Market Commentary

Don't think about elephants...

Wed, 20 Apr 2022 20:16:01 GMT

Don't think about elephants...

In the same way, the media controls our thoughts, and decides where we focus our attention. Many of us are going to enjoy Easter weekend without a hint of covid crossing our minds. Why? Because we are focused on the Russian-Ukraine war, inflation, and radical gender ideology in classrooms. We know by now that we are pawns in a game, but no one knows the rules or the score. That is why I believe the greatest challenge we currently face is not the threat of new covid variants, or global war, but the ability to distinguish reality from fantasy, and truth from lies.

I came across the following quote in a book that I am reading: “I have a foreboding of an America in my children's or grandchildren's time -- when the United States is a service and information economy; when nearly all the manufacturing industries have slipped away to other countries; when awesome technological powers are in the hands of a very few, and no one representing the public interest can even grasp the issues; when the people have lost the ability to set their own agendas or knowledgeably question those in authority; when, clutching our crystals and nervously consulting our horoscopes, our critical faculties in decline, unable to distinguish between what feels good and what's true, we slide, almost without noticing, back into superstition and darkness.” - Carl Sagan, The Demon-Haunted World: Science as a Candle in the Dark.

When I realized astronomer Carl Sagan wrote that quote in 1995, unbidden chills prickled across my back. Juicy conspiracy theories and eye-popping headlines are designed to reduce our capacity to reason what is going on in the world and inhibit our ability think for ourselves. Therefore, we outsource our thinking to others and allow their narratives to control our thoughts and actions. Whether the narrative comes from FOX news, CNN, or even your well-to-do neighbor, it can change the way we behave. I know that I am guilty of it. For example: just a few weeks ago, President Biden mentioned two words that should have been on his “You cannot say this on tv” list - food shortage. The rational side of my brain knows that the likelihood of a food shortage in America is low, but the recent narrative and fear-based side of my brain led me to double down on groceries. Now there are canned foods in our linen closet – green bean casserole for Easter anyone?

Contrary to the current trajectory of this blog, my purpose is not to suggest “the end is near,” but instead I wish to call attention to where you focus your attention. We cannot control the markets or inflation, but we can control our trading, thoughts, and our narratives. We decide whether we “clutch our crystals and consult our horoscopes” or lean on God and think about the good in our lives.

Understanding Inflation & Its Affects Commodity Prices

Tue, 22 Mar 2022 16:33:13 GMT

Understanding Inflation & Its Affects Commodity Prices

When the pandemic hit America in 2020, we quickly realized that the economy was in grave danger of collapsing. The Federal Reserve successfully intervened by providing an unprecedented amount of financial aid. While it was necessary to keep the economy humming amid global shutdowns, the money they “created” came at a cost, in the form of inflation.

Initially, inflation wasn’t a major concern. This is largely because inflation isn’t necessarily caused by the total amount of money in the system, but by the velocity or turnover over of the money supply. With national shutdowns, record high unemployment, and travel restrictions, the money injected into the economy wasn’t given the chance to “turnover.” That is, until COVID restrictions began easing, and life started to return to normal. Now, restriction-weary Americans are returning to work, reopening businesses, attending events, and swiping their credit cards with gusto during a time when supply chains are still recovering from pandemic-induced low inventory levels. Other factors, including rising labor costs, shipping disruptions and general abuse of the current situation dramatically increased the cost of goods and services.

Economists did not have to wait for the Superbowl to see something exciting – the main event arrived February 10th with confirmation from the US Bureau of Labor Statistics that the Consumer Price Index (CPI) was up 7.5% for the 12 months ending January 2022 - the highest since February 1982. As our country’s monetary authority, the Federal Reserve is responsible for keeping inflation within permissible limits, and after the recent inflationary data, most would argue they are not doing a very good job. Despite widespread call to immediate action, Fed officials made it clear that while they are poised to begin lifting rates in March and not before, the initial increase may be smaller than what investors expect. The Fed is also planning to purchase an additional $30 billion in US treasuries and mortgage-backed securities. The Fed’s "easy money" policies are undoubtedly contributing to inflation.

With unemployed at 4% and dramatically reduced COVID restrictions, it seems as though the next logical step is to scale back on the policies contributing to inflation and restore integrity to the purchasing power of the US Dollar (not the US dollar index).

So, how will the inevitable shift from easy money policies affect commodities prices? Historically, there is an inverse relationship between commodity prices and interest rates: when interest rates increase, commodity prices decrease and vice versa. This is largely because when rates increase the cost of carry, inventories rise, and consumers tend to buy raw materials on an as-needed basis rather than stockpiling due to the higher cost of financing. However, there is no guarantee this occurs; the commodity market’s reaction will vary and be heavily dependent upon whether prices rise because of inflationary pressures, or underlying supply and demand fundamentals.

The relationship between US interest rates and the US dollar further complicates the outlook. Typically, less accommodative monetary policy eventually causes a higher yield for dollars compared to other currencies in the world; this leads to dollar appreciation. As the world’s reserve currency and the benchmark pricing mechanism for most commodities, US dollar appreciation can cause the price of many commodities to trade lower, particularly goods like cotton that are widely traded on the global market.

Interest rates currently remain at historically low levels and the US dollar index is trading sideways in the middle of previous two years trading range. Posting a close above the January high of 97.30 (green arrow) may lead to an upside breakout, which could weigh on commodity prices.

Moving forward, listen to the price action. If the Fed’s statements switch from a dovish to a hawkish stance on monetary policy and the dollar increases in value compared to other currencies, watch for how certain commodity markets react. If they begin to lose upside momentum or trade lower, then it’s likely some of the price premium was inflationary. Conversely, if they trade higher than the underlying fundamentals are longer-term supportive, and the price action should be respected.

Inflation? Stagflation?

Tue, 22 Mar 2022 14:30:46 GMT

Inflation? Stagflation?

I’m not sure about you, but I feel like I have aged 84 years in the past three weeks. It’s a good thing I am blonde, or my greys would be showing. The Russia-Ukraine war caused parabolic movement across a range of commodities, and the volatility in the marketplace is wearing everybody thin.

Commodities aren’t a great first-date topic, but they are certainly “in vogue” right now. While the invasion affected nearly all commodities, wheat was the poster child. In previous years, Ukraine and Russia accounted for nearly one-third of the world’s total wheat exports. Therefore, a sharp price move higher was expected. The “take no prisoners” move into new all-time highs, however, was not (fig. A).

Thanks to lightning-fast technology, there is very little that goes unnoticed in the trading community. Naturally, it wasn’t long before Joe Blow in his mom’s basement knew the trading symbol for wheat. In just nine trading days, wheat rallied over $4.40/bu. Say a pray for the poor souls that were caught short in the wheat market or trapped in the spreads; a lot of emotional and financial damage has undoubtedly occurred.

Another hot commodity is crude oil. NYMEX Light Crude Oil futures skyrocketed to the highest level since 2008 (fig. B). The EU relies on Russia for 40% of its gas consumption, which is used for heating homes and powering businesses. Unlike the US, which can replace absent Russian gas with supply from our closest neighbors, Mexico and Canada, Europe doesn’t have a Plan B.

So far, western leaders are treating the energy calamity with caution. While they have effectively vaporized the Russian economy with a barrage of sanctions, they deliberately spared Russian energy companies from worse penalties, such as kicking them out of the global messaging service SWIFT.

As you can see in the charts, crude oil and wheat are well off their highs. It will likely take another week to reveal whether the primary trends are reversing from up to down, or if the next move is non-trending. Either way, significant buying climaxes are set and the price action that typically follows is either consolidation or corrective rebounds.

Absent of full de-escalation of the war or dramatically increasing US oil production, trend reversals in the energy complex would be very concerning. It could indicate that the marketplace is sensing economic turmoil. After all, there are some mumblings that the energy debacle could lead to stagflation like it did in the 1970’s. Stagflation was a term coined in the 1960’s by UK politician Iain Macleod. It occurs when inflation soars, and economic growth slows. This is a buzz word you will likely hear in the coming months. It is reassuring for now that the US economy is not stagnating, and oil prices are not collapsing. While there is inflation, steps are being taking to reduce it.

Russian-Ukraine War & the Corn Market

Fri, 18 Mar 2022 16:03:05 GMT

Russian-Ukraine War & the Corn Market

So, there are a lot of numbers flying around in the daily news wires surrounding Russia and Ukraine's affect on the global corn and wheat market. The values are quoted in million metric tons, billion bushels, million bushels and sometimes percentages. I work with numbers every day and even I find it difficult to keep everything straight. So, I’ll attempt to give the gist of the situation and leave the numbers out.

Ukraine only accounts for 3.5% of total world corn production, but they export 80% of what they produce! Combined, Russia and Ukraine are projected to account for roughly 18% of total world corn exports and 29% of global wheat exports.

The issue is that Ukraine cannot export any commodities right now because they rely on the Black Sea to do so, and the Black Sea is well, out-of-commission. This puts a lot of countries in a bind because they rely on Ukraine for food. Major corn importing countries, particularly in the Middle East and North Africa, are reducing how much corn they are using and relying on existing stocks; however, they can only do that for so long. Therefore, they must rely on the US and South America for supplies. This is largely because Brazil, Argentina, Ukraine, and the US are projected to account for 85% of global exports.

The trouble is that while Brazil and Argentina’s new crop supplies are forecast to be record-high in their marketing year, their corn supplies will not be available to the world market for another few months. So, as the world’s largest and residual supplier of corn, the US can fill the gap until South American exports are fully online; however, it comes at a cost. According to the International Grains Council, US corn export prices are record high (figure below from USDA FAS).

The Russian-Ukraine situation compounded the rally in prices from last year. On the heels of ravenous Chinese demand and reduced available supplies in Brazil, the front-month corn futures market reached a high of $7.4625/bu. in April 2021 before correcting $2+/bu. lower in the fall. Then, the Russian-Ukraine war and massive speculation fueled prices higher. On March 4th, the corn market came within $0.60/bu. of the all-time highs posted in August 2012.

The previous two years of bullish inputs, extreme uncertainties, and black swan events ensure that this coming crop year will be unlike any other. Domestically, we’re dealing with a tightening carryover, high input costs, and stiff competition for acres. Globally, South America is fighting drought, and Ukraine’s prospects for an exportable corn supply is ominous.

Moving forward, the potential for significantly higher prices will come more from the global picture, rather than domestic. Brazil, Argentina, Ukraine, and the US typically account for 85% to 87% of global corn exports. Combined ending stocks for the 2021/22 marketing year are expected to be the tightest since 2012/13 at 1.86 billion bushels (fig. 6). This is a problem because demand for global imports is nearly double what they were in 2012/13. This leaves very little room for production shortfalls.

Brazil’s safrinha corn crop is almost totally planted, and La Nina remains a major concern in South America. Unlike last year, however, conditions appear to be much better. Rains are seemingly consistent, and more is on the way. Brazil's government said that the country's fertilizer stocks should last until October, although shortages associated with the Russia-Ukraine situation may present problems. Brazil imports most of its fertilizer products from Russia, China, Morocco, and Canada.

Depending on who you ask, Ukraine is planning to plant their corn crop on time. Yet, no one really knows if they have the resources to do so. Conflicting reports are making it difficult to pinpoint whether we can expect Ukraine to meet global corn needs

Hedging and its Psychological Toll

Mon, 14 Mar 2022 16:21:24 GMT

Hedging and its Psychological Toll

I had a wise analyst tell me that “profitable farming is 35% farming, 65% marketing, and that hope is NOT a marketing strategy.”

Your job as a farmer is to raise the very best crop possible and sell it. However, deciding when, where, and how to market or sell your crop, like so many things, is much easier said than done. Hedgers and speculators alike can easily be moved to sell by news, emotion, or the fact that they’ve made a lot of money at current prices.

Everyone wants to sell 100% of their production at the market’s all-time high, but aside from making a deal with the devil himself, or sheer luck, the likelihood this occurs year-after-year is slim to none.

Tip #1 - Try to average in the upper third of the available price range over time.

Your goal should be to average in the upper third of the available price range over time. This means that sometimes you’re selling into rallies and other times you’re selling into declines. Regardless of when you decide to sell, it’s likely there will be a psychological toll.

Tip #2 - Be Patient and Maintain Your Position

Often, the hardest part of marketing is being patient and maintaining your position after you’ve made the decision to sell. Most farmers know how incredibly difficult it can be to price X% of your production on Monday morning, only to check it later in the day to see corn prices are up another 10 cents/bu.

Tip #3 - Ignore Coffee Talk

It’s tough to hear your neighbor crow about being unhedged and able to capture the $0.30 rise in prices, while you’re stuck making margin calls every day. Not knowing whether you made the right decision is mentally taxing and can turn a good marketing plan into a mess.

Moving Forward

That’s why moving forward, I plan to add something of value to this section of the blog each month. I legally cannot and will not make marketing recommendations, but I can explain the marketing tools available to you and how to properly apply them. My goal is to make you feel more secure in the marketing decisions you make for yourself and your operation.