- HEADLINES: Chicago mixed as bearish macro-economic trends battle post report chart buying; Argentine farmers sell more soybeans.
- Chicago futures are mixed at midday with August US inflation data causing doubt that a pivot from the US Central Bank (or any Western World Bank) will occur anytime soon. The US August inflation rate was an unacceptable 8.3% year on year with food inflation surging more than expected. Month on month US food inflation rose 0.6% which hardens the Fed’s inflation fight. And there is no relenting in US food costs. And rising Chicago values make the fight difficult.
- Future food inflation will be sticky with the US Central Bank likely to embroiled in its inflation fight well into mid-2023. We see the core inflation rate falling to 5.5-6% by yearend, but this a long way from the US Central Bank’s target of 2%. Historically, the US Central Bank must raise its fed funds lending rate 2% above the rate of inflation for it to cool. That suggests numerous future rate hikes and slowing of US/world economic growth. It is the slowing of grain demand that troubles us.
- The US$ has rallied sharply on the US August inflation data and movement of US lending rates to the upside. The yield on the 10 Year US Treasury is near 3.5% with the 2-year yield likely to reach 4.0% (currently trading at 3.77%). The rising US rates affords investors an alternative to equities. Cash is a new asset class. The US DOW is down 800 points.
- The rising US$ makes goods/grains/metal more expensive to importers. We hear of very limited interest in US Gulf corn, soybeans, or wheat. Elevation costs are high and when soybeans/corn are priced back to a local currency, the cost is immense. World importers will stay hand to mouth in their purchases.
- S American corn basis is weakening with Argentina offered at $0.20 over Chicago while Brazilian corn is offered $0.60 Chicago. This compares to US Gulf corn at $1.45 over for October/November/December. And the Ukraine grain export corridor is working with their offers for spot cargoes even cheaper. Chicago corn has acted heavy since the report was released due to keen competition from overseas sellers. US corn export demand is soft.
- Goldman Sachs is out telling its clients that they expect China will maintain its zero covid policy well into 2023 (March at least) which will continue to produce a headwind for future economic growth. This will impact ag import demand with grain/soy demand likely reduced from past year levels.
- Argentine sources report that farmers there have sold 650-750,000 mt of old crop soybeans today following the Chicago rally. The sale has allowed China to secure another 4-6 cargoes of soybeans for October/November. The new soybean Peso rate and Chicago rally sparked windfall profits for Argentine farmers.
- Corn prices are starting to eat into US ethanol producer’s profitability. Older US ethanol plants are posting negative margins and will close for maintenance. US grind rates are expected to decline in future weeks. A push in December corn to $7.10-7.25 would produce red margins for even newer plants.
- Chicago brokers estimate that funds have bought 5,400 contracts of wheat, 4,900 contracts of corn, and 5,500 contracts of soybeans. Funds have sold 1,200 contracts of soymeal and 1,500 contracts of soyoil. This is chart buying.
- There was limited change in the GFS weather forecast with improving harvest conditions across the Central US.
- Chicago soybeans above $15.00 November and December corn futures above $7.00 offer sales opportunities as funds add to existing net long positions. The US and world economic outlook is weakening. S American and Chinese soybean crush margins are deeply negative while the US crush rate is sliding amid the fear of a rail strike. Most of the US ethanol, soyoil and soymeal production moves by rail. And a new US harvest looms with additional cash supply to reach the marketplace. It is the bearish macroeconomic outlook and potential for a record large Brazilian soy crop which pushes us to now be a seller of Chicago rallies. The only market we want to be careful of being too bearish is wheat where funds are holding a sizeable short position. World wheat demand stays very slow.