Energy Shock Intensifies as War Escalation Keeps Markets on Edge

Expanded bombing by Iran on regional natural gas and oil pipeline infrastructure sent world crude oil and European natural gas prices much higher through the day which pulled the grains and soy complex higher. The biggest casualty in today’s trade was the equity markets as a longer timeline for conflict and higher energy prices are being priced into equities along with the possibility of a worldwide recession due to high energy prices. Although the markets remain very volatile with large volume trading, the news continues to be almost solely focused on the crude oil trade which is seeing more uncertainty with each passing day. Positioning ahead of the weekend will be key to Friday’s direction as escalation will be met with a bullish reaction while any diplomatic breakthrough sets up a massive reset for every market.

News and Notes:

- Weather remains a non-factor with some needed rain forecast for the S Plains today’s only meaningful change. Brazil’s bean harvest and corn planting are moving along at a normal long-term pace with a good mix of warm temperatures, sun, and rain.

- The daily December corn chart is on Page 2 and shows the volatile but controlled rally since the technical breakout a month ago. Every market that has a direct or indirect relationship with crude oil will see increased daily volatility, but the corn trade (producers and end users) is weighing the chances that the increased prices for nitrogen inputs will cut corn acres while also considering if sharply higher world freight rates will slow US exports. The juggling act of rewarding the corn rally by producers while being positioned for potentially higher prices has pushed the speculative long out to over 1.3 BBU which will be very overcrowded if the market turns lower.

- Cattle fell sharply today on fears that the sharp stock market losses and higher gas prices will cut into family’s food budgets and decrease beef demand. The front month contracts failed at overhead technical resistance which sets up a nervous trade ahead of Friday’s Cattle on Feed report.

- Crude oil prices jumped back over $100 a barrel again overnight before pulling back to small losses when Japan and several key European allies announced they would help with military escorts through the Straits. China, Japan, and the European Union are being most effected by the sharp rally in natty gas and crude prices. World leaders and world markets are putting political pressure on President Trump to end the war and re-open the Straits but unlike domestic policy, President Trump cannot just change his mind and immediately fix this problem. No one knows where the world economy’s point of no return is with higher energy costs, but another week with no clear plan will be a big problem.

- The weekly export report was uninspiring with bean and wheat sales while corn sales met estimates but were well below recent weeks. China has not showed up as a daily buyer of anything, which has stalled the demand optimism of the China/US trade meeting. Another piece of potentially bad demand news was rumors that the EPA’s announcement of the RIN/EVO updates would not be made at next Friday’s farmer appreciation day at the White House.

- Congratulations to all of my Nebraska friends on your university’s first NCAA tournament win. They are a fun group of guys to watch play.

As the uncertainty of the war with Iran and the clear lack of a plan for a reopening of the Straits drags along, evaluating the markets from a normal fundamental standpoint is necessary but just comparing prices to world ending stocks misses too many factors to find fair value. Other than the re-opening of the Straits, the ag uncertainty is how much will rising input and fuel prices influence this spring’s northern hemisphere planted acreage. A scenario I can envision is US planted corn acreage falls below 94 MA and that acreage not getting as robust of a fertility program as originally planned. If yield hits USDA’s trend line at 182 and the US only plants 94 MA, the corn market will be well positioned to rebound from the inevitable break when the Straits re-open. On the other hand, the US acreage switch to beans would put bean prices on a very slippery slope. Plan for the best and worst scenarios because no one clearly understands how all of this will unfold.