June 24 – The VIX is trading at nearly four-week highs this morning, although still below 14, as traders focus on Friday’s key inflation data. Yet, stock futures are trading just below record levels. The dollar index pulled back to trade near 105.5 this morning. Yields on 10-year Treasuries are trading near 4.26%, while yields on 2-year Treasuries are trading near 4.74%. Crude oil were mixed to weaker overnight, while the grain and oilseeds were mostly lower as traders look ahead to Friday’s USDA quarterly stocks and planted acreage reports.
China’s economy is heavily dependent on foreign direct investment (FDI), which continues to decline as tensions with the West continue to mount. FDI in the first five months of this year fell by 28% year-on-year, with losses accelerating. Ironically, Germany increased FDI in China by 24%, going against the trend of much of the rest of Europe and the United States. Today’s data shows that FDI in China overall is at its lowest level since 2015, with the United States expected to put on additional restrictions in the months ahead for investments in artificial intelligence, computer chips and quantum computing, which will add to China’s economic challenges.
Heavy rains are making the headlines as floodwaters make good news stories – both in China and in the United States. Chinese corn and soybean futures initially rose today, responding to flood reports in Heilongjiang Province, where nearly half of China’s soybeans are planted, along with considerable corn. Heavy rains fell over the weekend, filling reservoirs and causing rivers to overflow into farmland. The pictures are dramatic, and the local impact is significant, but reports thus far indicate that actual cropland impacted amounts to roughly 6,600 acres, which will have little impact on national production unless the problem continues to spread. Domestically, the focus is on heavy rains that fell causing significant flooding in key production areas of southeast South Dakota, southern Minnesota, and northwestern Iowa. This region is expected to see a drier break in the near-term, although rains are expected to return in week #2 of the forecast. The impact of the heavy rains in this region are significant, with crops under water, along with many farms and residences along the rivers, raising concerns about production losses, leading to questions about the potential market impact.
Rain makes grain, until it doesn’t. It didn’t in 1993. For those caught under the heavy rains in the northwest Midwest, I’m sure some are starting to wonder if we’re looking at a repeat of 1993? I pulled up the data looking at the four-week period starting May 26, which revealed that the climate reporting districts in the above-mentioned areas of the northwestern Midwest were among the top three wettest on record for the period going back through 132 years of data. Contrast that with 1993, when many of these same areas ranked in the top 10 wettest on record. So, from that standpoint, the past four weeks have been wetter than the same period in 1993. However, the real intense rains of 1993 were just getting started, with a very active rain pattern battering much of the northwestern and central Midwest from mid-June through mid-July covering more than half of the Midwest in the core of the Corn Belt at a time when the corn crop was trying to go through pollination. Contrast that with Commodity Weather Group’s estimates that this year’s flooding is impacting crops over roughly 10% of the Midwest. Furthermore, while the forecast remains favorable for rains over much of this region going forward, the pattern itself is expected to change, leading to less intensity of rainfall than we’ve seen recently. Iowa was ground zero for the problems in 1993. Harvested acreage in Iowa fell just 700,000 from normal expectations, which amounted to roughly 6% of planted acreage. The real impact was on yields, with the state’s average falling by a third from the trend of the time to just 80 bushels per acre. The yield losses mounted due to the persistence of the heavy rains over a much longer period of time in 1993, over a much larger area than is currently expected, based on today’s forecasts. It’s something to watch, yes. But thus far I do not see the type of production threat that we experienced in 1993. In fact, the majority of Iowa has thus far seen below normal rainfall over the past 30 days.
So, what about this short Russian wheat crop? Apparently, it’s not as short as feared, with early harvest results impressing observers thus far. Yes, it is smaller than those first reports of 93 – 95 million metric tons. The question was, would it fall below 80 mmt, leading officials to restrict exports. It still may, but the early harvest results have local production estimates bouncing back to roughly 82 mmt, which might allow Russia to continue exports without restrictions. Coincidentally, U.S. yields in the dry southwestern and central Plains have also been coming in much better than expected – posting record highs in some cases. Does that mean that the wheat market still has more downside risk ahead of it, or has it already priced in this bearish development? Considering the depth to which we’ve fallen as fund managers have rebuilt some short positions, that suggests that the market has factored much of the above in already, although current momentum still needs to be respected.
