Perspective: Mid-Day Commentary for January 19

By: Arlan Suderman, Chief Commodities Economist

Wed, 19 Jan 2022, 17:51

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

January 19 - Early strength in stocks quickly evaporated this morning, as traders worry about rising inflation and on elevated tensions between Russia and Ukraine that helped send grain and oilseed prices higher. The VIX traded to a fresh four-week high near 24 this morning, reflecting rising fears on Wall Street. The dollar index fell to 95.5, following yesterday's strong rally, while yields on 10-year Treasuries traded near 1.84%, after hitting a new one-year high above 1.90% earlier in the session. Crude oil prices are up 2%, while strong gains were seen in the grain and oilseed markets. That strength carried through to the protein sector as well, with yesterday's slaughter totals improving for both cattle and hogs, raising hopes that Covid-related plant capacity issues peaked last week.

U.S. Secretary of State Antony Blinken stated today that Russia could launch a new attack on Ukraine at "very short notice," raising fear in the global markets, and increasing volatility for those markets that could most dramatically be impacted by a disruption of trade from the region. That fear increased when Russia ordered families of diplomats working in Ukraine to return home. Russian lawmakers have also proposed recognizing portions of eastern Ukraine as independent. That's a similar approach to what Russia used ahead of annexing Crimea in 2014.

Russia is a major global source of crude oil, but it is also the world's largest exporter of wheat at 35 million metric tons, unless you consider the collective group of countries in the European Union that are expected to export 37.5 mmt this year. For comparison sake, the United States is expected to export 22.45 mmt of wheat this marketing year. Ukraine is expected to export 24.2 mmt this year, in addition to 33.5 mmt of corn. Some have speculated that Russian President Putin would like to reunite the old Former Soviet Union, but a full-scale war with Ukraine would be extremely costly to him. The casualties of war do little to boost political capital at home unless he can get something for it, and sanctions from the west could be costly. But President Putin has already invested too much capital in the troops buildup to come away empty. One of his objectives is likely to simply drive a wedge between NATO allies, while also eating away at the territory that he wants. Regardless, the risk is to the commodities traded out of the region, including vast amounts of crude oil, wheat and corn, with global supplies of all three currently snug.

Chinese feed demand is expected to be down 10 - 15% year-on-year in the first quarter of this year, due to poor feed margins, according to our boots-on-the-ground sources within China. We saw that result in a pull-back in soybean imports in 2021, as shown in the graphic below, along with a slowdown in U.S. corn shipments to China. We expected the corn shipments to pick up after the first of the year, after China focused on getting corn from Ukraine first, perhaps related to the above rising tensions, and they have done so. However, soybean crush remains slow, offsetting some of the lost weather-related production losses in South America. Those production losses have not yet been large enough in Brazil to suggest that China will need to return to the United States in July and August to help us hit USDA's current export target. However, I do expect to see U.S. crush demand hit new records as we go through the year.

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