August 23 – Stock futures were stagnant overnight, unable to sustain attempts to bounce as traders position ahead of Friday’s anticipated speech by Federal Reserve Chair Jerome Powell to this year’s Jackson Hole, Wyoming symposium. The VIX is trading near 17 again this morning, but the dollar surged higher to trade near 103.9, representing nearly an 11-week high for the greenback. Yields on 10-year Treasuries are trading near 4.29% this morning, while yields on 2-year Treasuries are trading near 5.02%. Crude oil prices are more than 1% lower on lingering concerns about softer global demand, while the grain and oilseed sector was mixed overnight. Corn and wheat prices initially rallied overnight on reports of another Russian strike on Ukraine port infrastructure, but they’ve since struggled to maintain those gains.
Wall Street is increasingly concerned about rising interest rates, and those concerns should go beyond the Federal Reserve. The string of credit rating downgrades we’ve seen over the past several weeks are a red flag about longer-term problems – especially the downgrade of the U.S. credit rating. The fact is, our rapidly expanding national debt requires an increasing number of buyers for the government debt securities, and it takes higher interest rates to attract those buyers. A credit downgrade also adds upward pressure to those rates. The problem accelerates as the government has to borrow more money due to the rising interest payments on that debt swallowing up a larger portion of that debt. It’s a risky cycle that we’re entering into, with rising rates threatening economic activity. This week’s move of yields on 10-year Treasuries to their highest level since October of 2007 increases the focus on this growing problem that nobody wants to talk about, but that will soon be here whether we want to think about it or not.
Members of BRIC are meeting in South Africa this week, with significant decisions expected to be made. Chinese President Xi Jinping has already signed 11 cooperation agreements with South Africa along the sideline of the meeting, largely tied to further involving South Africa in its Belt and Road Initiative. President Xi also promised to increase agricultural imports from South Africa, including increasing the amount of corn that it imports from there. BRICS members will also decide whether to accept Saudi Arabia’s membership application into the group. Saudi Arabia moved much closer to China and Russia after feeling disrespected by moves made early in the Biden Administration. Argentina has also applied for membership into BRICS after China offered to help it meet its debt obligations – in yuan currency of course. Argentina, desperate for financial assistance, has been all to eager to accept help from China, which sees its rich agricultural production potential as an alternative to U.S. supplies. Argentina’s peso has already fallen in value by 60% this year, and it continues to tumble. The acceptance of Argentina, when it occurs, together with member Brazil, would give China a stronger foothold in South America.
Russia conducted another drone strike on Ukraine port infrastructure overnight, striking facilities at Izmail on the Danube River. Ukraine indicates that the port’s capacity was reduced by 15% by the damages inflicted by the strike. Additional strikes took place on grain facilities at the ports in the Odessa region. The strikes come as Ukraine begins to tout its new “safe corridor” that allows ships to move along its shore toward Romania, and as it promotes exports out of its Danube River ports. Ukraine also announced this week that it is very close to finalizing a deal to subsidize insurance coverage for shippers willing to use its new “safe corridor” plan. I put that in quotes because even Ukraine admits that there continue to be risks involved with the passage, including floating mines. The concern was, would Russia allow this plan to work? Russia likely does not want to have the image of sinking ships, but it doesn’t need to if it can keep ships away and/or disable the loading infrastructure. It takes two to three days to load a ship at these facilities, leaving them vulnerable to damage if they are next to port infrastructure that is being hit by missiles and/or drone strikes. Shippers may not want to take that risk, even if the insurance coverage is subsidized, and that’s likely what Russia is counting on to essentially implement a blockade of Ukraine sea exports. The risk to Russia is that the Danube ports are right across the river from Romania, which is a member of NATO. An errant missile striking the Romanian shoreline would be considered an attack on NATO, which Russia would prefer to avoid at this point.
Day #2 of the Pro Farmer Midwest Crop Tour began to uncover more of the problems with this year’s corn and soybean crops. Tour participants continued to find good fields, but they were interspersed with more problem fields in eastern Illinois and in eastern Nebraska. That is again expected to be the case as tour participants move through western Illinois into eastern Iowa today, while also moving through areas of western Iowa. The problem areas do not suggest that we’ve facing a major crop shortfall, but they do lend evidence that there is downside risk to USDA’s current yield estimates. The corn balance sheet can afford some losses, amid its problems on the demand side of the balance sheet. The margin for error is smaller for soybeans though, which have a strong domestic demand story to at least partially offset concerns about exports.
