May 21 – Stock futures quietly consolidated near their recent record high levels overnight as traders wait for Nvidia’s earnings report and the release of the minutes of the latest Federal Reserve meeting tomorrow. Traders continue to be obsessed with figuring out the central bank’s next monetary policy move. Wall Street is slowly accepting the message of “higher for longer” interest rates from the Fed, with a plethora of members of the central bank using public appearances to emphasize that message this week. It continues to price in a September rate cut, while keeping alive hopes of at least one additional rate cut by the end of the year. Yet, even those hopes are slowly fading away. Crude oil prices are lower this morning on fears that those higher rates for longer will hurt demand for energy, but that has thus far done little to raise fears among stock traders. The VIX is trading near 12 this morning, while the dollar index is trading near 104.6. Yields on 10-year Treasuries are trading near 4.41%, while yields on 2-year Treasuries are trading near 4.83%. Crude oil prices are down roughly 1.5%, while the grain and oilseed markets are mostly lower as well.
China continues to diversify away from dependency on U.S. food-based commodities. This is a process that has been in place for some years now as geopolitical tensions rise between the two powers. China will buy from us what it needs to buy, but its preference is to reduce dependency on the United States as it is able to do so. Expanded production in Brazil and Ukraine in recent years has allowed it to wean itself off of many U.S. supplies. The Russian war with Ukraine disrupted that briefly, but Ukraine exports are now back to near pre-war levels. Chinese buyers are also price conscious, but the strength of the dollar aids in U.S. supplies being more expensive than Brazilian or Ukrainian supplies. Chinese corn imports in April included just 114K metric tons, or 4.5 million bushels from the United States, or just a 10% of total corn imports. Year to date imports of U.S. corn total 990K mt or 39 million bushels, which accounts for 11% of all Chinese corn imports. Meanwhile Brazilian corn accounted for 63% of the imports into China, while Ukraine accounted for 23%.
China imported 5.9 mmt of Brazilian soybeans in April, versus just 2.45 mmt of U.S. soybeans, or 29% of the month’s total soybean imports of 8.57 mmt. Calendar year imports of Brazilian soybeans through April totaled 15.9 mmt, up 6.7 mmt or 73% from the previous year’s pace. Meanwhile, Chinese imports of U.S. soybeans in the same time period fell by 8.7 mmt or down 48% from the previous year’s pace. Brazilian soybeans are expected to dominate imports through the remainder of the marketing year. Flood losses in Rio Grande do Sul are currently estimated to be 3 – 4 mmt, pushing basis there up by 20 cents per bushel last week, but Brazilian soybeans still remain cheaper than U.S. soybeans through the end of the marketing year. China bought another 35 cargoes of soybeans last week, including a few cargoes for the next calendar year, along with some Argentine soybeans. China has thus far booked an estimated 4.2 mmt of Argentine soybeans for shipment between April and July. The Argentine soybeans qualify for China’s reserve storage, which can then be used to reduce dependency on U.S. supplies six months from now if China so chooses.
Black Sea consultant IKAR lowered its Russian wheat production estimate to 83.5 million metric tons today, down from 86.0 mmt previously. Most private estimates were in the 91 to 93 mmt range prior to emerging problems with frost and drought this spring. The recent freeze damage created most of the headlines, but drought likely did the most to reduce production potential across southern Russia, and now the eastern three-fourths of Ukraine’s wheat belt. Furthermore, excessive rains are delaying planting of Russia’s spring wheat crop, which typically makes up nearly a third of its production, raising concerns of losses there as well. It’s still early enough that Russia’s wheat crop could gain back some of this production potential if the weather pattern were to flip, although we currently still see no sign of it. But we could also see these production estimates continue to fall if we do maintain the current pattern well into the critical development of June for the crop. The same is true for Ukraine’s crop as well.
Combined, Russia and Ukraine are expected to account for 33% of world wheat exports in the current marketing year. These two countries essentially set the world cash wheat price. Stocks among the major exporters outside of Russia and the United States are relatively tight, but that hasn’t mattered to the market as long as Russia and Ukraine are keeping the world supplied with record quantities of cheap wheat. That all changes IF this region sees production, and therefore its ability to export, notably curtailed. This makes wheat the most intriguing of the major commodities currently. The Black Sea will continue to pump out cheap wheat if current problems reverse, but we could see a dramatic increase in the focus on the wheat market if it does not, and that’s the direction that weather forecasters currently lean.
