June 3 – A bit of cautious optimism reigns over Wall Street this morning as traders focus on a resilient economy despite changing expectations about rate cuts this year from the Federal Reserve. The VIX is trading near 13, while the dollar index is trading near 104.5. Yields on 10-year Treasuries are trading near 4.46%, while yields on 2-year Treasuries are trading near 4.87%. Crude oil prices are nearly 1% lower and just above three-month lows this morning, while the grain and oilseed markets are mixed to firmer in early trade.
Today is the first trading day for the month of June. Fed Fund futures are essentially trading 100% odds of no change to the Fed’s benchmark interest rate at their June 12 meeting. They give less than 15% odds of a rate cut at the Fed’s July meeting, although the odds still give an edge toward a rate cut at the September meeting. Those odds continue to get pushed later, with some chatter now even emerging of a possible rate hike. That’s still seen as an outside possibility, as the Fed would not likely want to hike rates ahead of this year’s elections, but the bottom line is that Wall Street is gradually accepting the fact that the Fed will find it increasingly hard to cut rates this year.
Geopolitical risks continue to escalate in the Taiwan Straits as China’s CCP is angered by support from the West for Taiwan’s independence. China’s Defense Minister spoke at the Shangri-La Dialogue over the weekend, stating that Beijing is committed to “peaceful reunification” of Taiwan, but those efforts are being “undermined by Taiwan separatists and external forces.” He struck a tough line on Taiwan saying, “Whoever dares to split Taiwan from China will be crushed to pieces and invite their own destruction.” Increasingly, China’s aggressiveness in the South China Sea has been driving Japan and the Philippines toward a stronger relationship with the United States. But China’s defense minister blamed those tensions on the West as well, suggesting that the United States should allow China, Japan and the Philippines to work out their differences without interference. The conflict continues to escalate with few signs of it easing any time soon. As such, China is rapidly taking steps to reduce its dependence on commodities coming from the West, seeking to boost its own production, curtail its demand without negatively impacting the economy, and building stronger coalitions with other countries in the BRICS coalition.
Russia may declare a nationwide emergency by the end of this week due to frost damage to its crops, according to Russian Ag Minister Oksana Lut, as reported today by Reuters. Several provinces have already declared local emergencies due to the frosts, which impacted between 1.5 to 2.0 million hectares of cropland. The national emergency declaration would pave the way for insurance claims. Private wheat production estimates are coalescing around the 80 – 82 million metric ton range, although a few are now dropping into the upper 70s. The tendency in any adverse weather event is for estimates to overshoot to the downside and then to bounce back. Have we already overshot reality, or is there more downside to go? It’s still our view that there is potential for more downside, but it depends on weather over the next several weeks. Drought is actually the bigger problem currently, and the next 10 days continue to look hot and dry for the southern half of Russia’s wheat belt, while persistent rains continue to delay planting of the spring wheat crop. Again, the next several weeks will be critical there as well, in getting the spring wheat crop planted in a timely fashion. But the primary key here is, does Russia put restrictions on exports to fight food inflation risks? Some government officials have already stated that food inflation risks are a concern, and it's possible that the above emergency declaration cold be a step in that direction. The bottom line is that we need to keep our eyes on Russian headlines these next several weeks in the wheat market, and that would have implications for the corn market as well.
USDA will release its weekly crop progress numbers this afternoon, including the first corn condition ratings of the year. I’m looking for it to peg the corn crop at 67% Good to Excellent, down from 69% last year, and down from the typical first rating that tends to be in the low 70’s. For comparison purposes, the first rating in 2019 was 59%, but this year’s wetness doesn’t measure up to the problems that we had then. Corn planting progress should come in close to 89%, which is close to the five-year average, but that five-year average is dragged lower by 2019 when we were at just 67%. Soybean planting progress should come in close to 76%, which is again close to the five-year average, which was pulled lower by 2019, which came in at 39%. The other fundamental item that I’ll be monitoring today will be the release of StoneX Brazil’s latest customer survey results for their corn and soybean crops. It’s been our expectation that we would see some erosion of previous production estimates due to persistent rains in Rio Grande do Sul negatively impacting both unharvested and stored soybeans there, as well as excessive dryness negatively impacting yield potential for the winter (safrinha) corn crop in Mato Grosso do Sul and Parana. Both could have positive implications for U.S. exports in the 2024-25 marketing year, depending on the scope of the declines.
