It’s no secret that commodity prices remain elevated from year ago levels. Last November, the December 2021 corn futures contract was trading near $4/bushel. Today it is near $5.60. One year ago, December 2021 Chicago wheat was trading near $6.20/bushel, with current prices near $8. November 2021 soybeans one year ago traded near $10.25/bushel, with current prices near $12. December 2021 cattle futures were near $117.00 last year with current prices near $132. And the December 2021 crude oil futures were near $44/barrel versus the $81 we see today.

In recent weeks, many commodity futures prices continue to hover near recent high prices as traders monitor various headlines of supply, demand and inflation.

A perfect storm for grain commodities

For grain commodities, the rally over the past year was due to an influx of export demand coupled lower than expected U.S. supplies last fall. The rally continued into early spring and summer as suddenly the world was facing potentially lower supplies of global grains due to intense heat in the United States and Canada, which nipped production of spring wheat, canola, and robbed some corn fields of full yield potential.

Ending stocks in the United States thus became tight for many grain and oilseed commodities due to the above combination.

Fundamentally speaking, grain prices heading into 2022 are on the verge of soaring higher or sliding lower with price outlook heavily dependent on the upcoming growing season in South America. Traders will scrutinize every weather forecast. Any prolonged hot and dry spell for Brazil or Argentina could provide a $1 rally on soybean futures and a 50-cent rally on corn futures.

Traders will not just be watching weather, but also the battle for acres that is continuing to unfold for spring planted acres in the northern hemisphere. This battle for acres may likely assist to keep grain prices firm for months to come.

Energy commodity prices have doubled in one year

Switching to energy markets. The yearlong price rally is twofold. Demand for energy as the world emerges from the Covid-19 aftermath has been strong, and lower production. Here in the United States, our current administration is intentionally production less oil, and the combination of lower supplies and higher demand has doubled oil prices in one year.

$80 crude oil has been trading for six weeks. What once was a “resistance point” on technical charts is now strong “support creating firmer footing for a possible additional attempt for a new price leap higher.  How much higher can crude oil trade?

At first there was talk of $100 crude oil futures. From 2011 through 2014, crude oil prices hovered near $100/barrel so technically speaking $100 crude oil seems like a likely target. With lower supplies and stronger demand, I agree. However, add into this discussion inflationary talk, and the price objective quickly turns to talk of $120 crude oil futures by summer of 2022.

Is inflation just beginning?

Inflation talk is on nearly every morning cable news tv show. In addition, the economies of the world are being scrutinized, and the value of the U.S. dollar continues to be monitored. The Chinese economy is of concern; is Evergrande failing or not?

One day the world is coming out of the Covid-19 crisis, and the next there is a new eruption of positive cases somewhere in the world which puts fear into the market.

The ports are backed up, there are not enough truckers or containers, and consumer demand and spending ahead of the holidays is beginning.

Some economists are suggesting that Americans are now spending up to 15% more on goods than before the pandemic. A combination of increased wages, working at home during the pandemic which lead to home improvement projects and a new interest for ways to enjoy recreation between boating, RV-ing, camping, at home gyms spurred demand for many products. That demand as you know met with snagged worker efforts due to Covid-19 protocols and “just in time” purchasing buzzword jargon flew out the window with “bottle neck” and “supply chain disruption” the new industry catchphrases. The increased costs of doing business has been passed onto the consumer.

The numbers don’t lie

The reality of inflation hit the market on Wednesday this week. U.S. CPI data showed inflation at its highest level in three decades. The Labor Department's report showed that in the 12 months through October the consumer price index increased 6.2%, the largest year-on-year advance since November 1990! NOW you have the trader’s attention. Inflation is here, and it does not seem to be fading.

In my opinion this CPI news was like seeing the green flag waved at the Daytona racetrack with traders putting the acceleration on the “buy commodities” button.

Watch the fund money come into commodities in the weeks and months ahead. This fund money commodity buying spree that is likely to occur is going increase values of commodity futures, as fund traders both attempt to hedge against inflation, and puff up portfolio values.

It’s already beginning. Precious metal prices have been surging recently as traders fear inflation is here to stay, and cash is recently being thrust into precious metals as gold is widely viewed as an inflation hedge.

Watch the money flow

When one looks at global factors supply and demand factors, coupled with inflationary fears, the above looks like a hot mess. Recently the uncertainty of these factors had been keeping many commodity prices in a holding pattern for months as investors watched from the sidelines intrigued, but also perplexed as to where there they would find the best return on investments. Is this all about to change?

The stock market continues to rally, but can it continue? Is there a bubble waiting to burst somewhere here in the United States or is the bubble about to burst in China? What does history have to remind us about this topic?

In late 2007 and into 2008, money flow into commodities was astonishing. Trading commodities was sexy, inviting, promising, and seemed like a “no brainer” for both seasoned and novice investors. The U.S. housing bubble had burst, Chinese economy was hot, and the value of the U.S. Dollar was trending lower.

I have a feeling that same type of euphoric commodity fund buying interest may be front and center for the remainder of 2021 and the start of 2022.

My concern and point of contentions are 1) what happens if fund buying due to inflation is coupled with a true fundamental reason for a commodity rally; say a drought in South America during January as their corn and soybean crop are growing. Or 2) what happens if this fund buying due to inflation clashes with a bullish January USDA report, should the USDA share that old crop ending stocks for corn are smaller than what has been previously accounted for.

My concern quickly turns to nausea as I then remember the “new position rules” for commodity trading that the industry was focused on last spring. Remember that? The new rules will allow for roughly double the number of contracts that speculators can hold in "spot," or front-month, contracts while also raising the limits for positions held in all contract months combined.

Wow. More fund money and more contracts available to trade. I’ll let you catch your breath as you digest that. The potential price swings and market volatility ahead for commodities may only just beginning.

Reach Naomi Blohm: 800-334-9779, Twitter: @naomiblohm, and [email protected].

Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.

The opinions of the author are not necessarily those of Farm Futures or Farm Progress.