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- Grains & Oilseeds
Perspective: Morning Commentary for April 13
By: Mike Castle, Market Intelligence - Fertilizer Analyst
April 13 – Escalation returns again to the Middle East. Wall Street reacted overnight to reports that the weekend peace talks failed to reach an agreement, with President Trump now determined to finish the job, and Israeli Prime Minister Benjamin Netanyahu stating that the Iran ceasefire could end very soon. Stock futures were down less than 1% on average this morning, while the VIX traded near 20, and the dollar index traded near 98.9. Yields on 10-year Treasuries are trading near 4.32%, while yields on 2-year Treasuries are trading near 3.80%. WTI crude oil prices gapped higher to trade near $104 per barrel this morning, while Brent crude oil traded near $102 per barrel. The grain and oilseed markets generally traded higher, along with the energy markets, with money flowing into some of the more critical food and energy sectors on the news.
Vice-President J.D. Vance led the team of U.S. negotiators who met face-to-face with their Iranian counterparts in Pakistan on Saturday. The negotiations continued for 20 hours deep into the night, but they concluded with no peace agreement. President Trump posted a long response on social media Sunday stating that the negotiators established a friendly relationship in the talks, and that they agreed on many points. Yet, the president stated that doesn’t matter because Iran remained “unyielding as to the single most important issue” regarding its nuclear ambitions, and he emphasized that “Iran will never have a nuclear weapon!”
As such, he went on to say that the United States would begin the process of blocking any and all ships seeking to either enter or to leave the Strait of Hormuz. In fact, the blockade would extend to all Iranian ports, while communications from the U.S. military this morning indicate that the blockade would “not impede neutral transit passage to or from non-Iranian destinations.” The president also said the United States would block all ships paying extortion money to Iran to allow them to pass. In essence, this is a blockade to stop the movement of all Iranian oil – seeking to shut off Iran’s revenue flow. One option for doing so would have been to put troops on Kharg Island, from where 90% of Iran’s exports flow, but that would have presented a greater risk to troops than a blockade. The language seems to insinuate that we’re not blocking oil from other countries in the Gulf, but the market also probably correctly assumes that tankers originating from other sources also will not move through the Strait due to ongoing risks of Iranian attack. We can assume that what is true for oil movement is also true for fertilizer movement as well.
This essentially escalates the war. The president does not want to see this war linger. Both he and Iran know that time is on Iran’s side. Iran’s primary hope is that it can create enough economic pain on the world for the world to turn on Israel and the United States, while also causing the U.S. voter to turn on President Trump in the November midterm elections. As such, Trump is escalating the war in an attempt to bring about a quicker end to the conflict – inflicting short-term greater pain to hopefully exact longer-term gain of a total surrender of Iran. But as I stated last week, the current culture running Iran is not a surrender culture, but rather a “die for the cause” culture.
U.S. projected wheat ending stocks for this year are at 46% of anticipated usage, while hard red winter wheat stocks are even larger at 58%. Projected corn ending stocks are at a tighter – yet comfortable – 13% of expected usage. Fundamentally, there is no reason for prices to be at current levels if looking only at the fundamentals of supply and demand. But – and it’s a big “but” – the continuation and/or escalation of this war significantly raises longer-term risk for both inflation (food & energy prices) and fertilizer shortages that reduce food production. Some of the infrastructure that needs to be repaired may take several years to bring back to full production after this war ends, and that is based on just the damage done so far. Both energy and fertilizer shortages will get worse before they get better, unless this war ends today, which is not likely. That elevates the level at which the market manages supply and demand when money flows into these impacted commodities. How much it elevates that level will hinge on how far and long this war escalates, which will impact the scope of repair work that will need to be accomplished.
Chinese President Xi Jinping held a grand reception for the leader of Taiwan’s main opposition party, the Kuomintang (KMT). Keep in mind that this is the opposition party in Taiwan, but it is still significant. I see indications that Xi has doubts about the ability of his military to perform, in light of his recent anti-corruption campaign in the military, and he has seen the capability of the U.S. military firsthand in Venezuela and Iran. He cannot afford a failed attempt to take Taiwan by force. As such, I see signs that he is switching his strategy – which has been the official strategy all along – of wooing Taiwan instead of intimidating Taiwan into reunification. Xi unveiled a package of 10 measures designed to bolster cross-strait ties, encourage personal exchanges, open communication, and trade. This should also ease tensions with the United States on the Taiwan issue near-term.
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