Perspective: Mid-Day Commentary for June 28

By: Arlan Suderman, Chief Commodities Economist

Tue, 28 Jun 2022, 16:20

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

June 28 - Early gains eroded away through the morning as Wall Street remains concerned about inflation, and the Fed's response to it. The VIX dipped to its lowest level since June 10th on the early strength in stocks, but it has since rallied to trade near 28. The dollar index is trading near 104.4 at midday. Crude oil prices are 1% higher, while the grain and oilseed markets are generally 1 to 2% higher as well. Most of the focus is on corn and soybean prices, with weather models showing ongoing risks for the critical reproductive phases of development, leading traders to put some of the risk premium removed last week back onto prices. Higher feed prices are weighing on feeder cattle demand, which is spilling over into live cattle futures as well. Meanwhile, lean hog futures consolidate lower ahead of tomorrow's USDA quarterly hogs and pigs report, which is expected to show a shrinking breeding herd.

A reporter asked me today if the big correction in the commodity sector was over, considering today's price strength? It's a legitimate question, but I don't have the answer to that. I can only spell out the fundamental factors that will ultimately determine such. There are two macro factors that will shape the outlook for the commodity sector over the next 30 to 60 days. One factor will be the broader macro perception of the global economy. Last week's selloff was certainly influenced by moderating weather forecasts for the grain and oilseed markets, but that came within a backdrop of heightened global economic concerns. The markets are currently dominated by Algo computers triggered by reading headlines and technical momentum signals. Last week's headlines, and resulting momentum signals, keyed on global economic concerns. Those concerns have eased somewhat this week, as China reopens following its recent shutdowns due to Covid. We're not out of the woods yet on that question, but for now, those concerns have eased.

The second factor will be the weather for key crop areas of the Northern Hemisphere over the next 45 to 60 days. That ultimately will have the biggest impact on both the domestic and global balance sheets. That is where my focus is currently. Those weather concerns for the U.S. Ag Belt eased somewhat last week, but they're still present. In fact, there are early signs that those concerns may strengthen again beyond mid-July. The graphic below shows the European 30-day outlook for July 11 to August 11. That covers the 30-day period beyond the two-week outlook. Frankly, the two-week outlook is relatively favorable for the bulk of the Ag Belt, although heat will remain a factor at times for areas of the Plains and western Midwest. However, showers will occur as systems cross the Midwest. In fact, we don't currently see anything strong enough to totally shut off rains for the bulk of the Ag Belt. However, the combination of heat and below-normal rainfall would risk reductions in yields that the balance sheet can't afford - especially the corn balance sheet, but corn, soybeans and wheat are at risk. Again, weather forecasts beyond 10 days have very low confidence. This could all change tomorrow. But it does indicate that the models are still seeing risk factors in the atmosphere that must be respected until we see how they verify.

The latest European extended model continues to reflect risks. SOURCE: ECMWF, WeatherBell, & Nutrien

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