Commentary provided by Chad Burlet of Third Street AG Investments
As we close the month of November we are sad to report that COVID-19 has reclaimed the top spot as the single most important variable for the agricultural, and most other, markets. During the Thanksgiving break South African scientists announced that they had identified a new variant which was spreading rapidly and which carried a significant number of mutations relative to the other leading variants.
The Friday after Thanksgiving saw global equity markets fall 2-6% and crude oil fall more than $10 per barrel as risk managers and traders all took a “risk-off” approach to this new list of unknowns. Key questions revolve around: how contagious is this variant; (now labeled “Omicron” by the World Health Organization (WHO)); how severe are the symptoms; and how effective will the leading vaccines be?
Over the weekend, Goldman Sachs issued an encouraging financial assessment, and the Pfizer CEO gave a somewhat encouraging medical assessment. As a result, many markets recouped some of their losses on Monday. Then, Monday afternoon and evening, the WHO and the Moderna CEO gave statements which were more concerning. That pushed corn, wheat, and soybean futures down to three-week lows and crude oil to three-month lows on Tuesday.
Prior to Omicron’s arrival, the grain markets were trading extremely well. On the day before Thanksgiving corn futures made a new 3-½ month high and wheat futures made a new contract high. On the continuation chart it was a new nine-year high for Chicago wheat. For the month, wheat was by far the most volatile of the three markets, carving out a 13% trading range versus 7-½ % and 8-½ % for corn and soybeans, respectively.
Before COVID returned to the top of the front page, this month’s pivotal moment for the row crops, corn and soybeans, was the WASDE report on the 9th. Both futures markets made their monthly lows just minutes before the report’s release. The catalyst for their rally was a minor change in the U.S. soybean yield. Analysts and traders had expected yields to be increased by 4/10ths of a bushel per acre. Instead, they were decreased by 3/10ths of a bushel. While it was a very minor change, the market was clearly leaning the wrong way. Soybean futures rallied 5% in a matter of minutes.
The wheat market was also pushed higher by the November WASDE. The USDA tightened an already tight world wheat balance sheet as they reduced the carry-in and production and yet increased world trade by 3.5 million metric tons (MMT). To help make ends meet they increased Russian exports by 1 MMT, even though their export tax is up to $80/MT and their current export pace is 18% behind last year.
Omicron doesn’t get exclusive credit for wheat’s four-day 10% washout. Late last week, Australia and Argentina, the two largest wheat producers in the southern hemisphere, increased their crop estimates up to record levels. The Australian crop estimate was increased by 1.8 MMT to 34.4 MMT and Argentina by 0.5 MMT up to 20.3 MMT.
We anxiously await more clarity on the Omicron variant as we look ahead. Setting that aside we see South American weather as the lead variable for our markets. Most specifically, corn and soybean weather in Brazil and Argentina. Soon we’ll want the conflicting scenarios of dry weather for early harvest and wet weather for the late-planted crops. We also see geopolitical risks of a Russian move into Ukraine and/or a post-Olympic PRC move into Taiwan. The former would be explosive for the wheat market and the latter would generally be bearish as exports to China would be called into question. From a humanitarian standpoint, we hope neither of those scenarios becomes a reality.
–Data and information is provided for informational purposes only, and is not intended for trading purposes. Neither Third Street Ag Investments LLC nor any of their data or information providers shall be liable for any errors or delays in the data or information, or for any actions taken in reliance thereon. We do not guarantee the accuracy, timeliness, reliability or completeness of any financial data or information.
–The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.
Photo by Melissa Askew via Unsplash