- HEADLINES: Another day of risk off ahead of Fed rate announcement; Central US ridge looks to hold for next 2 weeks, likely longer.
- Chicago futures are mixed with wheat values sagging on the expanding US harvest and seasonal considerations while corn/soybeans hold on the prospect of heat/dryness impacting an expanding area of the Central US into July. The volume of Chicago trade has slowed from recent day activity as traders await the decision of the US Central Bank on lending rates tomorrow. A 0.75% rate increase is expected as the US Central Bank is behind the curve in its war against inflation. We note that the US Central Bank can raise rates several times, but world inflation is based on limited supplies, not surging demand. Our point is that the Fed does not have the right tools to fight supply inflation. Raising rates into 2023 will work to slow demand, not boost grain, energy, or metal supplies. We expects that at some point, the US will work to lower trade tariffs on China for inflationary relief on consumer goods in Q4.
- Otherwise, the US Central Bank has a war on its hands as it tries to battle limited and tightening supplies of raw materials. We look for a mixed close with values to rise into the weekend amid North American weather concern. It is not only the heat/dryness for the Central US, but too much rain looks to drop across Southern Canada. The forecast is unfavourable for both countries.
- US WTI crude oil futures pushed back to their March highs on solid demand and the record prices paid for gasoline/diesel. US refinery demand stays strong, but US Nat Gas prices fell sharply because of an explosion/subsequent shutdown of the Freeport LNG Texas plant which provides 20% of US LNG export capacity. The sharp fall in natural gas prices jump US ethanol grind margins. US corn ethanol producers are back looking at a huge $0.80-0.90/bu grind margin.
- Chicago brokers estimate that funds have sold 5,500 contracts of corn, 2,900 wheat, and 4,400 contracts of soybeans. In the soy products, funds are sellers of 3,200 contracts of soyoil and selling 2,500 contracts of meal.
- US domestic cash grain markets are holding strong. Corn bids based on Decatur are +0.65-0.70 with soybeans bid at $0.70-$1.20 over July. First notice against July is only 16 days off and ethanol/soy crushers are pushing for supply. We believe that domestic users are seeking nearby cash corn/soybeans, but movement from the farmer is limited. The coming heat/dryness and large farmer forward sold position (new crop) will keep the US farmer tight fisted with limited old crop stocks. Although the July/Dec corn spread has weakened, research expects that the July-December spread will have another push back upwards to 60-70 cents over.
- Russia has made a big offensive into Ukraine’s primary Donbas wheat area which could not only impact this year’s harvest, but the seeding of a new crop in August and September. Ukraine farmers are becoming worried about war duration.
- Ukraine farmers are suffering from a lack of fuel and operating capital to seed future crops. Few Ukraine farmers expected the war to linger which impacts not only this year’s harvest, but also next years. The lack of future Ukraine wheat supplies exacerbates tightening world exportable wheat supplies.
- Ukraine’s Ag Minister said the war would likely cause a production shortage for three seasons, due to mined wheat fields and destroyed storage and infra-structure; 2023 winter wheat planting is seen “significantly lower” due to the war. June grain exports are seen topping 2 million mt, up from 1.7 million in May.
- The European Union Crop Monitoring Service estimated Ukraine’s 2022 wheat crop at 26.9 million mt, down 16% from 2021, with corn at 35.3 million mt, down 16% from last season. Sunflower seed output was pegged at 12.1 million mt, down 26% from last year, with rapeseed up 28% year on year to 3.75 million mt in 2022.
- The midday GFS weather forecast is consistent in projecting an intense/expansive high pressure ridging across the Central US. A few showers are possible across WI/NE IA in the next 24 hours, but otherwise the forecast is dry through Tuesday. The ridge then sags south to the Delta with a trough pulling through the Prairies of Canada and far Northern US. The Central Plains and the SW Midwest hold in an arid flow. Extreme heat (90’s to lower 100’s prevails) with any cooling relegated to Ohio, Minnesota, Wisconsin, and Michigan. The Central US ridge shows stability and soil moisture levels will be collapsing with crop stress building in late June and July.
- It is about timing. Risk off ahead of the US Central Bank decision on interest rates is keeping Chicago values compressed. However, the weather forecast is threatening in a world that has poor forward purchase coverage in wheat/corn and vegoils. The world cannot afford to lose a bushel or acute demand rationing is required. Do not sell breaks. Chicago values should add weather premium ahead of the long US weekend once the Fed raises rates. The jet stream continues to weaken implying that the Summer 2022 weather pattern is forming for the Central US. Pattern stagnation is the worry heading into mid-July.