Morning Comments February 11, 2022

Soybeans Farnhamville

It was a rough and volatile day in the markets yesterday as a bigger-than-expected cut to Brazilian soybean production sent us to new contract highs before Fed-induced market jitters and rumors of Chinese cargo cancellations sent prices lower. At the end of the day corn was down 5, wheat was down 13 and beans were off 20.

We started the day with strength on a couple fronts. Early in the day we saw wheat move to the high side on rumors Russian military exercises would limit or completely stop shipping from Ukrainian ports. It appears as though these rumors are unlikely as shipping continues without issue, but the continued talk of a Russian invasion being imminent is keeping the world on edge. 

In addition to Black Sea chatter, we saw CONAB come in with a massive cut to their Brazilian soybean production outlook. We had discussed yesterday that a cut similar to the USDA's 5 mmt month to month reduction on Wednesday would likely be viewed as too conservative. However, trade was caught completely off guard by a 15 mmt (551 mbu) reduction from last month.

At 125.5 mmt the crop would be off an astounding 19 mmt from where production estimates at the beginning of the year started, if realized, that's nearly 700 million bushels lost. 

It feels important to note though that this crop would still be the second largest on record at 125.5 and account for 4.6 billion bushels of production compared to U.S. production last year of 4.4 billion.

Late in the morning a lot of talk started to surface regarding Chinese companies washing out of Brazilian cargoes. According to market watchers, both private and state-run companies are looking to liquidate some of the bushels they own out of Brazil for a couple of different reasons. 

Reason one is all the talk still taking place regarding the Phase 1 trade deal and negotiations regarding the removal of former President Trump's tariffs. Of course, market conditions have changed entirely since the start of the year when the Phase 1 deal officially expired, likely prompting state agencies to look in this direction whether it provides political benefit or not. But in this instance, it appears a case of killing two birds with one stone.

In addition to cancellations of Brazilian beans with a repurchase of U.S. beans, we are hearing stories of end users simply reselling their cargoes back into the market space. Chinese hog margins continue to struggle as do crush margins, providing some private companies an opportunity to make more by selling the beans back into the market before taking delivery.

With cash values falling off yesterday in Brazil and concern that the Brazilian farmer will quickly find themselves on the wrong side of the market as harvest drags on, what happens with Chinese demand April forward will be key to watch.

In any event, we are still well behind the pace needed to meet current USDA expectations on bean exports but are working quickly to catch up.

In addition to global supply and demand questions, we are watching what is taking place when it comes to interest rates and the economy as a whole. 

Yesterday morning's CPI data came in at a 40 year high with consumer prices up 7.5% from last year, while traders were expecting a 7.3% increase and consumers saw a 7% year-over-year increase in December. 

With the employment figures showing the country at near full employment and CPI data showing continued hikes, talk of "inflationary shock" has begun to circulate. 

Inflationary shock basically means that while the Fed thought this would be a short-term and somewhat contained inflationary event, we have managed to maintain nearly double the core inflation rate target for several months with wages slipping versus inflation for the 10th month in a row. 

Some of the Fed's more hawkish members (Hawkish means more likely to look to rate increases with a desire to keep economic growth in check) became outspoken yesterday, reemphasizing the need to make a major adjustment to the current plan, with a 50-point adjustment expected in March, a 100-point target by July, and potential for more increases after that. 

For many, adjustments as are currently being discussed haven't taken place in our lifetime, or at the very least happened when we were very young. We are most definitely in uncharted territory.

Overnight an announcement for a closed-door session of Fed members on Monday to discuss rates began to make its way around social media. It is unclear yet if this is a normal meeting, an emergency one, or even if the announcement itself is real, but it will definitely be something we will watch throughout the day.

Looking ahead, we will continue to monitor outside markets for guidance as well as watch what is taking place from a cash standpoint in Brazil. There is lots of talk regarding the potential for much increased Brazilian farmer sales in the week ahead as the farmer is only 40% sold on this year's bean crop versus 70% last year at this time, with a harvest pace that is much further ahead.

There was no corn sale announcement to China yesterday even after Wednesday's move to the high side on that talk. We will continue to monitor changes there as well.

Corn up 3 to 4

Beans up 10 to 12