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Established 1988
Commodity Week is a weekly wrap-up of the CME Group grain markets with analysis and guest interviews. The program is generally recorded Thursday afternoons and posted online by 7:00 p.m. central. It airs on WILL AM580 during the 2:00 p.m. hour each Friday. Commodity Week is a production of University of Illinois Extension and Illinois Public Media. Like the daily Closing Market Report, it is hosted by University of Illinois Extension Farm Broadcaster Todd Gleason.
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The July 16 edition of Commodity Week, hosted by Todd Gleason from the National Association of Farm Broadcasting (NAFB) Summer Showcase in Kansas City, Missouri, features agricultural analysts Mike Zuzolo of GlobalCommResearch.com and Arlan Suderman of StoneX. The program delves into deep macroeconomic and geopolitical parallels between the current market environment and the 1980s, highlighting how shifts in Chinese demand and escalating global conflicts, particularly new drone-driven disruptions in the Black Sea, are altering international grain and energy trade. The panel examines the operational complexities of domestic biofuel policies, such as the 45Z tax credit and RVO programs, noting that while soybean crushing remains robust, older biomass diesel plants are facing maintenance and cash flow limitations due to delayed regulatory guidelines. Looking ahead to the fall harvest, the experts advise grain producers to carefully monitor regional basis swings, look past short-term fund-driven market volatility, and proactively manage risk by securing early pricing protections.
Panelists
- Mike Zuzolo, Global Commodity Analytics and Consulting
- Arlan Suderman, StoneX
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Announce: This is the July 16 edition of Commodity Week.
Todd Gleason: Welcome to Commodity Week. I am Todd Gleason in Kansas City, Missouri, at the NAFB this week, the National Association of Farm Broadcasting. Today, our panelists include Mike Zuzolo with GlobalCommResearch.com out of Atchison, Kansas, and Arlan Suderman from StoneX from right here in Kansas City, Missouri. Commodity Week, of course, is a production of Illinois Public Media. It is public radio for the farming world, online on-demand at willag.org.
Mike Zuzolo, GlobalCommResearch.com out of Atchison, Kansas. Thank you for joining us here in Kansas City for a National Association of Farm Broadcasting event. I knew that you and Arlan Suderman, who we will talk with in just a moment, will be up in front of all the farm broadcasters talking about the marketplace. I am sure you’ve thought deeply about what the message should be for them. What’s the bottom line, and then we’ll get into some of the specifics?
Mike Zuzolo: That’s a good way to talk about it, Todd, because there’s so much you could get wrapped up in. I think it goes back to last winter. It goes back to the idea that this is a “back to the future” type commodity market where we’re heading back into the 1980s and having to look again at the Middle East and the rough waters there, literally speaking in the Strait of Hormuz, and also looking at what’s happening in Russia and Ukraine.
China is still at the heart of the commodity markets. Right now, while we talk about and watch the European markets lead our grain markets, and we’ll watch the US weather, I think we’re going to end up coming back around to China. We’ll see what they do in terms of buying crude oil, see what they do in terms of buying US beans, and see how the trade relationship develops as President Xi comes over here to the United States for a state visit in September.
Todd Gleason: I have a question about the purchases that they have recently made. The market was just so very excited for a couple of days about that. It’s built into the fundamentals of the marketplace; it is in the supply and demand estimate report. Do those purchases, when they’re made, offer an opportunity that producers really have to think about, because they are likely to be—or have been at least the last couple of times—very short-lived rallies?
Mike Zuzolo: I think that’s the key. They have been very short-lived, and you’re 100% right. When the USDA added 30 million bushels to the soybean export number on the WASDE report, it put the burden back on China, and it put the burden back on the US demand to be there. At 136,000 tons a day periodically, you’re not going to get to 25 million metric tons for purchases per the US-China agreement made back in Busan.
My assessment has been and will continue to be: let’s not rely upon Chinese demand. Let’s rely upon investment demand, let’s rely upon higher interest rates for longer, commodity inflation, and let’s rely upon weather and supply. At the end of the day, I don’t think this is a demand-driven market for soybeans, especially unless you start talking about the bean oil side of the equation. It’s not export-led demand like corn or wheat. When it comes to the soybeans and the soybean oil, your group—the University of Illinois and Oklahoma State—did a great paper not long ago talking about how we may be able to attain the EPA’s numbers. We’ve gotten more clarification on 45Z, but can we blend that much biofuel, can we get those plants up and running, and can Europe and the major importers be able to help us with that? Those are tall orders right now. I’m inclined to think that even bean oil is at the top end of the range at this stage, so it really goes back to weather and supply for higher highs when it comes to soybeans.
Todd Gleason: Limited by simple capacity to create the bean oil in the United States, crushing capacity?
Mike Zuzolo: Crushing capacity, and one thing that I was not aware of until I did some deeper diving was the idea that you crush it and then you have to blend it into biofuel to meet the 45Z requirements, which seems to be a pretty tough order. There was a study done not long ago that also brought up the idea that biofuel demand is already taking up about 5% of fertilizer usage. That is a really interesting thing that I’m going to be looking at in more detail because we may be making it on one end, but are we going to be paying more for fertilizer prices because of this demand for biofuels?
Todd Gleason: Let’s turn around to where we started. You wanted to put into context, historically speaking, the marketplace today compared to the 1980s. Can you tell me about what you’ve been watching and what comparisons you think work best?
Mike Zuzolo: In 1985, we asked Japan to strengthen their currency because they were oversupplying the world. We’re asking, and President Trump has been asking ever since his first administration really, to do that with China. So China is the new Japan. The similarities with the 1980s are very strong there.
In 1987, the United States Navy went in and escorted ships through the Strait of Hormuz. We have a very similar relationship with Iran right now as we had in the mid-to-late 1980s. So the idea is that we probably aren’t going to get a peace deal, and it’s going to have to play out through hard conflict. Now enters the Kerch Strait, which links the Sea of Azov and the Black Sea, and now we’re back to a more 2022–2023 type scenario when it comes to the grains being like crude oil in a different strait in the Black Sea.
Macro-wise, with currencies, interest rates, and the Middle East, it’s like the 1980s. I want to draw that into my commodity analysis. When it comes to wheat and corn specifically, I want to go back to 2022–2023 and work that, and I think that’s making sense because we just hit 2024 levels in wheat, led by the European market like we did back in 2022.
Todd Gleason: Let’s stay with the currencies for a moment. There is a large difference between the 1985 period and today—Japan and China—because of the way their economies work and how the United States has dealt with both; Japan an ally, the Chinese not. The yuan, they may or may not want to make stronger. They may want to leave it devalued. The President hasn’t for the better part of eight years talked about manipulating the Chinese currency. You may be telling me that that’s in the offing in the future; I don’t know whether that’s the case. But how do you see the US administration trying to guide the Chinese in that process?
Mike Zuzolo: I think after the midterm elections, if the Republicans hold on, President Trump will resume a more offensive tack with President Xi. That would put us past the state visit as well. I am assuming that Chinese demand is going to be steady or lower unless they have weather problems because of the Godzilla El Niño. I like to joke it’s the Godzilla El Niño against the Mothra Federal Reserve interest rate markets, and whether the Fed raises rates and cuts short commodity demand buying by the investment funds.
I would just reiterate the idea that China is already buying more from Brazil; they had record imports, I think, in June for soybeans. They’re buying more from Argentina. My understanding is they’re buying more commodities right now assuming that we’re going to have higher trade frictions with the United States eventually, and also because they’re worried about the El Niño. What we see in China buying right now may be forward buying.
Todd Gleason: On inflation, interest rates in particular. The new Federal Reserve lead, Chairman Warsh, and the board appear to think that they’ll need to raise interest rates one, two, maybe three times over the rest of the year. When you look back historically in context, what does that tell you about the sameness, if there is some, between now and the 1985 period?
Mike Zuzolo: That is the hardest question to answer that you’ve probably asked me in 20 years because we are in a dog-chasing-the-tail market when it comes to currencies and interest rates. I feel like our debt load at 300% of GDP in the world right now, the highest on record, is going to come in and take our interest rates higher. But does the Fed need to get behind that or get in front of it? In other words, do they need to be cutting rates because we’re going into a global recession because this debt finally hits the marketplace?
That’s the unanswerable right now. That’s a really tough question that I can’t give a good answer on, Todd. I do think that if the dollar continues to go lower, that breeds the idea that inflation is coming back. That could, and I think maybe should, bring the funds back into the long side of commodities again.
Todd Gleason: Now come back to the wheat market with me very quickly. You oftentimes like wheat to lead in a marketplace. There’s a lot of supply around the planet. I’m wondering whether the issues that are taking place that you outlined already in the Black Sea cause a real shortage problem that has to be addressed more than in just the short term. We’ve already been through this once, and we fixed it relatively speaking.
Mike Zuzolo: That’s a great point. I think you’re going to need to see something along the lines of a Chernobyl, where you would take supply off the table that we thought we had right here, right now, today. Otherwise, I think we’re effectively rationing demand. I see it as a domino effect right now, Todd, that Paris corn is leading Paris wheat, Paris corn is leading US corn, and therefore, once the Paris corn gets done going higher, the wheat doesn’t need to go any higher unless we get new fundamentals. It is a scale-up sell-type market right now with the idea that we may be in store for a high depending on the US weather pattern as we get into early August or get to the next WASDE report.
Todd Gleason: Paris corn probably should be fairly close to the high usually under drought years. It highs before harvest and then begins to drop.
Mike Zuzolo: That’s exactly right. I think we’ve got to play that seasonal to be smart when it comes to hedging. Lock in the profit, and then you can always buy back if the August report provides some reason to do so.
Todd Gleason: Are you scale and selling in that case, both corn and soybeans as well as wheat?
Mike Zuzolo: Yes, all three did that this week as a matter of fact, and just a small 10% increment on the recommendations. But that’s where we’re headed until I see that ridge of high pressure in the United States sit on top of Des Moines, Iowa. That would make me want to stop selling for right now.
Todd Gleason: So if we get to the fall, we find a new low at some point—you tell me when you think that might come or not. But the fact of the matter is producers will still have crop to sell. How should they view that which they’re going to have either in the bin or in storage at the elevator?
Mike Zuzolo: 2010 is a good model year for what you’re describing, where we went counter-seasonally higher after the June stocks report. The July report launched us really, and we went higher into the early part of fall, and then we went sideways to lower. I could see that type of scenario because of the demand rationing function, but the uncertainty of high fertilizer prices and what that means for 2027 supplies is a factor. We may see a high, but is it the high? I think 2027 and the dollar are going to decide that between the fertilizer and the demand side.
Todd Gleason: The timing there is interesting because it’s the second crop corn which is exported out of Brazil, and that fertilizer won’t be needed really until we get to the month of January or February. So there is a lot of expectation, but a lot of nervousness through that process as well.
Mike Zuzolo: Excellent point, and obviously what we need in the fall as well. In November and December, the trade is going to have to decide what the supply-demand fundamentals for 2027 are if we are back up in fertilizer prices because of what we’re seeing in these two massive, commodity-intensive straits that are so geopolitically important and really are reminiscent of the 1980s.
Todd Gleason: I hadn’t really thought about it. Our crop comes not for another year, but the fertilizer goes on first. So that timing we sometimes talk about—well, it’s going to be a problem for South America first—that’s not really true.
Mike Zuzolo: I don’t think so. I think this is where the new East and new West come into play, where China is really working hard to improve trade, improve logistics, and infrastructure with South America in general. They’re going to continue to do that because they’ve built billions of dollars worth of supply chain infrastructure. They’re going to use it if they can.
Todd Gleason: What else are you thinking about or are you worried about that you’ll be discussing this afternoon? I do have one item that is on my list, and it does reference China because they have been investing in Brazil and South America for quite some time. I believe it is in Peru that they have a brand new port. It is operational, if I remember correctly at this point. It’s just a matter of how you get crop out of Brazil to there, and I don’t know whether they’ve built the railway just yet or not.
Mike Zuzolo: The Chancay port is breaking records, it seems to me, about every month as far as what they’re getting out. It’s a deep-water port, very sophisticated, along the lines of the Port of Los Angeles. It cuts the shipping down by two weeks because they don’t have to go to Los Angeles. The intercontinental railway you’re talking about is being worked on. It is slow going because of politics, but here again, if the Brazilians see this big export tariff that we just slapped on them this week, and they see the reason why China wants to be their main trading partner, I think you have to lean towards the expectation that they will get the job done down there to service more of China’s demand.
Todd Gleason: Thank you very much, I really appreciate it.
Mike Zuzolo: Unbelievable to see you in person as usual, Todd. Thanks so much, buddy.
Todd Gleason: It is fantastic to have you here at the NAFB event in Kansas City. Now let’s turn our attention to Arlan Suderman. He is with StoneX. Arlan, thank you for being with us. What is your plan for the NAFB peers that are in attendance today?
Arlan Suderman: I’d say change. Times are changing. You may say that’s an old message—we’ve been at that for a couple of years—but we are going through another chapter of that change right now. A big piece of that is what we’re seeing happening in the Black Sea. All the focus has been on Iran and the war with Iran. What we feared in 2022 in the Black Sea is now starting to play out. We don’t know how that’s going to play out, but it continues to escalate in a very dangerous direction, which could shut down a significant portion of wheat and also corn and oilseed exports for the world market.
The market is putting some risk premium in there at a time when we’re also looking at weather and looking at China. I think that’s the other piece of the story. We have strong domestic demand dictated for us now with the RVO program, especially for the oilseeds and biomass-based diesel production. We’re adding the possibility that we may have the world’s largest buyer of soybeans buy soybeans at a higher price from the United States for political reasons, which would cause us to run out of soybeans in the next marketing year. We don’t know if they’re going to comply, but that possibility is there. And now we throw in another $17 billion of non-soybean commodities as well. What will that be? It has added a lot of intrigue to the demand side of the ledger at a time when world trade is being disrupted.
Todd Gleason: Let’s start with the Black Sea. I’m wondering whether you think there is very much difference between 2022 and today. Mostly, I’m thinking about the logistics of moving a crop that is in the middle of a war zone. We’ve already accommodated that once. How hard would it be to accommodate Russia not being available as a participant in the global market?
Arlan Suderman: In 2022, prices skyrocketed because of the fear that we could shut down trade of all energy and ag commodities coming out of the Black Sea. Russia quickly established that they were going to be able to export their crude oil and product, and also their wheat, through there. Ukraine, though, faced limitations, with threats to their export ability. Ukraine quickly got creative and sent a lot overland into Europe. That greatly angered farmers in Europe; there was quite a commotion at the time. Then they created some new sea shipping lanes that allowed them to continue to ship, and they did impressive things in maintaining exports. Prices just went back as if there was no problem whatsoever, and we became immune to it for a while.
The differences now are that Russia’s exports are at risk because Ukraine has far greater capability with its new drone technology it has developed, which is really pretty impressive. Additionally, Europe’s farmers are prepared this time around for the risk overland and may be quicker to respond to block those shipments. Russia appears to be doing more to directly attack the ports, which—I don’t care if you have safe sea lanes—if you can’t load ships, is still a problem. I think everybody learned from 2022, and they redid their strategy based on that to make it more difficult this time around.
Todd Gleason: Drones are in play, and they are in play both with the new sea lanes, which go along the western edge of the Black Sea to ports that are further down along the Black Sea, not even in Ukraine frankly. And then, of course, drones are how the Ukrainians are attacking in the Sea of Azov and impacting their ability to move grain and crude oil there. So the question remains: is this a 2022-kind of problem for wheat, because that was one high-priced market?
Arlan Suderman: It was. If you look at the time the war broke out, Russia and Ukraine accounted for 33% of the world’s exports. Now it’s about 29% or 30%. So not quite as much, but that is still a significant amount in a world that had gotten used to just-in-time supplies once again. Let alone Ukraine being the fourth largest corn exporter in the world at a time when Brazil has really ramped up its corn-based ethanol production, meaning it is more limited on what it can export. That means more opportunities for US corn exports as we go forward into the coming year.
Todd Gleason: Now turn your attention to the United States. We have the Phase One agreement…
Arlan Suderman: The Phase One agreement, they complied at about a 60% level. That would be about 15 million metric tons of soybeans and about $10 billion of other ag commodities if they did that. The agreement last fall for 12 million metric tons of soybeans had 100% compliance. Where will it be this time? As I do the math, it looks to me like the USDA has penciled in about 16 million metric tons of soybeans. So the balance sheet works with that. If they buy more than 16 million metric tons, that starts to tighten up the balance sheet and becomes bullish. If they do less, then it becomes bearish. It could go either way there. The potential is certainly there for something significant. What we hear on the ground in China is that the government wants to have at least 15 million metric tons booked by December 31st as a show of good faith. That’s probably because Xi and Trump are scheduled to meet I think three more times this calendar year. He has to show good faith that he’s doing that.
What about after that? If Trump loses Congress in the elections, maybe they don’t have to buy anymore. If he holds onto Congress, then maybe they have to buy the other 10 million metric tons. The bottom line is, it’s going to be quite a few months before we know what the impact is going to be on the balance sheet as far as soybeans. But they do have to show progress on the 17 billion as well. They’ve been kicking the tires on soft wheat, some hard red spring wheat, and on some corn. Will they make actual purchases? That’s not really accounted for in the balance sheet, which could put some fire into those markets as well if they start doing some significant amounts.
Todd Gleason: Now let’s turn your attention to—I won’t say the elephant in the room, maybe a gorilla—which is the RVOs, 45Z. The Trump administration has been really pretty active in this area. However, it’s not until November, as they announced this week, that we’ll know very much more. That’s pretty typical on the timing; both the 45Z and the RVO would be due about that same time as well. So it’s a wait-and-see kind of game. Plus, capacity in the United States is kind of running close to, well, not 100%, but 90% or something thereabouts.
Arlan Suderman: Two components to that. One is the soybean crush for developing the oil, and they’re running strong because they have financial incentives to run strong right now. They’re pushing as hard as they can, so I see a little more upside in old crop soybean crush and even the new crop as well. But that oil has to go into fuel production. Those plants haven’t run—they need to run over 90%, and they have never run at that level. They’re having trouble doing that, running into some maintenance problems. Some of the older biodiesel plants are struggling and having more maintenance problems and aren’t able to get capacity up where they need it. Part of it is financial as well. You mentioned until November, 45Z payments aren’t coming yet because the final regs aren’t finished yet. These plants, particularly the older ones with higher cash flow needs, aren’t getting the payments. Therefore, they can’t cash flow pushing as hard as they’d like to push. We’re having trouble getting production of biomass diesel as high as it needs to be to meet the RVO requirement, and that’s putting upward pressure on the RIN market to try to make things work.
Todd Gleason: Are the ethanol producers in the same boat as it relates to the available cash from 45Z?
Arlan Suderman: I’d say the ethanol producers are less dependent on it, and they’re more established financially, so they’re running pretty strong at this point. It has been surprising on ethanol, though, with ethanol priced at $1.40 less than gasoline, why we haven’t seen higher blending levels than what we are seeing. We expected to see more of a jump in blending that we’re not seeing, and that’s been a little bit of a mystery.
Todd Gleason: Let’s take you through pricing. Old crop corn and soybeans. Soybeans—if there are any left—corn certainly there are, particularly in this part of the world, the western part of the United States apparently. Producers have how long to think about marketing that, because it’s running out of time really quickly, and the question is, to some extent, will the futures prices maintain the level they are at? Even if they move higher, will basis break and how quickly does that all happen?
Arlan Suderman: The futures market is now increasingly becoming focused just on new crop fundamentals. If the weather continues to support a trend or higher yield potential, then the funds in the futures markets are saying there’s no reason to hold prices at these levels. Then it comes down to the basis market, and at what point do end users say, “Okay, I’ve got enough,” or, “I’m just going to give up and do maintenance until new crop becomes available”? The purchasing window for that is closing quickly. There’s not a lot of old crop soybeans left, probably more corn left. Processors have a lot of their soybean needs met. Those who don’t are starting to struggle to find what they need, as even a lot of the commercials have already given up the soybeans that they need. We could have some hot basis opportunities in the soybean market, it just depends on where you’re at relative to the processors in your area and whether that’s going to be an opportunity there. Monitor that closely. Otherwise, the focus is primarily going on new crop. Now, the Ukraine situation, the Black Sea situation, is going to add some intrigue there and possible volatility if it generates enough interest from the funds to make a run. We saw on June 30th that right now, the funds are looking for an excuse to be bullish on these commodities. Whether you justify it with supply and demand fundamentals sometimes doesn’t matter in the short run. They showed their hand—even rallying soybeans at a time when we got bearish numbers for soybeans on June 30th—they wanted to own it. They’re looking through that filtered lens right now. How long that lasts is always a guessing game.
Todd Gleason: What’s your best advice for producers on that first 40% that they probably want to market, try to market, prior to the time that they get to harvest?
Arlan Suderman: Push the pencil. Know what’s going to help make sure you’re in business a year from now. These are volatile times. I’m much more friendly now than what I was six months ago, and certainly more than a year ago. But that doesn’t mean we can throw risk management aside, particularly on those early bushels. If you can lock in some security on those, it gives you a little bit more freedom to play with the rest of the bushels.
Todd Gleason: Thank you very much.
Arlan Suderman: Thank you.
Todd Gleason: Arlan Suderman, of course, is with StoneX. Mike Zuzolo is with GlobalCommResearch.com. I talked with both of them at the National Association of Farm Broadcasters event, the summer showcase in Kansas City. You’ve been listening to Commodity Week from Illinois Public Media. It is public radio for the farming world, online on-demand at willag.org. I’m University of Illinois Extension’s Todd Gleason.