Perspective: Morning Commentary for February 26

February 26 – The focus shifts away from Nvidia toward a busy data week and the prospect of a government shutdown in the days ahead. Wall Street doesn’t care too much about a government shutdown, as long as it doesn’t last long, but it does care if the circus surrounding the debate in Congress leads to a credit downgrade, and that’s increasingly a risk that must be respected. Credit downgrades raise interest costs, and higher interest rates are inflationary while also stagnating the economy. We’ll get durable goods orders data tomorrow, followed by PCE inflation data on Thursday, in addition to a plethora of other economic data. The VIX is trading near 14 again this morning, while the dollar index is trading near 103.8. Yields on 10-year Treasuries are trading near 4.27%, while yields on 2-year Treasuries are trading near 4.71%. Crude oil prices are mixed this morning, while grain and oilseed prices were mixed to lower, with wheat and corn making new lows once again.

China has a population problem – but not because it keeps getting bigger. No, China’s population problem is that it is aging, and it is shrinking – two challenges for any government to sustain strength as a country. The problem began with its one-child policy introduced in 1979 for the purpose of containing a rapidly expanding population that made it the world’s most populous country. That policy was discontinued in 2015, but by that time it had become deeply engrained in the culture of China as parents invested everything that they had in that one child becoming as successful as possible. How could they now afford to do the same for two children, let alone three or more? Furthermore, the people of China lost interest in having children in the current culture, with the birth rate falling below the death rate in recent years, resulting in a declining population. Its population is now in decline, while India has taken its place as the world’s most populous nation. Furthermore, it has fewer young people to support the economy, let alone to support an aging population. China currently boasts roughly 5 workers per retiree, which is one-third as many as there was in the 1960s, and that number is expected to drop to just three by the middle of the next decade. How does China maintain enough young workers to support an aging population, let alone a military that strives to be number one in the world? While China publicly addresses many other issues, the above is one of the greatest challenges that haunts President Xi Jinping in his goal of becoming the world’s top economy and military, and it drives nearly every decision that he makes to that end.

China bought 10 cargoes of Ukrainian corn last week, according to our cash sources, as it remains the cheapest available on the market currently. We don’t have prices for the Ukrainian purchase, but it was said to be notably cheaper than Brazilian corn imported into China at $278 per metric ton, and U.S. corn at $289 per metric ton. Domestic corn prices firmed in recent weeks to $338 per metric ton as government buyers stepped up their reserve purchases. The price differentials continue to support imports of corn, albeit from Ukraine currently. Brazil is in the process of shifting its ports over to focus on soybean exports, but Ukrainian corn continues to undercut U.S. prices that are currently at three-year lows.

Some of those Brazil soybeans are making it north to the United States. Shipment data shows three cargoes containing 3.8 million bushels of Brazilian soybeans are expected to make their way to the U.S. Southeast for processing. That’s not unusual when Brazil has big supplies relative to the United States, and it doesn’t make much of a dent in the U.S. balance sheet, but it does tend to have a big psychological impact on the market. Brazil exported roughly 15 million bushels of soybeans to the United States last year, but just a miniscule amount the year prior to that. AgRural lowered its current-year soybean production estimate for Brazil to 147.7 million metric tons this morning, down from 150.1 mmt the previous month. StoneX Brazil’s customer survey pegged the crop at 150.35 mmt on February 1^st, and it will be releasing updated survey results at the end of this week. I have long felt that the crop would end up in the 147 to 149 mmt range, but that may be too low based on some of the satellite acreage estimates emerging. Regardless, it would take production estimates much lower than that to justify rationing U.S. demand with higher prices, based on current production estimates for Argentina, Paraguay, and Uruguay.

Managed money continues to build record to near-record short positions across the grain and oilseed sector, pulling prices to their lowest level in roughly three years – depending on the market. These markets are oversold, and this may feel like a final flush. But the truth is that they still lack a fundamental reason to force a change in market direction. That could come via a headline tied to geopolitical risks, or it could come via a weather problem in Brazil or the United States over the next several months, but today’s sentiment remains entrenched. Cheap prices are creating demand, and that will eventually be the roots of the next rally down the road. End users will have incentive to increase coverage on signs of a bottom, and fund managers will also have incentive to unwind short positions. But the timing of such and from what level we make that bottom is still yet to be determined by this market.