- The world is not running out of wheat. I can't stress that enough, despite all the headlines to the contrary.
- OPEC+ will continue to extend production cuts, particularly with the next round of US elections on the horizon.
- The lower close by US stock indexes was not a case of the economy collapsing, but rather a simple seasonal move.
When we turned the calendar page from August to September late last week, a number of things changed: The Northern Hemisphere moved from meteorological summer to fall while south of the equator moved from winter to spring meaning the next planting season is just around the corner. The mindset here in the US also switched from growing season to harvest, despite the fact combines were already running in some areas. Some things that didn’t change, though, were tired news stories that either didn’t warrant much discussion in the first place or have been proven irrelevant for months on end.
Let’s start with the Bloomberg piece from this past weekend that had the headline, “Australia Trims Wheat Crop Estimate, Curbing Global Supplies”. The next time tightening global wheat supplies is mentioned, I’d like to put my head through one of the cinder block walls here in the basement office. The world is not running out of wheat. In fact, based on what we see in the market, it is safe to say supplies are more than abundant at this time. The reality is those writing the stories and headlines have no idea how to read markets, and then fail to ask those who do.
Chicago SRW is the most heavily traded wheat futures market in the world, and therefore we can use what we see in that market to understand global supply and demand. It has been well documented the recent CME averaging period for its Variable Storage Rate program finished with the September-December (ZWZ23) future spread averaging 90% full carry. Over the course of a month. This means the CME’s maximum storage rate increases to 8 cents per bushel per month on September 19. For the record, the December-March spread has been above 100% full carry as well while the March-May is greater than 90%. At the same time, US national average basis was pushing $1.00 under December futures until late last week. I will type this slowly so everyone can understand: Nothing about the situation is fundamentally bullish.
The second story that gets discussed far too much is airtime is OPEC+ production cuts. We saw the latest headlines come out early Tuesday morning stating, “Oil jumps as Saudi Arabia and Russia extend supply cuts to end-2023”. Is anyone surprised by this? Anyone? Bueller? I didn’t think so. I know the hue and cry of, “But crude oil is rallying Tuesday!” My response? So what. Both crude oil markets have been building a long-term uptrend since this past May and finally posted a new 4-month high in late August. Meanwhile, the market’s forward curve has been inverted (in backwardation) for as long as I can remember.
The market has seen a number of contra-seasonal moves during 2023, telling us there is something different about supply and demand. OPEC+ has held to a series of production cuts for months while the market moved lower, but now the headline is supposedly driving the market higher. If we are seeing a shift in fundamentals it is likely coming from a handing of the baton from domestic gasoline demand to global distillates (diesel fuel, jet fuel, heating oil, etc.). This is the time of year when distillates (HOV23) tend to rally, and everything we hear is airlines are jam-packed with folks booking travel. Back on the crude oil side of the ledger, there is a strong likelihood the US Department of Energy is quietly buying barrels to restock the Strategic Petroleum Reserve.
The third tired story is US stock markets closing lower at the end of August. The Chicken Littles of the industry were all running around squawking about how the sky was falling for much of the month, when in reality is nothing more than a general seasonal tendency. We can look at the 5-year index, 10-year index, 20-year index, or 30-year index and the result is the same: The S&P 500 ($INX) tends to move lower from the second week close of August through the last weekly close of September.
Is the US economy collapsing because of this seasonal move? Despite what some in Washington, D.C. have tried to tell us over the years, US stock indexes are not the economy. Most of the data economists like to talk about has been relatively bullish for a number of months, if not more than a year at this point. Yet the most popular “analysis” is that looking for cracks that might not mean anything when all is said and done. Including making too much of a seasonal move in the indexes.
Will things change? No. Much of media these days has to do with click-bait rather than pieces that mean anything. Why? Two reasons: There is too much time and space to fill every day and all that matters is views. Understanding what markets are actually saying doesn’t matter. Or maybe it never did.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
