Evening Report | Oct. 13, 2021

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Cotton hedgers: Finish 2021-crop sales… Cotton futures are sending strong signals a major top is in place. With December futures still presenting an opportunity to sell $1-plus cotton, we advise hedges to sell the final 15% of 2021-crop production to get to 100% priced in the cash market. We’ll manage upside price risk from here on the board. Cash-only marketers must maintain some inventory as gambling stocks with three-quarters of the marketing year yet to go.

 

Soybean hedgers: Increase 2021-crop hedges… Soybean futures have further broken down technically and have sharp downside price risk from current levels. We advise hedgers to hedge 15% of 2021-crop production in January soybean futures. You already hold a 10% hedge in November soybeans and have 50% of this year’s crop sold in the cash market. This pushes 2021-crop coverage to 75%.

 

FOMC minutes signal tapering of QE could begin as soon as mid-November… One of the major takeaways from the minutes of the September Federal Open Market Committee (FOMC) meeting was a firming up of plans to begin reducing the Fed’s bond buying stimulus program by “mid-November or mid-December.” Initial tapering efforts will likely include cutting $10 billion a month in Treasury buys and $5 billion a month in mortgage-backed securities purchases. Currently, the Fed buys $80 billion in Treasuries each month and $40 billion in mortgage-backed securities.

Participants reaffirmed the committee’s “substantial further progress” standard regarding its asset purchases was distinct from its criteria for any increase in the federal funds rate and “that a policy shift toward a moderation of asset purchases provided no direct signal about its interest rate policy. Rather, the Committee had articulated a different, and more stringent, test concerning the conditions that would need to be met before it started raising the target range for the federal funds rate.” Several participants indicated an increase to that rate may be possible by late 2022.

The next FOMC meeting will occur Nov. 2-3.

 

Latest CPI update shows inflationary pressures linger… The overall U.S. consumer price index (CPI) shows inflation rose at a slightly stronger pace than expected in September, with an increase of 0.4% from August versus expectations for a rise of 0.3%. On an annualized basis, headline inflation rose 5.4%, also just above expectations of a 5.3% increase. Core inflation, minus volatile food and energy prices, was up 0.2% for the month and 4.0% on an annualized basis, both in line with expectations.

This likely does little to change the inflation narrative from the Fed relative to the situation being temporary. But it may also indicate the comments from Fed Chairman Jerome Powell that inflationary pressure could last longer than expected will be more on the mark than not.

 

EIA calling for ‘significantly’ higher spending on home heating this winter… Average U.S. household expenditures for all major home heating fuels will increase “significantly” this winter due to higher expected fuel costs as well as more consumption of energy due to a colder winter, forecasts the U.S. Energy Information Administration (EIA) in its Short-term Energy Outlook (STEO). “Compared with last winter, we forecast propane expenditures will rise by 54%, heating oil by 43%, natural gas by 30%, and electricity by 6%,” EIA details. The report also says that based on winter forecasts from the national Oceanic and Atmospheric Administration, U.S. average heating degree days will likely rise 3% compared with last winter.

The STEO expects Brent crude oil prices to remain near current levels the remainder of 2021, averaging $81 per barrel during the fourth quarter of 2021, which is a $10 per barrel jump from its previous forecast based on a lower global oil supply late in 2021. In 2022, it expects growth in production from OPEC+, the U.S. and other non-OPEC countries to outpace slowing growth in global oil consumption, helping brent prices to decline to an annual average of $72 per barrel.

 

IEA estimates clean-energy spending must triple to curb climate change… Extreme volatility in energy markets will present a continued risk unless investment in clean power is tripled in the next decade, the head of the International Energy Agency (IEA) warned, as he issued a call to arms for world leaders ahead of the upcoming U.N. climate summit. Fatih Birol, IEA executive director, told the Financial Times that while projected investment in oil and gas was now aligned with the changes needed to reach net zero emissions of greenhouse gases by 2050, public spending on renewable power was only at a third of the future levels required. “There is a gross mismatch, and the longer this mismatch persists, the greater the risk of further sharp price swings and increased volatility in the future,” Birol said. Annual global energy investment is set to rise to $1.9 trillion this year, according to the IEA, including about $370 billion on new renewable power generation.

 

Anec raises Brazilian corn and soybean export forecasts for October… Brazilian grain exporters association Anec expects the country to export 2.973 MMT of corn during October, a nearly 300,000-MT increase from its forecast last week. The association also raised its monthly corn export forecast by nearly 550,000 MT from last week to 1.968 MMT.

 

Big increase in Iranian wheat imports expected… Iran likely needs to import a record 8 MMT of wheat after the country was hit by the worst drought in 50 years that sliced production by around 30%, according to a Reuters report citing Kaveh Zargaran, chairman of the Grain Supplying Association of Iran. In addition, the country’s economy has been damaged by tough U.S. sanctions and the Covid-19 pandemic. High freight rates are adding insult to injury. Over the past five years, the country has imported an average of 1 MMT of wheat each year, so imports of 8 MMT would be a dramatic hike. Yesterday, USDA projected Iran would import 4.5 MMT of wheat this season; the International Grains Council has forecast Iran’s imports will total 2.4 MMT.

 

USDA releases new tool to help drought-impacted ranchers calculate compensation for feed transport expenses… USDA issued a new online tool to help ranchers document and estimate payments to cover feed transportation costs caused by drought that are now covered by the Emergency Assistance for Livestock, Honeybees and Farm-raised Fish Program (ELAP). Besides including those costs, USDA also lowered the threshold for when assistance for water hauling expenses is available. USDA’s Farm Service Agency will begin accepting applications this fall. Learn more about ELAP.

 

Chinese home sales dive… Home sales in China are falling sharply as curbs on lending and worries about developers’ financial health deter house buyers, casting a pall over an industry that is central to the Chinese economy, the Wall Street Journal reports. In recent days, numerous big developers have reported lower sales figures for September, with many showing year-over-year declines of more than 20% or 30%. If sustained, the sharp downturn could have serious economic consequences. Real estate has played an outsized role in China’s economy in recent years, and Chinese families have much of their wealth tied up in homes and in investment properties. Slower sales could spill over into investment and construction, potentially hurting growth, employment and local government finances.

 

House Budget Chairman Yarmuth announces retirement... John Yarmuth (D-Ky.), 73, represents his state’s third congressional district, including Louisville. David Wasserman, House editor of the Cook Political Report with Amy Walter, said in an analysis, “Yarmuth is at the center of Democrats’ grueling House negotiations over the infrastructure bill and becomes the 10th Democrat — and the first committee chair — to announce a retirement. Taken collectively, it’s evidence Democrats are pessimistic about holding the majority beyond 2022.” Aaron Yarmuth, the congressman’s son, recently sold LEO Weekly, the alternative newspaper he owned. The Courier-Journal reported that Aaron is not ruling out a run for his father’s seat.

 

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