Inflation And Interest Rates Have Dramatic Implications For Agriculture
DR. AARON SMITH
KNOXVILLE, TENNESSEE
This week the Dow Jones Industrial Average (DJIA) continued its downward trajectory. In the past six months, the DJIA is down 5,043 points (14.44 percent), closing Friday at 29,889. The Federal Reserve increased the benchmark interest rate by 0.75 percent the largest interest rate increase since 1994. Additional increases in 2022 of 1 to 2.5 percent seem likely as the Federal Reserve attempts to slow inflation. The current annualized inflation rate is estimated at 8.6 percent. Inflation and interest rates have dramatic implications for agriculture due to elevated input prices and increased debt servicing requirements.
December corn has rebounded off the recent June 1 low of $6.82, closing the weak at $7.31 and positioning the contract to possibly take out the current high of $7.66 ¼. The USDA’s June 30th Acreage report could provide the fuel for corn to take an-other step up. The December corn contract has solid support near $6.80.
After last week’s November soybean contract high of $15.84 ¾, prices retreated 43 cents this week. The long term up trend in soybeans prices remains intact, however without new bullish information a correction could be forthcoming. Protecting against a downside move in soybeans futures should be considered for producers with limited price protection for the 2022 crop.
December cotton is over 10 cents lower than the recent contract high and appears to be consolidating in a trading range of $1.15 to $1.25. The U.S. Southern Plains drought, and corresponding abandonment, will be closely watched for price direction. Globally, demand for cotton remains strong, however, can U.S. export sales be maintained at current levels with a combination of high domestic cotton prices and a strong U.S. dollar? The U.S. dollar index is at its highest point since December 2002. A strong U.S. dollar makes U.S. agricultural exports more expensive relative to competing countries with weaker currencies.
Is the current pull back in July wheat futures a result of harvest progressing or are wheat markets commencing a downward trend? Wheat futures have traded largely between $10.00 and $12.50 since the beginning of March.
Corn
Ethanol production for the week ending June 10 was 1.060 million barrels per day, up 21,000 from the previous week. Ethanol stocks were 23.197 million barrels, down 439,000 compared to last week. Corn net sales reported by exporters for June 3-9, 2022, were down compared to last week with net sales of 5.5 million bushels for the 2021/22 marketing year – a marketing year low – and 5.5 million bushels for the 2022/23 marketing year. Exports for the same period were up less than 1 percent from last week at 54.6 million bushels. Corn export sales and commitments were 96% of the USDA estimated total exports for the 2021/22 marketing year (September 1 to August 31) compared to the previous 5-year average of 99 percent. Across Tennessee, aver-age corn basis (cash price-nearby futures price) weakened or remained unchanged at West, Northwest, North-Central, and Mississippi River elevators and barge points and strengthened at West-Central elevators and barge points. Overall, basis for the week ranged from 25 under to 5 over, with an average of 6 under the July futures at elevators and barge points. July 2022 corn futures closed at $7.84 up 11 cents since last Friday. For the week, July 2022 corn futures traded between $7.58 and $8.00. Jul/Sep and Jul/Dec future spreads were -47 and -53 cents.
Nationally, the Crop Progress report estimated corn condition at 72 percent good-to-excellent and 5 percent poor-to-very-poor; corn planted at 97 percent compared to 94 percent last week, 100 percent last year, and a 5-year average of 97 percent; and corn emerged at 88 percent compared to 78 percent last week, 95 percent last year, and a 5-year average of 89 percent. In Tennessee, corn condition was estimated at 79 percent good-to-excellent and 6 percent poor-to-very poor; corn planted at 99 percent compared to 98 percent last week, 100 percent last year, and a 5-year average of 99 percent; corn emerged at 97 percent compared to 92 percent last week, 98 percent last year, and a 5-year average of 96 percent; and corn silking at 2 percent compared to 0 percent last week, 1 percent last year, and a 5-year average of 2 percent. September 2022 corn futures closed at $7.37, up 5 cents since last Friday. New crop cash prices at elevators and barge points ranged from $6.91 to $7.53. December 2022 corn futures closed at $7.31, up 11 cents since last Friday. Downside price protection could be obtained by purchasing a $7.40 December 2022 Put Option costing 72 cents establishing a $6.68 futures floor.
Soybeans
Net sales reported by exporters were down compared to last week with net sales of 11.7 million bushels for the 2021/22 marketing year and 15.0 million bushes for the 2022/23 marketing year. Exports for the same period were up 49 percent compared to last week at 26.0 million bushels. Soybean export sales and commitments were 102 percent of the USDA estimated total annual exports for the 2021/22 marketing year (September 1 to August 31), compared to the previous 5-year average of 100 percent. Across Tennessee, average soybean basis weakened or remained unchanged at West, Northwest, West-Central, North-Central, and Mississippi River elevators and barge points. Basis ranged from 40 under to 15 over, with an average basis of 5 over the July futures contract. July 2022 soybean futures closed at $17.02, down 43 cents since last Friday. For the week, July 2022 soybean futures traded between $16.82 and $17.57. Jul/Aug and Jul/Nov future spreads were -80 and -165 cents. July 2022 soybean-to-corn price ratio was 2.17 at the end of the week. August 2022 soybean futures closed at $16.22, down 40 cents since last Friday.
Nationally, the Crop Progress report estimated soybean condition at 70 percent good-to-excellent and 5 percent poor-to-very poor; soybeans planted at 88 percent compared to 78 percent last week, 93 percent last year, and a 5-year average of 88 percent; and soybeans emerged at 70 percent compared to 56 percent last week, 85 percent last year, and a 5-year average of 74 percent. In Tennessee, soybean condition was estimated at 76 percent good-to-excellent and 7 percent poor-to-very poor; soybeans planted at 81 percent compared to 73 percent last week, 75 percent last year, and a 5-year average of 77 percent; and soybeans emerged at 70 percent compared to 55 percent last week, 67 percent last year, and a 5-year average of 62 percent. Nov/Dec 2022 soybean-to- corn price ratio was 2.10 at the end of the week. New crop cash soybean prices at elevators and barge points ranged from $14.97 to $15.83. November 2022 soybean futures closed at $15.37, down 31 cents since last Friday. Downside price protection could be achieved by purchasing a $15.40 November 2022 Put Option which would cost 89 cents and set a $14.51 futures floor.
Cotton
Net sales reported by exporters were up compared to last week with net sales of 26,500 bales for the 2021/22 marketing year – a marketing year low – and 380,200 bales for the 2022/23 marketing year. Exports for the same period were down less than 1 percent compared to last week at 335,800 bales. Upland cotton export sales were 112 percent of the USDA estimated total annual exports for the 2021/22 marketing year (August 1 to July 31), compared to the previous 5-year average of 110 percent. Delta upland cotton spot price quotes for June 16 were 142.53 cents/lb (41-4-34) and 144.78 cents/lb (31-3-35). Adjusted world price (AWP) was up 6.06 cents at 140.47 cents. July 2022 cotton futures closed at 143.45 cents, down 1.61 cents since last Friday. For the week, July 2022 cotton futures traded between 142.5 and 147.5 cents. Jul/Dec and Jul/Mar cotton futures spreads were -25.16 cents and -29.3 cents.
Nationally, the Crop Progress report estimated cotton condition at 46 percent good-to-excellent and 19 percent poor-to-very poor; cotton planted at 90 percent compared to 84 percent last week, 87 percent last year, and a 5-year average of 88 percent; and cotton squaring at 14 percent compared to 11 percent last week, 12 percent last year, and a 5-year average of 15 percent. In Tennessee, cotton condition was estimated at 52 percent good-to-excellent and 21 percent poor-to-very poor; cotton planted at 97 percent compared to 94 percent last week, 97 percent last year, and a 5-year average of 97 percent; and cotton squaring at 14 percent compared to 12 percent last week, 17 percent last year, and a 5-year average of 17 percent. December 2022 cotton futures closed at 118.29 cents, down 4.07 cents since last Friday. Downside price protection could be obtained by purchasing a 119 cent December 2022 Put Option costing 10.12 cents establishing a 108.88 cent futures floor. March 2023 cotton futures closed at 114.15 cents, down 3.69 cents since last Friday.
Wheat
Wheat net sales reported by exporters were down compared to last week at 8.7 million bushels for the 2022/23 marketing year. Exports for the week were up 6 percent compared to last week at 13.6 million bushels. Wheat export sales were 23 percent of the USDA estimated total annual exports for the 2022/23 marketing year (June 1 to May 31), compared to the previous 5-year average of 26 percent. Nationally, the Crop Progress report estimated winter wheat condition at 31 percent good-to- excellent and 42 percent poor-to-very poor; winter wheat headed at 86 percent compared to 79 percent last week, 91 percent last year, and a 5-year average of 90 percent; winter wheat harvested at 10 percent compared to 5 percent last week, 4 percent last year, and a 5-year average of 12 percent; spring wheat condition at 54 percent good-to- excellent and 9 percent poor-to-very poor; spring wheat planted at 94 percent compared to 82 percent last week, 100 percent last year, and a 5-year average of 99 percent; and spring wheat emerged at 72 percent compared to 55 percent last week, 95 percent last year, and a 5-year average of 93 percent. In Tennessee, winter wheat condition was estimated at 74 percent good-to-excellent and 8 percent poor-to-very poor; winter wheat coloring at 97 percent compared to 93 percent last week, and 95 percent last year; winter wheat mature at 50 percent compared to 22 percent last week; and winter wheat harvested at 7 percent compared to 1 percent last week, 13 percent last year, and a 5- year average of 24 percent. Wheat cash prices at elevators and barge points ranged from $9.47 to $10.33. July 2022 wheat futures closed at $10.34, down 36 cents since last Friday. July 2022 wheat futures traded between $10.30 and $10.93 this week. Downside price protection could be obtained by purchasing a $10.35 July 2022 Put Option costing 21 cents establishing an $10.14 futures floor. July wheat-to-corn price ratio was 1.32. Jul/Sep and Jul/Dec future spreads were 12 and 27 cents.
September 2022 wheat futures closed at $10.46, down 38 cents since last Friday. September wheat-to-corn price ratio was 1.42. December 2022 wheat futures closed at $10.61, down 37 cents since last Friday. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee