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Perspective: Morning Commentary for June 12

By: Arlan Suderman, Chief Commodities Economist

June 12 – The ebb and flow of whether we have a deal with Iran or not continues, while Wall Street demonstrates that it wants to believe the positive at a time when earnings reports and much of the economic data point upward, despite some risks. Stock futures pushed higher on that optimism over a possible end to the war with Iran, along with enthusiasm over today’s highly anticipated SpaceX IPO. The VIX slipped lower to trade near 19, while the dollar index traded near 99.8. Yields on 10-year Treasuries are trading near 4.48%, while yields on 2-year Treasuries are trading near 4.08%. Money generally flowed out of both the energy and food-based commodities overnight on Iran peace prospects. WTI crude oil prices fell to an eight-week low overnight and are now trading near $85 per barrel, while Brent trades near $88 per barrel. The grain and oilseed markets were mostly lower as well.

A peace memorandum with Iran could be signed as early as Sunday, according to news reports. Conflicting messages continue to flow, but investors focused on momentum in that direction. To be clear, this is not a final peace deal. Rather, leaked reports suggest that it is a memorandum of understanding to negotiate the most contentious issues between Iran and the United States over the next 60 days, while various other steps are taken to provide sanction relief and to reopen the Strait of Hormuz. Keep in mind that a two-week ceasefire to negotiate these more contentious issues turned into a two-month discussion to reach an agreement to spend another two months negotiating these more contentious issues. I am no more confident that the two sides will reach a final agreement over the next 60 days than I was when the war started – or at least an agreement that will settle the centuries-old issues behind the conflict. Yet, the markets are focused on the prospect of seeing the Strait of Hormuz opened for commerce again. There’s a bit more hope that the Strait can reopen at some point, and Wall Street money is focused on that. When and if that occurs, it will still be some months – maybe years – before the flow of energy and fertilizer returns to prewar levels, but that’s a worry for investors another day.

The next question if the memorandum is signed is what will be the over/under on how long it will take before one side or the other accuses the other of violating the agreement. I would put that in days, rather than weeks, months or years. The agreement reportedly calls for the United States to withdraw its forces from the region and for the Strait to reopen, but do we truly expect the Revolutionary Guard to remove the mines from the waters of the Strait? Just keeping forces in place to remove the mines might be seen as a violation. The memorandum also calls for an end to conflict on all fronts in the region, including in Lebanon. That assumes that Israel and Hezbollah will bring a halt to all of their hostilities, as well as the other Iran-backed forces in the region. The odds of that happening are near zero after thousands of years of conflict. Any skirmish between Israel and one of these groups could be seen as a violation, putting us right back to where we are currently. That’s the difficulty in negotiating peace in a region that has seldom known peace over the past couple of millennia. We all hope for it, but we must also be realists when it comes to creating risk plans for the commodities most impacted by the conflict. Energy continues to be the current risk, whereas the fertilizer deficit becomes more of a potential issue for the global 2027 food crops.

USDA’s June WASDE crop report is known for being a sleeper. Yesterday’s lacked any “wow” moments as well. But the lack of any bullish surprises within the report allowed the funds to resume the selling of late May and early June, which was only paused to see if there were any surprises in the report. It didn’t help that the peace talk of yesterday added head winds as the WASDE report was released. USDA cut the size of the U.S. winter wheat crop by another 18 million bushels, making it the smallest crop in the past 60 years, but that doesn’t matter in the near-term if Black Sea wheat still prices into Western Hemisphere markets. Furthermore, USDA “found” another roughly 14 million metric tons of global corn production for the current marketing year in yesterday’s report. That’s more than a half-billion-bushel increase in one report. USDA increased the size of Brazil’s crop by another 3 mmt on Thursday, while adding 2 mmt to Argentina’s crop, and India’s crop was increased by nearly 9 mmt. Global demand was increased to absorb better than half of the increased output, pushing current year ending stocks upward by 6.4 mmt.

India has an aggressive ethanol blending program. It now blends 20% ethanol in its gasoline, with an increasing share of that ethanol production now using corn as a feedstock. That means increased nitrogen fertilizer demand. But India subsidizes its fertilizer industry so that the farmer doesn’t see the price increases of much of the rest of the world in times of shortages, such as what we are currently facing. That creates inelastic demand. Corn is a high nitrogen use crop. India will simply bid the price necessary to get its nitrogen fertilizer needs filled. Yesterday’s big production increase provided an excuse for corn futures to break below chart support, but this is also a longer-term bullish demand and fertilizer story, which is why demand for new-crop U.S. corn is getting front loaded.     

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Perspective: Morning Commentary for June 12

June 12 – The ebb and flow of whether we have a deal with Iran or not continues, while Wall Street demonstrates that it wants to believe the positive at a time when earnings reports and much of the economic data point upward, despite some risks. Stock futures pushed higher on that optimism over a possible end to the war with Iran, along with enthusiasm over today’s highly anticipated SpaceX IPO. The VIX slipped lower to trade near 19, while the dollar index traded near 99.8. Yields on 10-year Treasuries are trading near 4.48%, while yields on 2-year Treasuries are trading near 4.08%. Money generally flowed out of both the energy and food-based commodities overnight on Iran peace prospects. WTI crude oil prices fell to an eight-week low overnight and are now trading near $85 per barrel, while Brent trades near $88 per barrel. The grain and oilseed markets were mostly lower as well.

Arlan Suderman
Arlan Suderman
  • Grains & Oilseeds
  • Energy
  • Dairy
  • Renewable Fuels
  • Cocoa
  • Coffee
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  • Sugar
  • Meats & Livestock
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  • Dairy
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  • Forest Products

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