July 21, 2022
A couple weeks ago, I wrote about how commodity prices might be officially looking to take a pause on the 2022 bull run. In the last sentence of that article, I wrote that my “bullish” horns had been retracted, and my “bearish” claws were coming out.
Now if you know me, you know that I’m by nature more of an optimistic person. And while I’d love to write this week’s blog about how the heat could affect yield, giving us fewer odds of a record large U.S. crop from the United States, and how that alone could keep prices supported, I won’t.
I would be doing you all a disservice to not discuss the other half of the fundamental story, which is global demand, and how it could potentially be declining.
In the coming months, global demand for commodities will not stop, but it may slow a bit, just enough to offset the potentially smaller U.S. crop. If this happens, the lower supply story would be “offset” by a lower demand story, ultimately keeping ending stocks unchanged -- or maybe even potentially slightly larger.
Hear me out. There are two primary factors that I’m watching for the rest of July that have the hairs on the back of my neck standing up. One is China, and the other is higher interest rates.
This week China has touted that they are expecting a record corn crop and a record soybean crop. Remember, China grows nearly one-quarter of the global corn crop, and everything they grow they use. Only recently have they had to rely on imports of U.S. and Black Sea region corn to fill their gap. If they do have a record crop, it could be suggested that they will need to import slightly less corn from the U.S. and the Black Sea region than in years past.
According to the USDA, in 2020/21 China imported a total of 29.51 mmt of corn. In 2021/22, China imported 23 mmt of corn. Now looking ahead to the 2022/23 season, it is expected that China will import just 18 mmt of corn. My hunch is that if China truly does have a record corn crop, we will likely see that import number decline in the upcoming USDA reports.
In addition, China has nearly 17 percent of their population still under some sort of Covid lockdown. So that means that nearly 238 million people are consuming less good than they potentially may have otherwise.
Less Chinese imports may mean that the USDA will also reduce the expected amount of corn and soybeans that U.S. farmers could export. We could see that on the August 12 USDA report. Less demand for U.S. grain exports would help offset any potential less production that U.S. growers could face due to this hot summer growing season.
The other factor I’m watching closely is the interest rate hikes happening not only in the United States but around the world in an effort to tame inflation.
As you already know, during the June Fed meeting, interest rates were increased. It is largely expected that the Fed may continue to increase interest rates very rapidly in the coming months. The next Fed meeting is coming up next week, July 26 and July 27. Including the latest rate hike, the Fed has already lifted rates by 1.5 percentage points this year, putting its benchmark interest rate at a range of 1.5% to 1.75%.
If the Fed raises interest rates next week, that alone could trigger more fund selling. Higher interest rates and further recession talk may keep demand for commodities and agricultural commodities in check as trade assumes that commodity demand will fall as businesses may not need to purchase as many raw commodities (based on the assumption that the consumer will not be interested or able to afford to purchase the end product).
And now just recently it was announced that Ford would be laying off nearly 8,000 workers. That is 8,000 workers out of jobs that may be forced to buy fewer goods and products in the coming months. This could also weigh on commodity demand.
As I wrote two weeks ago, I’m also still watching that Goldman Sachs Commodity Index. This index is important because it measures the value of 24 different commodities, all into one index number. The metric is a mix of precious metals, energies, grains, livestock, and softs (i.e., cotton, sugar, coffee and cocoa).
During the month of June, this index posted a bearish key reversal on monthly charts. This can be viewed as a potential topping signal. To me that says that says for now, commodity markets may have likely topped.
Unfortunately, this may be one of those times when commodity prices bow to the pressure of negative outside market influence, and notions of potentially smaller demand rather than the potentially lower supply of grain growing in some parts of the United States due to the extreme heat.
For grain farmers, this can be nerve-wracking as they witness the crops in their field wither from flash drought concerns and the reality of high grain prices slipping away. Please make time today to think about where your current cash sales are, how much grain you have forward contracted, and consider potentially protecting the value on any remaining unpriced bushels of grain. Also think about that 2023 crop, too.
There were many stars that perfectly aligned that sent grain and commodity prices higher in 2021 and early 2022. Unfortunately, those stars may not be perfectly aligned any longer.
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. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. 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.
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