Perspective: Morning Commentary, 12/11/2015

Friday, December 11, 2015

December 11 – Crude oil resumed its downward trend overnight, with West Texas Intermediate falling to $36.12 per barrel before coming off its lows. That represented nearly a 10% decline in just the past week, while the lowest since February 2009 as the world frets about increased OPEC production amid sluggish global demand. Non-OPEC nations are expected to see a 250,000 barrel-per-day drop as low prices curtail output. However, that reduction is small relative to expectations for rising OPEC production, particularly as sanctions are lifted on Iran. The International Energy Agency forecasts a global oil surplus persisting until at least late next year.

Sinking oil prices send a signal to fund managers that things are not well with the world economy, leading them to sell the major commodity indices. The Thomson Reuters CRB index gapped lower once again this morning, trading at its lowest level since 2002. That creates headwinds once again for the Ag commodities, although grain and oilseed prices are steady to firm on their own seasonal strength this morning.

U.S. retail sales rose 0.2% over the previous month in November, up from 0.1% in October, but below Wall Street expectations of 0.3%. However, sales minus autos were up 0.4% from the previous month, beating the previous month’s gain of 0.2% and beating expectations of 0.3%. Furthermore, sales excluding autos and gas rose 0.5%, up from 0.3% in October and beating trade expectations of 0.3%.

The Department of Labor reports that the producer price index rose 0.3% in November versus minus 0.4% in October and market expectations of flat wholesale prices. Even so, deflationary pressures remain real, with the year-to-year index at minus 1.1%. However, the November PPI minus food and energy was up 0.3% on the month, beating expectations of 0.1%, while up 0.5% on the year. Energy continues to provide downward price pressure, while inflation remains alive in other sectors.

China’s yuan fell to 6.4553 per dollar overnight, down 0.27% on the day. The yuan’s losses this week are the largest since the surprise devaluation in August. The International Monetary Fund granted the yuan reserve status November 30. There have been nine trading days since that decision was made. China’s central bank lowered its daily yuan peg versus the dollar on seven of those days. The moves appear to be a deliberate attempt to devalue the currency ahead of next week’s anticipated rate hike by the Fed.

We continue to monitor rainfall in northern areas of Brazil’s crop belt. While below normal, the rains continue to be timely enough and sufficient to maintain crop development over all but the northern and eastern 10% of Brazil’s summer corn and 15 to 20% of the soybeans. This morning’s models suggest the deficit area could shrink a bit in the 6- to 15-day period, but we’ll have to watch how systems verify versus the forecast models.

Look for a lot of chatter this morning when USDA releases baseline 10-year balance sheets for some commodities. Again, these numbers are produced by economists sitting in their office without input from producer or end user. As such, the numbers get far more attention than they should and may provide some short-term movement in prices today.

Wheat continues to lead corn higher since the first of the month. The rally comes largely at the expense of open interest, suggesting that much of the strength is short-covering. That’s not a recipe for a sustained rally. Longer-term, we could see more risk premium based on El Nino and its anticipated demise, but headwinds from the other markets remain strong near-term.

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