November 7 – This week’s Wall Street optimism is waning with rate cut hopes, as traders begin to realize that a) the Federal Reserve might mean what it says about “higher for longer” rates, and b) that rates on the longer end of the yield curve may move higher independent of what the Fed does due to the increase in debt certificates being offered on the market amid fewer buyers. Traders are also monitoring the war in the Gaza Strip, which continues to heat up tensions across the region. Even so, the VIX continues to trade near 15 this morning, after setting a fresh six-week low below that level yesterday. The dollar index rallied to trade near 105.7 as the euro fell on weak German industrial production data today. Yields on 10-year Treasuries are trading near 4.61%, while yields on 2-year Treasuries are trading near 4.94%. The broader commodity sector faces modest headwinds this morning, with crude oil prices down by 2% to fresh 10-week lows, while the grain and oilseed sector is mostly weaker ahead of Thursday’s USDA WASDE crop report, with soybeans and soymeal being the primary exception.
Chinese exports fell for the sixth consecutive month in October, dropping 6.4% year-on-year, which was a much larger decline than the 3.3% drop expected by the market. Meanwhile, imports rose 3% year-on-year in October, largely due to commodity shipments coming into China as it builds energy supplies for national security reasons. China’s total trade surplus in October stood at $56.5 billion, down from $77.7 billion in September. Bilateral trade with Russia is up 12.2% year-on-year, while trade with participating Belt and Road initiative countries was up 3.2% on the year. However, that was not able to offset lost trade with Europe and the United States. Exports to Europe were down 12.6% year-on-year, while shipments to the United States were down 8.2% as they deleverage.
Both soybean and soymeal futures continue to be supported by adverse weather in South America. Strength in soymeal has its roots in the drought of the past several years in Argentina, reducing exports coming from that country. The current expectation is for soybean production to return to “normal” in the months ahead, but that means that we still have several months to go where Brazil and the United States fill the void of soymeal exports. Soybean futures find their strength in tight U.S. stocks and current weather concerns in Brazil. It’s been too wet in southern Brazil, but farmers there are more concerned about dryness in Center-West Brazil – specifically Mato Grosso and surrounding areas in the northern soybean belt. Weekend rains disappointed, and the next 10 days remain dry, with heat rebuilding across the region. Our people in Brazil say that, while there are exceptions, much of the crop should be fine another 8 to 10 days, but then crop stress will become a problem. Some spotted replanting will be needed, and concerns are increasing for this year’s crop.
That puts increased importance on Thursday’s USDA WASDE crop report amid fears that USDA will again reduce the size of the crop. The agency has cut its soybean yield estimate in both September and October five times in the past 30 years. It cut it again in four of those five years in November. Our StoneX customer survey says that this year will follow that trend with a slight reduction in yield. The average trade guess has USDA keeping its soybean yield unchanged at 49.6 bushels per acre, with the range of expectations stretching from 49.0 to 50.3 bushels per acre. I do not expect USDA to cut exports or crush if it leaves its yield unchanged, or even if it increases it, although an increase in crush could probably be justified. But a notable cut in yield – which is not currently anticipated by the trade – would necessitate a drop in demand, and that would likely come out of exports.
China imported 5.2 million metric tons of soybeans in October, up from 4.1 mmt the previous year, but notably below the five-year average for October of 6.2 mmt. October is typically a slower month for imports as Brazilian supplies dry up and U.S. new-crop shipments are just starting to arrive. China’s year-to-date soybean imports total 84 mmt through the first 10 months of the year, up 10.8 mmt or 14.6% from the previous year’s pace, while also exceeding crush for the period as well. That leaves some room to slow imports over the next several months while it waits for new-crop Brazilian supplies to arrive. Those new-crop Brazilian supplies should start arriving by mid- to late February, regardless of current weather conditions. However, those weather conditions will largely determine the volume of soybeans that Brazil will have available to ship as we move through the year, possibly impacting the shipping pace for U.S. soybeans late in the current marketing year and early in the next. We sometimes see China do some panic buying of U.S. soybeans when Brazil faces adverse weather, but little panic is seen to this point, likely due to the surplus supplies that it’s been importing to this point.
