AgriVisor Market Recap

Tuesday, July 07, 2020
Commodity values set back overnight as light profit taking developed following the recent rally we have had, which is not that surprising. Forecasts have tempered their heat for later this week which added to the negative tone. Futures were quick to stabilize once the day session started though as traders are not interested in removing recently added risk premium at this time. We are seeing building doubt over large global production estimates which added market strength today, especially in the wheat complex. 

All eyes were on weather outlooks today, mainly the heat that is affecting much of the central US. Temperatures are forecast to reach into the 90’s for the next few days before breaking down to more seasonable levels by the weekend and through early next week. Along with this comes elevated chances of rainfall. Some models are indicating heat will build into the last half of July though, with temperatures hitting higher levels than we are currently seeing. A few indicate temperatures could lead to July going down as one of the hottest in the past 125 years. 

The equity markets had more of an impact on commodity values today, and unfortunately, it was a negative one. Global economic indicators are showing countries have not recovered from the Covid-19 outbreak as fast as thought. One getting the most attention today was the EU where officials believe the GDP will fall 8.7% this year. In the US we are seeing cases of Covid spike, causing some retailers to again shutter businesses. This has caused investors to return to the US dollar, which tends to reduce commodity demand. 

A story that has slipped through the cracks of the market is the decision by the Environmental Protection Agency to leave biofuel blend rates unchanged for 2021. It was believed that the EPA would increase the US blend rate slightly from the 2020 target of 20.09 billion gallons to a 2021 level of 20.17 billion gallons. Industry hopes were this announcement would come in mid-July, but the EPA has stated any decision to make changes is on hold indefinitely. 

Planting plans are being made in South America, and the country getting the most attention as they start is Argentina. When the Argentine government took office last January it immediately raised export taxes to 33% on soybeans and 12% on corn to generate additional income. The total tax rate on Argentine farmers increased a large 20%. There are thoughts we could see Argentine farmers scale back their acreage as a result. 

We are also seeing a decrease in Argentine crush output. The current yearly crush volume in Argentina stands at 10.8 million metric tons compared to 13.6 mmt a year ago. This is the slowest start to the Argentine crush rate in the past six years as farmers are unwilling to make sales given the tax rate changes being enforced. Argentina has also harvested a smaller soybean crop as the country still suffers from drought conditions. Increased transit restrictions to stop the spread of Covid are also reducing the country’s crush ability. 

While the recent futures recovery has been welcomed by farmers, there are already concerns over what it may do to demand if it continues. This is especially the case for the ethanol industry as plants were finally able to report positive margins. The rally that took place in corn likely erased much of this profit, although building demand is beneficial. Exports are also being questioned following the rally in futures, especially with a firming US dollar. 

More concerns are being voiced over the quality of the remaining corn in the United States. Much of the corn currently being delivered is lower in test weight, which is not a surprise. This factor may end up impacting balance sheets as more bushels will need to be consumed to reach the same result as higher quality corn. While this may elevate usage, it will lower efficiencies, especially for feed and ethanol. 

RISK DISCLAIMER: The risk of loss in trading commodity futures and options is substantial. Before trading, you should carefully consider your financial position to determine if futures trading is appropriate. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results. The information contained in this report is believed to be reliable but is not guaranteed to accuracy or completeness by  AgriVisor, LLC. This report is provided for informational purposes only and is not furnished for the purpose of, nor intended to be relied upon for specific trading in commodities herein named.  This is not independent research and is provided as a service.  As such, this is considered a solicitation.