Perspective: Mid-Day Commentary for June 7

By: Arlan Suderman, Chief Commodities Economist

Fri, 07 Jun 2024, 16:07

Perspective: Mid-Day Commentary

Arlan Suderman

Chief Commodities Economist

June 7 - Stocks recovered early losses after this morning's job report showed larger than expected growth in the sector, along with rising wage inflation once again. Yet, stocks continue to trade near record territory, despite worries that today's data will scare Fed members away from considering rate cuts when they meet next week. Yet, the commodity sector faced stiff headwinds today from a surging dollar that was following Treasury yields higher. Through it all, the VIX is trading near 12 at midday, which is historically a very low number, while the dollar trades sharply higher to 104.9. Yields on 10-year Treasuries are trading near 4.41% at midday, while yields on 2-year Treasuries are trading near 4.86%. Crude oil prices tried to sustain yesterday's rally, but they are now modestly lower as strength in the dollar creates headwinds. Those headwinds are also contributing to a sell-off in the grain and oilseed markets, with wheat also facing pressure from a report that Turkey will halt imports from June 21 until at least October 15th. Europe wheat prices led the U.S. market lower, contributing to today's overall negative tone in the grain and oilseed sector, to go along with the strong dollar influences. This week's cash cattle trade has largely been $1 lower on the week with a stronger harvest rate once again post-holiday, although that's still above where the board is trading.

Grain and oilseed prices took back much of Thursday's gains today as we head into the weekend. Much of Thursday's gains were based on changes to the tax code in Brazil, which the market interprets as a threat to Brazil's ability to export whole grain, as well as soymeal, soyoil and biofuel. In essence, it's a setback for the country with the current hottest global streak of increasing Ag commodity production and exports. Bloomberg quotes Abiove - an industry group in Brazil representing major grain and processing companies - as saying that the executive action taken by President Luiz Inacio Lula da Silva's Administration will mean that soybean crushers will see their margins decline by $12 per metric ton, or nearly 33 cents per bushel. The change in the tax code will impact essentially every corporation doing business in Brazil, but agriculture and energy are a major part of Brazil's economy.

Agribusinesses make up roughly a quarter of Brazil's gross domestic product, while accounting for half of the country's export revenue in the first half of 2023, the latest year for which we have data. The weakness of Brazil's currency relative to the dollar will still keep it competitive on the global market, although there will be times during the year when it will struggle to remain competitive enough to beat U.S. offers on the market. A decline in crush and processing margins is expected to decrease crush and biofuel production volumes, shifting some of that business to Argentina and to the United States, but that is also expected to weaken cash basis in Brazil, helping exporters to remain competitive on the world market. As I stated yesterday, this executive action takes effect immediately, but it needs to be ratified by Congress within 120 days to remain in effect. As such, industry groups are stepping up pressure on Congress to block the approval process. Meanwhile, the controversy contributes to Brazil's real trading near one-year lows versus the dollar on the currency market. The below graphic compares soybean prices from various sources shipped into China, and you can see that Brazil is still quite competitive.

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Grains & Oilseeds

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