Perspective: Morning Commentary, 12/29/2015

Tuesday, December 29, 2015

December 29 – There are just three trading days left in 2015, with most traders still off for the holiday break. The Case-Shiller index showed a 0.9% rise in home prices in October, beating expectations of a 0.6% rise. Look for consumer confidence data at 10 a.m. CST. Otherwise the news front is quiet. Traders who remain engaged are simply squaring their year-end positions and marking time ahead of the turn of the calendar, hoping that the news remains quiet.
The dollar is modestly higher this morning on expectations that it will continue to see strength versus most other major world currencies in 2016. The Federal Reserve has initiated the beginning of monetary tightening, however so slow, while the bulk of the rest of the world remains in stimulus mode, attempting to increase the supply of money available to consumers. This is expected to continue to provide headwinds for the broader commodity sector in 2016, although individual commodities can still rally if they develop a compelling story.

Crude oil is also modestly higher this morning, after failing to take out yesterday’s low on early selling. There is some chatter in the market this morning that we could see U.S. crude exports next month, easing pressure created by supplies near 80-year highs. Keep in mind that speculator attitudes toward crude oil tend to be reflective of their perception of the broader global economy, and therefore anticipated demand for other commodities as well.

To this point, low crude oil prices are seen as an indicator of a weak global economy, leading to expectations of weak demand for the other commodities. At some point, sentiment will shift to seeing low crude oil prices as an economic stimulus, signaling a turn in attitudes toward the other commodities as well. That is not yet the case, and may not be the case for some time if we continue to see upward strength in the dollar and lingering economic malaise overseas.

Certainly a sign of the times can be seen in Saudi Arabia, where the government is using low crude prices and increased regional tensions to justify a reshaping of its budget. Consumer subsidies are being scaled back, while increased emphasis is being placed on funding Saudi defense needs. While probably strategically necessary, the move risks a rise in social unrest that could further contribute to the region’s instability.

Another long-term sign of changing times comes from China, where officials ended a policy meeting Friday with a commitment to reforming its agricultural policy. Record corn surpluses of nearly 8 billion bushels are largely a product of high subsidies meant maintain feed grain supplies while funneling money into the vast rural population during the recession to maintain political support during the Great Recession of the past decade. However, those policies proved costly for China’s budget, while pushing hog producers out of business, leading to high food prices as pork supplies shrank.

The government is now believed to be considering another 25% reduction in subsidies, while would bring domestic support prices to near $6.25 per bushel after conversion, down roughly $3 from their peak. Officials are also said to be considering paying farmers not to plant corn. The moves are bearish U.S. corn and grain sorghum exports in 2016, but look for rapid expansion of the hog industry to increase demand for corn and soybeans down the road a few years as the pendulum swings the other way.

Brazilian weather continues to look favorable for crop development. Showers begin mid-week in the Center-South region, expanding northeast into currently dry areas. Soaking rains are expected to remain active through much of next week in the region.

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