June 26 – Stocks are soft this morning as Wall Street is reminded that global geopolitical risks remain high. The VIX jumped back above 14 overnight, but that’s still relatively low. The dollar index pulled back to trade near 102.7. Yields on 10-year Treasuries are trading near 3.71% after hitting a fresh 19-day low, while yields on 2-year Treasuries are trading near 4.73%, topping a 100-point inversion. Crude oil prices erased early gains to slip into modest losses at this hour, while the grain and oilseed complex traded mostly higher overnight.
It was a wild weekend in Russia, with long-term implications for geopolitical risks. A 24-hour mutiny ended relatively peacefully with charges dropped against the leader. That’s unheard of in Russia. A heavily armed mercenary army got within 200 kilometers (125 miles) of Moscow with relative ease after overtaking two key cities on their way from Ukraine toward Russia’s capitol. Public support for the war within Ukraine will no doubt be shaken by the weekend’s events, with a declaration of a state of emergency in Moscow as the coup attempt unfolded. The real-time TV coverage of an army moving toward the capitol cannot be undone. Russian President Putin will now feel compelled to show some battlefield success in Ukraine to re-establish public support for the war, as well as to re-assert his authority and power in Russia, while sustaining the current economic recovery. The appearance of a weak response to the coup attempt removes one of the three critical components necessary for maintaining power in Russia – fear. The other two components would be unity among the nation’s elite, which may also be at risk, and a satisfied public, which has been a concern for some time. The coup attempt ended relatively peacefully, but the seeds of unrest have been sown. The struggle for power within Russia has begun.
The commodity markets took the weekend events in stride, but that doesn’t mean that traders were not on alert over the matter. Energy traders monitored the situation closely, as a full coup could have resulted in disruptions to crude oil flows to the export market, due to limited worker availability or damage to pipelines. Similar reasons could have disrupted the flow of wheat and other food products to the export market. The world quickly adjusted to the reduced flow of commodities out of Ukraine after the war started last year, but fear would likely grip the markets once again if the flow of food and energy commodities out of Russia would be threatened. That didn’t happen with this coup attempt, as it ended almost as quickly as it started. But the weekend remined traders of the risks still at hand as the above dynamics continue to play out. Geopolitical risks that have significant implications for the commodities continue to rise, and it doesn’t take much of a spark to ignite a much greater threat for trade out of this commodity-rich part of the world.
Weekend rains pretty well played out as expected in last week’s released forecasts. That’s a switch following a stretch of weeks when forecast rains disappointed. That doesn’t mean that the drought has ended, as the forecasts were not promising such. But rather, rains mostly fell where expected, even if those expectations were disappointing. Nonetheless, much of the northwestern half to two-thirds of the Corn Belt saw rain over the weekend, with substantial totals in some locations. The pattern is expected to be more active going forward, with El Nino type thunderstorm clusters moving across the Midwest. Unfortunately, this pattern is expected to favor the southern half to two-thirds of the belt, which may now leave those northern areas wanting for rain. It is a better pattern overall, although we still need to see enough moisture to prevent heat from building and to sustain crops with limited subsoil reserves from which to pull. 1992 saw a pivot from similar conditions to a very wet pattern that produced above-trend yields. I don’t currently see that happening. A couple of other similar years saw trend yields but achieving that will necessitate that areas of the Midwest not under stress achieve sufficiently above-trend yields to offset below-trend yields in stressed areas. That’s still possible, but things need to go right from this point forward.
Regardless, demand still remains a very real problem for corn and soybeans. Heat and dryness are a growing problem in China’s northern corn and soybean belt, which will need to be monitored. Feed demand is notably lower in China this year, although it’s still a big consumer of corn and soymeal. That may still end up adding demand back to the equation for the 2023-24 marketing year if yields are substantially impacted. For now, the big Brazilian supply continues to hit the world market. Short covering continues in the wheat pits amid rising global risks. Corn saw increased farmer selling from areas that received rain last night, along with perhaps Brazilian farmer selling, but then prices stabilized. Look for this afternoon’s crop ratings to see another 2- to 3-point decline.
