September 12 – Stock futures have a cautious tone ahead of tomorrow’s inflation data from the consumer level, which will be followed on Thursday by inflation data from the wholesale level, combined with retail sales data. The VIX is trading near 14 this morning, reflecting relative calm amid the caution. The dollar index bounced this morning to trade near 104.9, while remaining just below six-month highs. Yields on 10-year Treasuries are trading near 4.29% as they consolidate just below nine-month highs ahead of next week’s meeting of the Federal Reserve, while yields on 2-year Treasuries are trading near 5.01%. Crude oil prices are 1% higher this morning, as they post yet another nine-month high on concerns about tightening global supplies, while grain and oilseed prices were weaker ahead of today’s USDA crop report.
Inflation will be the primary focus over the remainder of the week, leading up to next week’s Federal Reserve meeting. Wage inflation, and its impact on the service sector, remains the primary focus, while rising energy costs present challenges on the commodity side as well. Wall Street continues to hold out hopes for a soft- or no-landing for the economy, but that could be challenged if the Fed continues to push interest rates higher. Keep in mind that those interest rates could also face upward pressure from the rapidly growing federal debt as well.
A showdown is setting up in Europe as Poland takes a hard stand against Ukrainian grain crossing its border. The European Union is considering whether to extend a ban on Ukrainian grain moving into five countries that border Ukraine on its western border. That ban is set to expire on Friday if it is not extended, but Poland’s prime minister stated today that it will not allow Ukrainian grain to cross its border no matter what the EU decides regarding the larger ban. That’s not going to set well with Brussels, with one of the EU’s members challenging its ability to regulate its borders. It may also give courage to the other four countries to take a similar stand. That would leave the EU in a precarious position of either showing weakness or needing to take an unpopular stand against one or more of its members. Poland took its stand to protect domestic grain prices ahead of next month’s elections for its Parliament. The EU failed to act in a timely manner to show leadership one way or the other. It has a vested interest in not allowing Ukraine’s agriculture to die. The fear is that Ukraine farmers will simply quit planting crops if they lose their export markets, as the financial incentive to take the risks in wartime will not be there. That would have negative long-term consequences for Ukraine, for Europe, and for the world. But the EU also needs to acknowledge the negative impact that grain flooding across Ukraine’s western border has on its own farming economy. Europe has talked about developing solidarity channels to move Ukraine grain through its territories to export terminals, but it has not yet acted on it. Meanwhile, Russia finds all of this EU feuding satisfying.
El Nino tends to increase crop production challenges in Asia, including China’s key crop-producing regions. Crops in China experienced periods of heat and dryness, while other areas saw extensive flooding. The northern crop belt now is expected to see a cold wet pattern set up as crops move toward maturity and harvest, with spotty frost expected through the northern belt over the coming week. However, the areas impacted by frost are expected to be less than a half million acres. China doesn’t release good crop data, so we look to the cash market to assess local concern levels. The cash market currently shows little sign of panic over this year’s crop problems, suggesting that yield potential is holding up thus far. Meanwhile, Chinese buyers continue to purchase soybeans from Brazil following Brazil’s massive harvest this year. Crushers purchased an estimated 18 cargoes of soybeans last week, down more than from 35 the previous week, with the purchases focused on supplies from Argentina and Brazil. U.S. supplies typically dominate shipments to China in the fourth quarter, but we know that Chinese buyers have booked at least 160 million bushels thus far from Brazil for shipment in the fourth quarter, reflecting their concerns over low water levels on the Mississippi and in the Panama Canal.
USDA will release its monthly WASDE crop report at Noon Eastern Time today. It will set the tone for the Ag commodity markets for the weeks and months ahead following a challenging Midwest growing season in a world that’s adjusting to geopolitical risks in the Black Sea Region and with China. Today’s USDA corn and soybean yield estimates will be the first of the year resulting from actual field sampling, providing our best perspective on this year’s crops to date. The expectation is that USDA will cut its yield estimate for corn by another 1.6 bushels to 173.5 bushels per acre, which would still keep projected stocks for the 2023/24 marketing year more than ample to meet anticipated soft demand over the coming year. USDA is expected to reduce its soybean yield by 0.7 bushel to 50.2 bpa, which would further tighten already snug stocks for the coming year. Those numbers have been priced into the market. The question is, where will USDA come in relative to those expectations, and what will it do with the demand side of the balance sheet? Corn in particular has room for USDA to lower demand, but will it do so at this time, or will it wait until later to cut usage? The potential is there for a volatile response to today’s report, so fasten your seatbelt.
