- HEADLINES: Funds hedge inflationary risks and buy Chicago; Hope is for bearish report Thursday to add to length; Central US forecast wetter.
- Chicago grains are sharply higher at midday with “risk on” being the early mantra of investment managers. The US Labor Dept reported that the April US inflation rate was up a larger than expected 8.3% with food inflation soaring 9.4%, the largest monthly gain since April of 1981. Hedge fund managers note that Bitcoin has not been an inflation hedge with its value in decline along with US tech stocks. And gold has also not kept up with inflation. The only real inflation hedges that have worked is being long ag, energy or industrial metal futures. The world of “stuff” has outperformed all other inflation hedges and we expect that additional inflows will be pointed at Chicago markets as a result.
- The US April inflation rate was down just 0.2% from March. But, with US gasoline/diesel prices at fresh record highs, there is no evidence of a softening of US food prices. The US inflation rate will stay stubbornly high into the autumn. This means that the US Central Bank will raise their fed fund lending rate by at least 1.25% and potentially 1.50% collectively at their next 3 meetings. US short term interest rates have only begun to rise and rallies in equity markets will not be sustained until the FED’s tightening cycle ends, or there are signs of a US economic recession. Extracting all of the capital that is in the hands of US consumers will take years, which is why we fear the new natural rate of US inflation is between 3-4.00%.
- Chicago volume of trade has not been all that large this morning, it is just that there are few resting sell orders. A few bulls will look to take some risk off the table ahead of the USDA report, but most traders want to stay positioned for the new growing season that is ahead. Chicago brokers estimate that funds have bought 3,100 contracts of wheat, 6,600 contracts of corn, and 5,300 contracts of soybeans. In soy products, funds have bought 3,200 contracts of soyoil while being flat in soymeal. It does not take much fresh fund buying to produce a 40 cent rally in wheat or 2.50 cent rally in Chicago soyoil futures.
- The EIA reported that US weekly ethanol production rose by 6 million gallons to 291 Mil. This is up 1% from last year. The US needs to produce 304 million gallons per week to reach the USDA’s annual corn grind forecast of 5,375 million bu. We expect that the US maintenance period for ethanol has passed and that production will continue to ramp up which will boost US corn consumption. We estimate that a US ethanol plant is making close to $0.83/bu. They will continue to raise their cash basis bid to secure old crop supply.
- US gasoline consumption was down 1% from last year at 8.7 million barrels/day. US gasoline demand has been holding flat with consumers driving similar miles each week.
- A 4–6-day period of warm/dry weather allows for Midwest spring seeding to push ahead. E Midwest farmers got at seeding late Tuesday and today, while W Midwest farmers are looking to start today or Thursday. US corn seeding will not surpass 45% through Sunday, which means that any return of rain next week is very unwanted. The Northern Plains will stay exceptionally wet with new storm systems every 3-4 days which does not allow for a planting window. Unfortunately, it appears that rain pushes back into the C/E Midwest late Sunday/Monday with fresh delays. The 10–15-day period places heavy rain back into MO/IL and the remainder of the E Midwest. This is not the wanted warm/open forecast that gets crops seeded on a timely basis. Our weather concern stays high with the Plains drought to worsen.
- Large funds, end users/specs are hoping for a bearish USDA report tomorrow to provide a dip to make purchases. Importers and end users are poorly covered beyond the next 30-45 days. US crush margins are near $3/bu in soybeans with ethanol grind margins above $0.80/Bu. The market has not produced any meaningful demand destruction. We stay bullish on North American weather and smaller world wheat production. Buy breaks is our continuing advice.