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, says Chad Burlet of Third Street Ag Investments, LLC.
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); 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 (PFE) 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 (MRNA) 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 very minor change in the US 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, despite the fact that 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, both 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.
As we look ahead, we anxiously await more clarity on the Omicron variant. 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 geo-political 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.
Learn more about Chad Burlet at Third Street Ag Investments.