October 3 – Stock futures had a negative tone to them overnight, as traders worry about the negative impact of rapidly rising Treasury yields, particularly on the long-end of the yield curve. The VIX traded near 19 this morning, reflecting the elevated angst on Wall Street, while the dollar index traded at fresh 10-month highs near 107.2. Yields on 10-year Treasuries are trading near 4.72%, after hitting a fresh 16-year high above 4.75% earlier this morning, while yields on 2-year Treasuries are trading near 5.10%. Crude oil prices are modestly higher, while grain and oilseed prices were mixed.
We continue to hear hawkish talk out of the Federal Reserve, with some individual members saying openly that we’ll need to see restrictive policy for “some time” in order to bring inflation down to the 2% mandate. They call it a mandate to give it added weight, but it’s somewhat of an arbitrary target. It may be the best target, or it may not be. That’s increasingly being debated. There are pros and cons to moving higher. But the fact is, the Federal Reserve has repeatedly stated that it is committed to the 2% level, and so we must take them at their word. That’s because moving from 3% to 2% can be the most painful part of the tightening process.
Fed members understand that a consumer-driven economy, such as we have here in the States, is largely driven by perception. Bringing inflation down means to reduce demand to match supply. The opposite is true as well, but the Fed has fewer tools to increase supply of goods, without further elevating wage inflation when the number of workers is limited. As such, the Fed seeks to slow down the economy to reduce the demand for goods. It’s doing so by reducing M2 money supply. Real M2 money stock, adjusted for inflation, is currently at $6.9 trillion, up from $6 trillion at the start of the pandemic. That’s getting close to trend supplies of cash on hand, so consumers are now reaching into their credit cards to continue spending. Higher interest rates are meant to discourage that borrowing to reduce demand, and that has a greater impact if consumers are worried about the economy. However, they feel freer to use those credit cards if they think the economy is turning the corner, increasing demand again. Thus, the Fed’s focus on maintaining the rhetoric, to keep consumer buying suppressed.
The October StoneX customer survey pegged this year’s U.S. corn crop at 15.202 billion bushels on a yield of 175.5 bushels per acre, up from 175.0 bpa the previous month. This went contrary to what I expected following the heat and dryness late in the season that I believed would end up reducing seed size. That’s still possible, but if it’s the case, it’s not yet being seen by our customers. Instead, they’re seeing a modest trend overall of better-than-expected yields versus expectations of a month ago. Illinois’ corn yield held at 204 bpa in the survey, while Iowa increased by 3 bushels to 202 bpa, while Minnesota added 3 bushels to 183 bpa. In fact, the survey indicated that the corn yield increased over the past month in seven of the 12 states surveyed, while remaining unchanged in two states, with Nebraska, Kansas and Missouri seeing month-on-month declines. The StoneX soybean yield rose to 50.4 bpa this month, up from 50.1 bpa in September, with increases in five states, declines in four states, and three states unchanged. USDA’s September production estimates pegged the corn crop at 173.8 bpa, with soybeans coming in at 50.1 bpa. It will update its production estimate based on actual field sampling and farmer surveys on October 12th. Other private estimates should come out over the coming week, but the trade will likely need to see some indication of tightening supplies to justify anything more than a short covering rally.
More showers fell in Center-West Brazil over the past 24 hours, although they remain somewhat scattered in nature. The European ECMWF weather model has been more accurate than the American GFS in picking up on these storms thus far, and it projects that we’ll see increasing frequency with these storms as more moisture becomes available in Days 5 – 10, which should see a rapid increase in soybean planting if those rains verify. Chinese buyers have told us that they’re watching those rains as well, with very little coverage currently on the books for December and January shipment. They’ll likely be buying soybeans from both the United States and from South America in that period. Delays in rains would likely see them buy most of their soybeans from the United States, while a good start to the Brazilian growing season would likely see more South American supplies mixed in with those purchases of U.S. soybeans. So, the question is not whether they’ll buy U.S. soybeans or not, but rather what the mix of U.S. and South American soybeans will be. I’d normally just say U.S. / Brazilian mix, but Argentina’s soy dollar program currently has more Argentine soybeans making their way into Chinese purchases than normal.
