A few years ago I saw a PowerPoint presentation titled, “The Keys to Global Commodity Prices.” There were five bullet points on the slide all starting with the letter C: China / Corn / Cash / Capacity / Consolidation.
I did not think much of this at the time as the trade was oversupplied and rather boring. But I certainly cannot say the same thing anymore! Over the past few months and with greater intensity over the past few weeks, many of these key C factors have been driving the market.
CHINA – Recent ‘commands’ – and they are exactly that – from the central government to Chinese entities, particularly state-owned entities, warned of the consequences for speculating in the commodities markets. Translated, that means ‘you better not be long…or else!’ Initially, some saw this as more relevant for metals like copper, but increasingly, we see the impact on the Ag markets too. Remember, all commodities are intertwined via Index Products traded in the U.S. derivatives markets.
CORN – The recent forecast change brought cooler and wetter weather into some areas of the Midwest that desperately needed it, thus lessening the concerns over U.S. production and yield. Therefore, a tight supply projection has suddenly, in some analysts’ eyes, become much less so. Now the question, “where are all those acres the USDA was supposed to find at the end of June?”
Moving further south, the Brazilian corn crop is done, and whether it is a 95 MMT (Million Metric Ton) crop or, more likely, a weather-impacted 82 MMT crop, the ‘story’ has apparently become stale among speculators. While this ‘story’ is far from over in our eyes, speculators and the media apparently want a new focus.
CASH – The driver on the way up, based on the macro inflation expectations, was the inflow of investment money into the ag futures markets. Now, with potential changes to U.S. bio-energy policies, changes to the U.S. weather forecast, and talk of a more hawkish Federal Reserve that might raise interest rates by maybe 0.50% in late 2023, everyone seems positioned to want to sell everything, or at least talk about it. Today, with equities at all-time highs and the inflation story running rampant, one would think investors might move more financial asset allocation over to commodities, including Agriculture - right?
CAPACITY – While the U.S. markets have, over the past few years, dealt with export capacity limitations during key periods – soybean harvest, for example – the recent evolution of import capacity limitations in China, as barley, wheat, corn, sorghum (milo), and soybeans all compete for discharge capacity, has caused issues. Talk in the U.S. that China might not execute all the old crop corn purchases – by private market bears and, apparently, by USDA officials – has been seemingly supported by the recent slowing pace of Chinese executions.
We see this more as evidence of the lack of vessels at competitive prices – supported by the inability of the Egyptian buying agency to get offers of more than three vessels of freight for a very routine voyage from the Black Sea in late August.
CONSOLIDATION – As noted above, the lack of available freight, and the resulting increase in global ocean freight rates, has impacted some FOB markets. For example, the recently high corn derivatives price and very rich ocean freight rates has limited, to a degree, the shipments of corn from Argentina and, as importantly, offset some of the ‘gains’ importers expected from lower futures markets.
This disruption is not due to a lack of demand or a surplus of supply overall, but from a short-term phenomenon brought on by the longer-term loss of vessel capacity. It takes a lot longer to build a vessel than to grow a crop of corn or wheat, so the reality of higher ocean freight rates is likely here to stay – unless one anticipates another pandemic or other disruption(s) that causes trade to collapse.
I always try and take a macroeconomic look at the commodity ag space so that I can keep things simple and in perspective. Protect profits, have a systematic approach to your marketing plan, get a trusted advisor, but not a ‘guru’ -- and enjoy the rest of the growing season!
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