Perspective: Mid-Day Commentary for July 5

By: Arlan Suderman, Chief Commodities Economist

Tue, 05 Jul 2022, 16:53

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

July 5 - Today quickly turned into a "risk-off" day on Wall Street, as traders shed assets amid fears that economic risks are rising due to inflation, and due to central bank efforts to control inflation. The long liquidation seen in stocks and in most commodities is orderly in nature, with the VIX hovering near 29 for much of the morning. Selling in the Food and Energy commodities accelerated following a factory orders data release that came in better than expected, pushing the dollar index sharply higher to trade near 106.8 - a new 19-year high. The dollar is again serving as a safe-haven asset amid rising global economic fears, creating greater challenges for the commodity sector. Yields on 10-year Treasuries plummeted to trade at new nine-week lows near 2.79%, suggesting that government securities are also acting as a safe-haven asset. Crude oil prices are down by more than 9%, while the grain and oilseed sector is down generally 4 to 6% at midday.

Grain and oilseed prices have essentially removed all of the Ukraine war risk premium, and then some. It's as if the war never happened in the eyes of the market. Obviously it did, but the market is trading an assumption of deteriorating demand. This morning's weekly export inspection data did little to dispel the notion that demand is eroding. Shipments of corn, grain sorghum, soybeans and wheat were dismal in the week ending June 30, with very little shipped to China during the week. Weekly shipments of corn need to average 38.1 bushels through August to hit USDA's target. This morning's announced weekly total of 26.6 million bushels was the first time this calendar year that shipments fell below the 38.1 million needed per week. Soybean weekly shipments need to average 27.1 million bushels, which we haven't reached since the first half of May due to weakening Brazil basis and aggressive releases by China of reserve supplies. China has 75% of its August soybean needs covered, but very little of its September needs. Unfortunately, rebounding production estimates for this past year's crop in Brazil have allowed basis there to fall for the fourth quarter of the marketing year as larger-than-expected supplies become available.

The Corn Belt is getting warmer and wetter. That's the longer-term trend shown in the NOAA graphic below that reveals a trend toward wetter Julys for the Corn Belt. Years with notable extreme dry conditions are few and far between, although regional droughts still develop from time to time. Temperatures are trending warmer as well, although that's largely due to higher humidity levels holding up night time temperatures. Extremes in day time temperatures are becoming less frequent. This pattern is expected to be the main feature over the coming week as well. This year's signature high pressure ridge is shifting to the west, as I indicated last week. The storm track is riding up and over the ridge, riding northwesterly winds on the back side of the ridge down into the Midwest to foster storm clusters - some of which could be quite strong. The expectation in week #2 is that these northwestern upper-level winds on the back side of the ridge will turn more northerly in nature, ushering in drier, but milder, air into the Midwest, so rains in these coming days will be critical to take the corn crop into pollination. Fortunately, that is currently expected to be the case, supporting this year's yield potential. Grain prices may be oversold, but there's nothing in the forecast to turn the tide at this point.

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