Today's featured video perspective: Middle East Tensions Send Crude Oil and Fertilizer Prices Soaring
June 13 - It's all about risk today, as well about opportunity. Investors are reducing risk exposure in some markets, while shifting money into other markets where they perceive opportunity. Risk aversion is seen in the equity markets, as well as some commodities, based on Israel's strike on Iran's nuclear and military targets. However, some other commodities are seeing strength following the release of long awaited guidelines from the U.S. Environmental Protection Agency regarding this country's biofuel program.
The consumer sentiment index rose to 60.5 for June, according to the University of Michigan, up from 52.2 in May, but still below the 68.2 posted a year ago. The current economic conditions index rose to 63.7, up from 58.9 in May, and almost back to the 65.9 posted last June. The index of consumer expectations rose to 58.4, up dramatically from 47.9 in May, but still well below the 69.6 seen last June. These trends were seen across the board regardless of age, income, wealth, political porty or geographic region. Consumers still perceive significant risks going forward, but their adjusting. Year-ahead inflation expectations are now at 5.1%, which is down notably from 6.6% in May. Long-run inflation expectations ticked lower to 4.1%, down from 4.2% in May.
Stocks are coming off their lows, although still down notably from yesterday's close as tensions remain high in the Middle East. The VIX surged above 22 this morning, but it is back to trading near 19 at midday. The dollar index is trading near 98.0 after hitting fresh three-year lows yesterday. Yields on 10-year Treasuries are trading near 4.43%, near session highs, while yields on 2-year Treasuries are trading near 3.97%. Crude oil prices are nearly 6% higher on the Middle East tensions, while the grain and oilseed markets are solidly higher on the EPA announcement.
The EPA finally released its long-awaited biofuel blending mandates for fiscal 2025, 2026, and 2027 this morning, and they were larger than what the trade anticipated. The EPA changed its mandates into RINS, rather than gallons, so some conversions need to happen to translate it. The EPA set the RVO for biomass diesel - biodiesel & renewable diesel - at 7.12 billion RINs for the 2026 fiscal year that starts on October 1st. The standard conversion rate in the past has been 1.55 RINs per gallon, putting it at about 4.6 billion gallons. The EPA however revised its conversion value for Renewable Diesel from 1.7 to 1.6. Accounting for imported feedstocks and finished fuel that now generate 0.5 RINs per gallon, that drops the conversion rate to somewhere around 1.27, which is how some in the media came up with the 5.61 billion gallon mandate that has been widely reported for biomass diesel production.
But that assumes that we continue to see 50% of the volume derived from imported feedstocks. The new proposed rules punish imported feedstock with lower RIN values, which we believe will shift some of those feedstocks into food use, while domestic feedstock flow into fuel production. However, we have not yet heard the EPA rule on Small Refinery Exemptions, and those requests are backed up from all the way back to 2016. We're still cautiously optimistic that the net number is high enough to support solid demand for domestically produced feedstocks even with possible large SREs, but we won't know for sure until they're announced.
Both crude oil and fertilizer prices surged today on the escalation of geopolitical risks tied to Israel's attack on Iran. Thus far neither the Israeli strike nor the retaliatory efforts have negatively impacted either the production or exports of either crude oil or fertilizer from the Middle East. As such, today's rallying prices reflect risk premium rather than actual shortages tied to the conflict. Yet, it is important to understand that this was not a one-and-done strike by Israel. It has stated that operations will continue for several days yet, which leaves the door open for more escalation in the region.
Otherwise, we're seeing risk-off action in markets such as livestock and in wheat. Speculative fund managers had very large long positions in the livestock sector, and very large short positions in wheat. The current geopolitical uncertainty leaves both nervous, and easing their load of positions. That means long liquidation in livestock and short covering in wheat. Livestock traders are also growing increasingly nervous at recent highs, with demand tending to trail off past the Fourth of July holiday. Feeders are actively hedging, and speculators are taking note of slower chain speeds for cattle slaughter this week.
