Perspective: Morning Commentary for March 9

By: Arlan Suderman, Chief Commodities Economist

Wed, 09 Mar 2022, 14:26

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

March 9 – It’s Day 14 of the Russian assault on Ukraine. The VIX is still trading near 32 this morning, reflecting ongoing fear on Wall Street, but stock values became tempting for bottom pickers amid the fear overnight, with stock futures posting strong gains. Yet, the strong VIX suggests that demand for put options to offset those purchases remains solid. The dollar index is trading near 98.3 as it consolidates just below the 100 level. Yields on 10-year Treasuries are trading near 1.92% as money slowly flows back out of the safe-haven assets for the time-being, focusing again on rising inflation. Crude oil prices pulled back from this week’s surge to 13-year highs to trade near $116 per barrel this morning. The Ags are mixed, albeit near recent highs, as they position for today’s big USDA WASDE crop report.

Hand-to-hand combat is reported on the outskirts of Kyiv, Ukraine as Russian troops start to encounter the city. Meanwhile, Russian forces are bombing strategic points of the city to soften it up. It’s increasingly more difficult to get supplies into the city, which is said to have food and fuel to last perhaps another couple of weeks. Power, and therefore heat, is largely cut off for the city, where 3 million remaining residents are also battling extreme cold this week. The conflict has already lasted much longer than the “experts” felt it would as the people of Ukraine fight for their freedom. That suggests that the battle for freedom may last long after Russia takes possession of the country, leading to sanctions against Russia continuing for the foreseeable future, while also increasing the likelihood that the productive soils of Ukraine will not see crops planted and harvested to any notable degree in 2022. That could keep global supplies of wheat and corn tight for another year or more, along with the edible oils market as well.

President Biden banned the import of Russian energy on Tuesday, as expected, as strong public opinion supported a move in that direction. West Texas Intermediate crude oil prices surged to $130.50 on expectations of the move, trading at a premium to Brent crude oil for a period of time while the market sorted out the implications. Gasoline prices soared to a record high national average price of $4.25 per gallon on the rise in crude oil values. Russia warned of the possibility of $300 crude oil if we followed through with a ban. Anything is possible, but Russia also has incentive to create fear to sway public opinion. Russian crude oil imports increased significantly over the past year or so, but still accounted for roughly 5% of U.S. consumption. The question then is, what will be the level of pain required to ration that portion of demand? Look for families to take fewer trips, and to cut back wherever possible to reduce gasoline consumption. That in turn is expected to modestly reduce the demand for gasoline, as well as the ethanol that is blended into it. The job of high prices is to cure high prices by rationing demand while increasing the availability of alternatives sources. The market is doing what the market does.

The Ag commodities refocus on the other supply and demand factors today, as USDA releases its monthly WASDE crop report. USDA will likely tweak its global balance sheet a bit today to account for the conflict in Ukraine, but significant changes related to the war in Ukraine are not expected at this point. USDA’s tendency is to allow things to play out a bit before making major changes will likely again be the path that it takes, and it’s hard to blame it for doing so. However, it will likely need to make significant changes in the months ahead. For today, the primary focus reverts back to this year’s drought in South America. USDA was embarrassed last month when it pegged Brazil’s soybean crop at 134 million metric tons, when CONAB came out the next day with a 125 mmt estimate.

The question now is, has enough of the crop been harvested to give USDA the confidence to close the gap with CONAB and with most of the rest of the local production estimates? If so, it has significant other questions to answer on what to do with the roughly 1.3 billion bushels of lost production in Brazil, Paraguay, and Argentina. It has at times cut supply without accounting for it at the time, but eventually lost production must be matched by a combination of rationed demand (done by prices), and reallocation of supplies from other alternative sources (U.S. inventories). This part of today’s WASDE crop report has the potential for the greatest market impact as either USDA disappoints once again, or USDA gets aggressive in its balance sheet changes to confirm the significance of the problems in the oilseed sector. On a related note, I should address Tuesday’s Russian statement that it was banning the export of strategic commodities, with no details provided. This appears consistent with Russia’s previous responses to countries refusing to do business with Russia. It’s a case of, “if you won’t buy our commodities, then we won’t sell them to you.” The lack of specifics allows it to apply it as is convenient to do so.

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