third this fall due to the higher cost of using these alternate export routes with the traditional Black Sea ports blocked.
Both U.S. corn and soybean crop ratings fell in the past week as expected, but that did little to change market dynamics overnight. The U.S. corn crop boasts a condition index score this week of 345, down from 351 the previous week, down from 355 in the same week last year, and down from the 10-year average for the week of 371. Condition index scores fell west of the Mississippi River, while rising to the east of it over the past week, reflecting where the heat was most intense last week. Missouri continues to post the lowest condition index score in the Corn Belt at 263, down another 10 points over the past week, followed by Illinois at 330 and Minnesota at 333. The best corn continues to be in the southeastern Midwest. My seasonally adjusted yield model fell nearly two bushels this week to 172.5 bushels per acre, which is 5 bushels below USDA’s July estimate. I expect hybrid variability to be more significant this year, as the various genetics handled the June and late July stress periods differently. As such, that gives me a bit less confidence in USDA’s subjective crop ratings in a year like this, and it tells me that we’ll likely have some movement around in yield estimates between August and November, in either direction. Favorable August weather can’t add kernels to the ear, but it can add up to 10 to 15% to the size of those kernels, helping to recover a portion of the lost yield.
This week’s soybean condition index score fell to 340, down from 344 the previous week, down from 357 in the same week last year, and down from the 10-year average for the week of 366. This drops my seasonally adjusted yield model a quarter bushel to 49.6 bushels per acre, which is down from USDA’s current estimate of 52.0 bpa. That will dramatically tighten the balance sheet if it verifies, but that remains the question at hand. Like corn, the lowest condition scores are in Missouri and Illinois, with the western belt generally struggling more than the southeast. Soybeans have the opportunity to add more pods with bigger beans in them in August, giving them more of an ability to improve yield prospects with favorable weather as summer closes out. As a former agronomist, I’m troubled that this soybean crop has not responded as quickly to periods of favorable weather, which makes me wonder if we did something to the root system with the stress in June, but we’ll see. Soybeans can surprise you. StoneX plans to release the results of its August customer production survey for corn and soybeans tomorrow afternoon, with other private production estimates coming out in the days that follow. On a related note, we’re learning more details about the series of USDA flash sale announcements last week, many of which were to “unknown destinations.” Our cash sources indicate that Chinese buyers bought roughly 40 cargoes of soybeans last week for primarily loading in the United States in October, although the purchases included a few cargoes for Brazilian loading in September. Brazilian farmers still have a nearly 40 mmt of soybeans estimated yet to sell, but they’ve become tight-fisted with those soybeans, resulting in a surge of 40 – 50 cents in basis for October loadings, resulting in the shift to U.S. origins last week.
