Diesel Hits Another Record, Inflation Is BACK

0:00morning guys it's Thursday, September 10th, 524 a.m. Central time. Green markets are mixed to higher this morning. December corn futures up three and a quarter at 531. November soybeans up six and a quarter at 1315 and three quarters. December Chicago wheat up a half cent at 729 and a quarter. December cans of city wheat down to an quarter at 804. December spring wheat up one and a half at 749 and a half. The crude oil market is off to the races again. Why don't we start there? So Brent crude jumped 3.4% to rise above $100 per barrel yesterday settling at its highest level since late May while WTI gained 3.3% to close just above $96 per barrel. The increase in prices is resulting in higher fuel costs for US consumers. Starting to triple A the national average for regular gasoline reached 422 per gallon

1:00Wednesday while diesel climbed to a record 594 diesel as we all know touches nearly every part of the supply chain adding to already elevated inflationary pressures refinery outages in Russia and reduced refining activity elsewhere around the world are exacerbating the situation. All right, here's a nice little chart of Brent crude that AP printed yesterday and it just kind of tells you, hey, here's the reasoning for the crude price spikes over the years. This is Brent crude. We tend to track WTI here in the US. Your spot month WTI futures trading 9730. That's the October contract. That's the highest level for a spot month contract since mid May. So we're into like some three and a half month highs here. Crude oil is not really the problem. Diesel is the problem and actually the triple A national average rose to $598 as of early this morning. And the people in the know say that this number than the national average on highway diesel price, it will hit $6 per gallon before the end of the week.

2:00So this is all very inflationary in nature. Let's look a little bit more closely at diesel and kind of what's going on here. This is a chart of US refiner in blender net production of distillate fuel oil. This is US diesel production. We've actually been fairly steady. We're off like 8% in terms of US diesel production. We peaked in 2017. We backed off a little bit. But we are running at 98% of capacity. We're producing all of the diesel that we can here in the United States. The problem is overseas right now. Russia may be the biggest problem, depending on who you ask. Drone strikes knocked out 40% of Russian refining capacity, forcing Russia to enact a total diesel export ban. That's a big deal. The straight of four moves and Iran, of course, is a big deal. China has been hoarding some diesel the way that it sounds. That has not been helpful at all. We've got a CPI print coming out tomorrow that's consumer inflation. It's going to be 3.4%. That's what the traders are looking for.

3:01That's the annualized change versus the same month last year. That doesn't really take into account the new element of inflation that we've seen here just in the last couple of weeks. As Mackenzie mentioned, diesel touches everything in the supply chain. This is ultimately very inflationary and what is Trump's answer to this. We're going to give everybody $5,000. Trump promised last night a $5,000 dividend to US citizens if Republicans win the midterms. That sounds like a bribe to me. I don't have in the comments they're going to say I'm a liberal today. It'll be I'm a conservative tomorrow. In any case, I just don't know that that's the fix. The problem that we have right now is supply side inflation. We can't get the diesel out of Russia and out of the Middle East. Now you want to add demand side inflation to it by giving everybody $5,000. I don't know if that's the right course of action, but that's why I'm on YouTube and

4:01not in the White House necessarily. What is this done for grain prices? Well, grain and oil seed prices are not keeping up with rising energy prices at all. ULSD futures. That's ultra low-salt for diesel. The closest thing we trade on the board to off-road diesel, up 123 percent since the start of the year. Crude oil futures up 68 percent versus the start of the year. So I mean futures up only 24 percent. Corn futures up only 14 percent. I think that part of the reason we talked about this yesterday, part of the reason large speculators are long, the row crop markets and the oil seed markets, the complex, it's such a drastic way. A lot of it has to do with the US crop and supply and demand. You look at the case of corn in particular, the balance sheets have been tightening for years in the case of global corn balance sheets. But fundamentals aside, supply and demand aside, there's an element of inflation trade in here for sure. There are absolutely funds who are buying commodities just because they see increase inflation on the horizon.

5:02What's the Fed going to do? I don't know. Some people think rate hikes are a good idea. Other people think rate hikes won't open the straight of Hormuz and result in more diesel flows. There is a seasonal, as it relates to diesel usage, but when regular gasoline, we're kind of exiting driving season right now. But diesel usage actually increases a little bit when you get into fall because of what you guys do because of harvest activity. So I don't know if this thing comes down anytime soon without some sort of resolution overseas. Wheat features tumbled yesterday with the December Chicago wheat contract falling roughly 18 cents to settle near 729 per bushel. Well December Kansas City wheat dropped about 13 cents to close around 806 per bushel. The sell off occurred despite ongoing strikes between Russia and Ukraine, which have nearly halted black sea grain shipments. Corn and soybean futures also finished lower as traders positioned ahead of tomorrow's USDA report. December corn fell about 6 cents to close near 528 per bushel. Well, November soybeans lost nearly 7 cents to settle around 1310 per bushel.

6:04So the wheat market hasn't really acted that great as of late despite ongoing conflict. There were more overnight airstrikes in the black sea and wheat futures trade mixed this morning. Under this December SRW contract, you've got trend support called about 684 today and that feels like a long ways away, but it's really not. You could go down and test that and we could still be in bull market territory. It is interesting and actually a little surprising to me that the wheat market is not acting better amid the situation in the black sea. Corn futures in the business, we call this pre-report position squaring. I don't know if there's any reason necessarily that the market is backed off a little bit the last few days. We've been down for I think five consecutive days. If the report tomorrow, we're going to get to it in a second. If it's bearish, I think that 509 gap is perhaps a stopping point, gaps matter because everybody watches them. 549 and 3 quarters was the high from last week. That's certainly in play. Maybe beyond that, if the report is bullish, relative to expectations. Noibans just kind of treading water here very much sideways, same things, kind of pre-report

7:07position squaring. I think the trend support, if you look at that yellow line, I've got there's about 1277 today. Same thing that would feel like a long ways away, but you could go down to 1277 and keep this bull market intact certainly. So as I just mentioned, USDA will release its monthly crop production and WASD report tomorrow at 11 central time. Traders expect the USDA to make a notable cut to its corn yield and production estimates, soybean yield and production estimates are also forecast to be reduced, but only modestly on the balance sheet. New crop US corn ending stocks are expected to decline significantly, while soybean stocks are projected to decline more modestly and wheat stocks are slated to edge higher. The global outlook is similar with corn ending stocks forecast to see a substantial drop, soybeans and more modest decline and wheat a slight increase. All right. So the big ticket items on this report are the corn yield number number one and then probably the soybean yield number number two. I'd say at this point, if I had to guess, the trade is fairly accurate in terms of what

8:08the market is trading. I think we're trading something around 178. If I had to guess, I'd say south of 177, probably friendly, north of 180 is bearish in this report. That's the way I'm looking at it. There are other things in the report that matter. There's demand statistics. What if USDA messes with? Gosh, you know, it's acreage, feed and residual usage, new crop export. I mean, there's all sorts of different things they could be messed with, but the yield numbers will be the first things traded by the algorithms and then it'll all sort itself out after that. World ending stocks expected to decline a little bit in corn, a little bit in soybeans and actually rise just a little bit in wheat. And these are just projections for a marketing year that just started 10 days ago. So don't get too worked up about them. This corn number for new crop, what could be projected a 1.528 billion bush of carry out. That's a number that corresponds with generally speaking what we've got going on in terms of

9:08prices right now. Spot corn, north of $5, probably could be as high as 5.2550 if that's a realized carry out number, but that's far from reality. There are some holes beginning to emerge in the demand base. Sales aren't great. Ethanol production margins have slipped. Feed and residual is just a fudge number and USDA can do whatever it wants with that. So don't get too held up on the carry out projection, but the yield number I think, even though it's not reality, it's of course an educated guess. But that's going to be what the trade trades for the most part tomorrow. If you guys have not checked out our premium content, you sure need to do so. Joe King tell our viewers about some of this week's premium videos. Matt, it was on yesterday for a fantastic 20 questions segment in our 20 questions mail bag videos. We take questions from our premium subscribers mostly about grain marketing. Joe, here's my situation. What should I do? We had one question come in about a what I would call very dangerous hedge strategy and we let off the show with that because I wanted to make sure that nobody went bankrupt.

10:09We talked about option strategies. We talked about the USDA report. A lot of like regional specific stuff. Hey, I'm in South Dakota. Hey, I'm in Ohio. You know, here's my situation. Always great stuff with Matt. Pete Meyer was on. We talked about the funds. We talked about diesel. We talked about inflation, all sorts of stuff earlier this week. In today's premium video, I'm going to talk about some pre-report risk management strategies for corn soybean and wheat growers. What I'm going to kind of do is mirror what used to be like a phone call between me and my customers when I was in the brokerage business. I'm going to talk about some option strategies and some like kind of short term hedge ideas, which is typically not my favorite thing. But I think there's a lot of risk in every direction up down in sideways ahead of Friday's report. If you want to see the premium stuff, go to standard grain.com. You can sign up this morning. This is a $50 per month subscription. You can cancel it any time. There's no other fee, no other obligation, no, but to try to sell you anything else. If you are the decision maker in your farm operation, you've got to buy this because your neighbor is and he's watching this stuff and he's making decisions based off of it

11:11regarding things like crop insurance and policy and estate planning. He's going to be ahead of the ballgame. So give that deal shout this morning, guys. So Vicon reduced his 2627 Russian wheat export outlook yesterday. The consulting group estimates the seasons wheat exports at 41.4 million metric tons down 7.2% from its prior estimate. Russia's total grain exports are projected at 49.4 million metric tons down 8.2%. The cuts come as it appears. There is no light at the end of the tunnel for the Russia Ukraine conflict, which has disrupted grain shipments through both the Black Sea and the Sea of Azav. According to Sovicon, the shipping disruptions could become a bigger shock to the wheat market than what we saw in the first half of 2022. The key difference is that back in 2022, only Ukrainian ports were blocked, whereas now shipments from both key exporters are being disrupted. I had some really good top 10 exporter charts in the email this morning that I neglected to throw into the podcast. So premium subs, you guys do have those. I believe USDA is at 46 million.

12:12And so Vicon's at 41. And even 41, given what's going on now, sounds maybe a little bit high to me. That's probably a number that could come down in the future. So again, I am slightly puzzled that the wheat market's not acting better. And we've risen quite a bit. And markets need to correct. And maybe we're just kind of waiting on data, waiting on Friday, waiting on CPI, who knows, waiting on something from the Fed. But it feels like we could be acting just a little bit better to me. Ukrainian grain export challenges are creating opportunities for other suppliers. Argentina's corn exports are expected to reach a record 10 million metric tons in August in September, up from the typical 3 million metric tons as buyer seek alternatives to disrupted Ukrainian supplies. Meanwhile, drought and extreme heat have damaged Europe's corn crop, pushing EU imports to an expected 25 million metric tons up from 19.3 last year. Ukraine typically supplies about half of those imports, but with Black Sea shipments disrupted and alternative land routes to costly US corn is filling the gap.

13:14US corn accounted for more than two fifths of EU imports in July and August. If Black Sea disruptions persist, the US could supply even more of Europe's corn demand. I'm not seeing much in terms of new crop corn sales to Europe on the books to the EU at least. They're not even in the top five in terms of export sales. They're actually off like 65% versus where they were a year ago. Maybe that picks up or maybe we've just gotten a little bit too expensive here. But if they want the corn, I guess they could come to the United States. Wheat export sales, Mexico's been number one, Philippines number two, Japan number three, Korea, and then Taiwan. Despite the Black Sea, we're off 31% year over year in terms of wheat export sales, with updated numbers from USDA today. USDA reported multiple flash sales yesterday with US exporters selling seven million bushels of corn to Mexico for delivery during the current marketing year. Exporters also sold 12 million bushels of beans to China and four million bushels of beans to unknown destinations for delivery during the current marketing year.

14:15More beans to China based on what we know officially China has hit 35.3% of the 25 million metric ton commitment that the White House says that they made. They're now at 8.8 million metric tons for the now current marketing year out of the 25. That's based on last week's export sales report plus every flash sale that we've seen since. Now some people seem to believe, and then they may be right, that this number is closer to 50% reality. You can take a whole bunch of the sales that were for unknown destinations. At least half of those are going to China. Maybe there's some stuff that's not officially yet. This number could be 12, 13 million metric tons at this point, which is very positive. China officially even not including the flash sale stuff has been the top buyer of US soybeans for the now current marketing year at 7.7. But again, that number in reality is quite a bit higher. What did cattle the yesterday? Cattle futures were mostly higher. Life cattle were buck 18 lower to 25 cents higher. Featers meanwhile saw gains ranging from 38 cents up to a buck 23.

15:16Stock markets recovering just slightly. I'm having a call to recover. We're just fractionally higher. Treasuries off just a little bit crude oil. And it's up $1.03 in the October WTI at 97.10 last trade into some three and a half month highs. Have a great day guys. Back on Friday.