December 18 – Optimism continues to support stocks as we head into the Christmas Holiday period, while crude oil sees strength from rising geopolitical risks for trade. The VIX continues to trade near 12, reflecting optimism in the equities, while the dollar index is trading near 102.4. Yields on 10-year Treasuries are trading near 3.95%, while yields on 2-year Treasuries are trading near 4.44%. Crude oil prices are nearly 3% higher this morning, following increased risks for trade through the Red Sea, while the grain and oilseed sector was mostly weaker overnight.
Container shipping company Maersk announced Friday that it would no longer be moving freight through the Red Sea due to an increased frequency of attacks by Houthi Rebels on civilian ships in the sea. This will require those ships to take the longer route around the southern end of Africa, rather than the shorter route through the Suez Canal, creating added costs and obstacles for trade between China and Europe – something that the economy of neither region can afford right now amid their other challenges. MSC is another freight shipping company that has chosen to avoid the Red Sea, among others. Combined, the companies that have chosen to avoid the Red Sea route control roughly half of the world’s container shipping market. Big oil company BP has also temporarily paused all movement through the Red Sea following more attacks on civilian ships over the weekend, and again today.
But the implications go far beyond the container freight world. Low water levels on the Panama Canal have most grain cargoes traveling from the Gulf of Mexico to key markets in Southeast Asia choosing the longer route through the Suez Canal and the Red Sea. The Panama Canal did increase its booking slots on Friday, stating that it would allow 24 ships to pass through the canal per day starting in mid-January, rather than the 18 previously planned in a prior announcement. But the bidding process and congestion at the canal is still expected to make the longer, costlier route through the Suez Canal and Red Sea the more economical and dependable route for grain trade. It’s difficult for grain ships to compete for those slots in the Panama Canal. But the Maersk announcement raises concerns that we could see insurance rates rise for cargoes moving through the Red Sea, which would increase the costs even further for shipping grain on the Suez Canal route, or even see that shipping option lost. This again puts the focus on the greatest threat to the global grain trade currently – logistics. Those logistics risks are focused on the Black Sea, Panama Canal, and now on the Suez Canal. Thus far grain is flowing, and buyers are getting deliveries, but those buyers see increased risks, which tend to make them step up purchases to make sure that they have coverage just in case something goes wrong. The last thing we need now would be for a ship to go down, either in the Black Sea or in the Red Sea.
These increased risks provide some explanation for the increased Chinese demand we’ve seen on the world market in recent months, with China importing larger quantities of corn and soybeans than it is consuming currently, while one can make similar statements about other commodities that it imports as well. USDA puts China’s corn crop at 277 million metric tons, while private estimates were just below 300 mmt. Yet, it continues to aggressively buy corn from Brazil and Ukraine, and even some now from the United States as well, following the same pattern that we’ve seen in soybeans, crude oil, and other commodities Other countries see this and follow suit as well.
Rains are moving forward in the forecast for Center-West Brazil, raising hopes of soaking rains starting as early as Wednesday of this week. We’ve seen this before, and the rains disappointed. This is a critical time for soybean development in Center-West Brazil, making it a pivotal time for the crop. Commodity Weather Group calls for 0.50 to 1.5”, locally 5” with 55% coverage focused on some of the driest areas of Brazil’s soybean belt over the next five days, with even more rain in the 6- to 10-day outlook. Even so, CWG still expects stress to linger over 30% of the belt over the next two weeks. That would suggest continuation of the pattern that we’ve seen for much of the growing season. How does that then play out as farmers there start harvesting soybeans over the next several weeks ahead of planting the winter (safrinha) corn crop? Some models show a significant shift toward a wetter pattern, while others show continuation of the dryness, which would be an even bigger problem for corn than it was for soybeans. That doesn’t mean that we’re going to see the corn market add risk premium like the soybean market has in recent months, since we have a lot more margin for error in the corn balance sheet. However, a perceived risk could help corn carve out a bottom, if it occurs, facilitating some short covering rallies until more is known.
