Kansas City Wheat Report
Kansas City Wheat Report
Mike O'Dea
- Grains & Oilseeds
Perspective: Morning Commentary March 3
By: Arlan Suderman, Chief Commodities Economist
Today's Perspective Video: Updated Look at Rising Geopolitical Risks
March 3 – Stock futures again came under significant selling pressure overnight amid the escalating and expanding conflict in the Middle East. The question is, will stocks recover during the U.S. trading session again today, as they did during Monday’s session, or will the fears take a stronger foothold today? The VIX surged to a fresh three-month high above 27 early this morning, although it has since settled back to trade near 26. The dollar index continues to play the safe haven role, rising to a fresh six-week high to trade near 99.2 currently. The Treasury market initially traded as a safe haven to start the week, but then it took on more of an inflation trade look due to rising oil prices. Yields on 10-year Treasuries are trading near 4.11% this morning, while yields on 2-year Treasuries are trading near 3.56%, after trading near 3.6% earlier this morning. Crude oil prices are trading above $77 per barrel, after setting fresh eight-month highs this morning. The grain and oilseed markets are more of a follower of energy prices higher this morning, versus taking a counter position on Monday.
Wars are never good, but sometimes essential. The disagreement typically revolves around when they are essential, and sometimes that question is only answered definitely in hindsight, if then. Regardless, wars create death and destruction. Unfortunately, the symptoms of death and destruction are spreading across multiple areas of the Middle East this morning, as feared, as Iran strikes out in desperation amid the calculated barrage of strikes from Israel and the United States that seek to destroy Iran’s military capabilities. Iran’s strikes across the Middle East include U.S. military bases and embassies, but they also include oil production infrastructure. As such, much production has been temporarily shut down, hoping that the carnage soon comes to an end. The Strait of Hormuz, through which a fifth of the world’s oil and energy products pass, is essentially shut down as well. Insurance was pulled for ships passing through the Strait in some cases, or it just became too expensive to do so in other cases. Tankers continue to back up just outside the Strait, with shippers hoping for a quick end to the war. President Trump stated yesterday that the original U.S. plan was designed for a four-week operation, although that is difficult to pre-judge in war. However, he stated that thus far things are going much faster than expected. Another source stated that it was a two-week plan, with things moving much faster, although Israel indicates that it is stepping up efforts to hit its objectives just in case President Trump yields to Iranian requests for a halt to the war. Yet, the risk remains that this war effort could last much longer than anyone wants. Wars simply are difficult to predict.
It’s highly significant that Iran is rapidly becoming very isolated in this war. Most of its Arab neighbors have essentially turned on Iran after Iran started spewing missiles and drones across the Middle East. The fact is, many of Iran’s neighbors feared Iran, but they feel more emboldened now that Iran appears to be in a fight that it cannot win. Most European countries also threw their support behind Israel and the United States on Monday, and the responses from China and Russia appeared somewhat vanilla – more of a formality than showing the type of strong protest that one would expect. President Xi particularly has much to lose if the current regime falls in Iran, as it was a major ally for China in the region, and one through which it could cause the United States much pain. Iran supplied China with significant quantities of cheap crude oil, although China’s reserves are believed to be relatively full at this point, so it can live off of them for a while, and it still is getting cheap Russian oil.
Our StoneX Commodity Index tracker shows that the 10-year correlation between the energy complex and the consumer price index is 0.83, whereas anything above 0.70 is considered statistically significant. This has not gone unnoticed by the Treasury market. Of course, a quick end to the war could see energy prices rapidly sink again, but a more prolonged war could do the opposite. There’s also the risk of civil war breaking out within Iran amid the current power vacuum that could shut down Iran’s oil production long term. The cost of the war to the U.S. Treasury will also be high, requiring more debt certificates to be issued, which can also push yields higher. Ironically, our StoneX Commodity Index tracker shows an even higher correlation over the past 10 years with another sector in the commodities – the grain and oilseeds. The 10-year correlation in this case remains strong at 0.88. Some of that correlation is causative, while some of it is coincidental, but the relationship remains nonetheless as the sector with the highest correlation with inflation over the past 10 years. Fund managers are aware of this as well. It doesn’t mean that they will necessarily trade that relationship in the future, as past performance is not a guarantee of future performance, but it does draw more attention to the grain and oilseed sector when prices are near multi-year lows, with a strong biofuel program expected to be announced in the days/weeks ahead. As such, we didn’t see a robust rally overnight, but we did see buying emerge on yesterday’s selloff to lift prices once again overnight. We’ll continue to monitor these markets for indications of inflation-related money flow in the days ahead that might elevate the level at which supply and demand is managed, as we’ve seen in the past during inflationary times.
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