December 10 – The markets have quieted considerably as the flow of news slows this week, at least for the commodity sector. Wednesday’s USDA WASDE report was pretty much as expected, providing little fresh direction for the Ag sector. The bottom line is that supplies of Ag commodities are more than adequate to meet demand at this point, with no real threats currently confronting the market.
We continue to see a well-defined El Nino weather pattern impacting South America, with an active rain pattern over southern Brazil and a drier pattern over northern crop areas. I noted yesterday that the drier northern pattern is starting to become a concern. The region normally receives upwards of 8” to 10” of rainfall per month, so “below normal” rains are not necessarily a threat unless they are substantially below levels that would meet crop needs. However, recent rains have been under-performing forecasts, allowing deficits to build.
Yesterday’s notes indicated that a storm system coming through the region in the first of next week could leave the area short once again, allowing crop stress to spread over a third of Brazil’s belt. However, overnight forecasts improve rain chances mid-week, with additional rains in the 11- to 15-day period. Once again, these rains need to verify to avoid increased concerns, but the forecast models provide a bit more confidence that they will indeed be sufficient at this time. Thus, the grain and oilseed markets continue to search for a weather event that will lift the market out of their malaise.
The dollar fell to a fresh one-month low Wednesday after breaking below last Thursday’s session low. The greenback has essentially retraced 50% of the rally off the October lows. It is posting a healthy bounce this morning as the euro approaches an area of chart resistance and ahead of next week’s highly-anticipated Federal Reserve meeting.
We can fully expect to see the Fed raise its base interest rate by 25 points next Wednesday, for doing less would likely create volatility in the markets that the central bank would like to avoid. The primary focus will then be on verbiage in the policy statement, and perhaps more significantly in the words of Fed Chair Janet Yellen at her press conference. Wall Street is anxious to know the speed at which monetary tightening will take place, now that lift-off appears inevitable. That perception of the Fed’s intent should then shape sentiment toward the dollar heading into the winter, along with evolving sentiment toward the euro.
Most other central banks around the world continue to be dovish; supporting monetary easing to stimulate their economies. The Swiss central bank announced earlier today that it will hold its rates unchanged, with additional verbiage that it would intervene if necessary to ease upward pressure on the franc, which it considers “significantly overvalued.” The Bank of England also announced that it will keep rates unchanged, while the Bank of New Zealand cut its official cash rate 25 basis points to 2.5%.
USDA announced it will release a portion of its long-range supply and demand balance sheets Friday. The balance sheets will reflect a portion of the work the agency is doing for its Outlook Conference in February. The annual release tends to create a lot of headlines, but I can’t remember the last time they were actually relevant. The numbers were created by economists sitting in a government office, rather than reflective of surveys of either producers or end users. It’s rare for them to reveal any unanticipated changing trends in agriculture. None-the-less, they provide fodder for the wire services at a slow news time of the year. For today, crude oil is weaker again, setting new lows for the move and providing a drag for the broader commodity sector yet once more.
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