Perspective: Morning Commentary for June 7

By: Arlan Suderman, Chief Commodities Economist

Tue, 07 Jun 2022, 13:25

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

June 7 – Stock futures came under pressure overnight, as Wall Street frets about risks to the economy amid lingering inflation, monetary tightening by the Fed, and fears that the two combined are already creating significant headwinds for the economy. The VIX is slightly elevated to 26 this morning, while the dollar is trading at a two-week high near 102.8. Yields on 10-year Treasuries are trading near 3.00%, after rising to a nearly four-week high above 3.06% earlier in the session. Crude oil prices are pulling back modestly from three-month highs this morning, while the Ags are mixed as traders sort through conflicting reports regarding Ukrainian exports.

A third year of La Nina raises concerns for Midwest crop production this year, particularly since supplies of global grain and oilseeds are tight, with that tightness further aggravated by the Ukraine war. Soybeans have the best opportunity to grow their way out of a tight stocks situation if we have a normal growing season, while we could see corn stocks tighten even if we have trend yields this year if Ukraine supplies remained limited, and if we lose acres due to the inability to plant in the northwestern Midwest. Spring wheat is in a similar situation, especially with planting problems extending north into Manitoba. That really elevates the stakes for this summer’s weather pattern.

I’ve previously shared that forecasters are deeply divided over expectations for adverse weather this summer. Some expect a near-normal summer producing trend or better crop yields, while others expect something close to the drought of 2012, with others falling somewhere in between. The Euro model has been one of the models leaning toward a hot dry July and August for the Ag Belt, but I was probably more surprised to see the normally conservative U.S. Climate Prediction Center take a similar approach over the past 60 days. We saw few signs a week ago of the atmosphere moving in that direction, as I wrote at the time, but knew that we needed to respect the possibility with La Nina in place.

This La Nina is unlike any other in its characteristics, so finding an analog year is difficult. Nonetheless, indications of a pattern change started showing up over the weekend – subtly at first but gaining some momentum now. The ECWMF European model’s 30-day outlook covering mid-June to mid-July shifted notably hotter and drier late yesterday, but again, not all the models agree. The risks do seem to be increasing for hotter temperatures as we go deeper into June, amid signs that a high-pressure ridge will start to build east of the Rocky Mountains. It’s too soon to know whether this high-pressure will be transitory or more persistent, but that will be the key to determining conditions next month as we move into corn pollination. The overall sea surface temperature patterns in the Pacific have become somewhat less conducive to a significant blocking pattern this summer, but that too could change considering the lingering La Nina in the equatorial Pacific.

USDA reports that 94% of the nation’s “intended” corn were planted as of June 5^th, up from 86% the previous week, and up from the five-year average for the week of 92%. The question is, has “intended” changed as the calendar has changed, moving us closer to 100% regardless of planting activity? That depends on which crop reporter you ask. They interpret it differently. With that in mind, USDA’s data released Monday afternoon, suggests that 1.230 million corn and 1.793 million spring wheat acres remain unplanted in primarily northern Minnesota and North Dakota combined. I’m focusing on that region, because that’s where the growing season is the shortest, with the fewest options. Most producers have given up on planting corn in this region, while many have also parked the spring wheat planters. Soybeans are still an option, while canola will be a more attractive option for those who are able to make that work. We could see other scattered losses of corn in the South, as well as a few wet pockets elsewhere as well. USDA’s June 1 survey will probably not show all of these lost acres when the results are revealed on June 30^th, but total corn acres – accounting for spot gains elsewhere – could drop by 1 – 2 million, with spring wheat acres dipping as well. Unfortunately, the acreage question probably won’t be settled before fall.

Ukraine managed to export 1.7 million metric tons of grain in May – primarily over land. That’s a quarter of what it did prior to the war using its ports. Overland capacity is likely 2 mmt. Turkey continues to tout an agreement for a humanitarian corridor for moving grain out of Ukraine’s ports, but Ukraine says that it hasn’t even been involved in the talks and Russia continues its attacks on Ukraine’s grain infrastructure. These headlines will continue to move prices near-term, but U.S. weather will increasingly take the focus if the above risks start to verify later this month.

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