July 17 – Stock futures have a softer tone this morning, following solid gains last week. Traders are cautious ahead of this week’s earnings reports, but they’re also taking note of economic data out of China. The VIX is very modestly higher near 14 this morning, while the dollar index is bouncing along with Treasury yields. The dollar index is trading near 99.9 this morning, while yields on 10-year Treasuries are trading near 3.81% and yields on 2-year Treasuries are trading near 4.74%. Crude oil prices continue to pull back following last week’s chart failure at the 200-day moving average, while the grain and oilseed markets are mostly higher, supported by Russia ending the Ukraine grain initiative earlier today.
China’s gross domestic product rose 6.3% year-on-year in China in the second quarter, which of course is against a year-ago base when Covid lockdowns were in place. That’s up from 4.5% growth in the first quarter, but below the low end of analyst expectations. Second quarter growth was up just 0.8% on the quarter, down from 2.2% growth the previous quarter. Total retail sales slowed to 3.1% growth in June year-on-year, down from 12.7% in May. Consumer confidence continues to slide, creating a drag on consumer spending. Domestic spending is sluggish and export demand is down due to decoupling by Europe and the United States. China needs to stimulate, but its ability to do so is limited by monetary tightening in other major economies and by its own domestic debt issues.
Russia formally suspended participation in the Ukraine grain initiative that was set to expire today. Hopes for an extension now appear to be evaporating, although attempts to revive it continue. The agreement facilitated shipment of 33 million metric tons of commodities over the past year – mostly corn and wheat. Russia left the door open for returning to the grain agreement if all its demands are met, but that doesn’t appear likely at this time. Ukraine has previously said that it expects talks to take place in Turkey between President Erdogan and Russian President Putin next month, with little grain moving through the “safe corridor” in the meantime. Ukraine has also previously stated that it has a Plan B that it is prepared to move forward with if those talks in August fail. The Plan B would involve continuing the initiative without the participation of Russia. The question is, will Russia allow that to happen, or will it do something to send a message that it is unsafe for ships to move through the region? If so, will Ukraine then retaliate against Russian shipments? Russia will be in a weakened negotiating position if Ukraine grain is able to move out of Ukrainian ports without Russia’s involvement in the agreement. Look for Ukraine to continue to move 2 – 3 million metric tons per month through other routes, but the opportunities to move more grain than that onto the export market appear to be limited in the near-term.
China pegs its 2023 winter wheat crop at 134.53 mmt, down 1.2 mmt from the previous year. Prolonged heavy rains as the crop matured in early June reduced both the yield and quality of the crop in southern Henan and North Jiangxi provinces. Small amounts of spring wheat will boost total production a bit, but USDA’s overall production estimate is still 3.5 mmt above China’s official number. Furthermore, it’s estimated that 30 mmt of poor-quality wheat will likely move into the feed market displacing corn this year, reducing corn demand, but also increasing China’s need to import quality milling wheat for food production. News headlines highlighted an all-time record high temperature recorded in China over the weekend, but that heat was centered in western China away from major crop-producing areas. We have seen periods of above-normal temperatures in the crop belt, but major corn and soybean producing areas have also seen an improvement in rainfall since July 10, helping crops to maintain productivity in the region. It’s still too early to fully assess the crops, but we see no credible evidence of significant production cuts for corn and soybeans based on what has transpired to this point. We should note, corn stocks are low in China, so there’s not much margin for error if there is a crop problem, but thus far we lack evidence of significant losses.
USDA is scheduled to release its weekly crop progress reports this afternoon at 3 p.m. Chicago time. Look for corn condition ratings to rise again this week, although maybe not as much as they did last week. I expect soybean ratings to continue rising as well, but at a slower pace. It concerns me as a former agronomist that we’re not seeing soybean ratings respond to the improved weather in a more significant way, which may indicate that the June weather stress took a bigger toll on the crop that first thought. The grain and oilseed sector got a boost overnight from the Russian statements that the grain initiative has come to an end. Most notably that pushed November soybeans above areas of significant chart resistance. Now we need to see if we can hold those gains today. The majority of the Ag Belt is expected to see slightly below-normal temperatures over the coming week, which favors crop development, but then things warm up somewhat next week. Scattered thunderstorm chances will continue to provide moisture to those areas who are fortunate to be in the path of one of them this week, while the chances diminish as we go into next week. The general thinking continues to be that August will be cool across the bulk of the grain belt, which is good for grain fill, but confidence in forecasts that far out is low. I continue to look for yields that are modestly below trend this year, but it’s still early, and a lot can still happen.
