TOP FARMER WEEKLY PERSPECTIVE 8/19/2022 BY BRYAN DOHERTY
Don’t Expect a Repeat of Last Year
If one studies markets closely, especially row crop and price movement, history suggests these commodities are considered margin businesses. That is, the price received for producers spends much time hovering at or near the cost of production. Some years offer gains and other years losses. On occasion, big gains and losses occur, however, these are mostly exceptions. The saying “high prices cure high prices and low prices cure low prices” has validity, in that farmers have the ability to shift in and out of production, and end users have the ability to react to under or over-priced commodities. Since the pandemic, U.S. grain and oilseed markets, much like the rest of the world, have had to deal with many variables. Yet, as we edge back to “normal,” prospects for a price rally of last year’s magnitude are slipping.
Let’s first look at what was moving prices higher over the last two years. Namely, a significant price advance in the energy complex followed by the war in Ukraine brought money into commodities. Supply disruptions (fertilizer) and a weather-related shortened soybean crop in Brazil also helped prices advance to their highest level in over a decade. Now, as the harvest for 2022 approaches for the Northern Hemisphere, concern that inflation will slow world economic growth has many concerned that a return to bull markets in not likely. Price rallies will occur, however, an alignment of the stars to keep both end users and speculator buying at higher prices is not the most likely path for prices. A year ago, U.S. consumers were coming out of the pandemic with an estimated additional two trillion dollars in savings – basically, dollars not spent during lockdowns. Inflation, government spending, and slowing economies (China) will likely have market participants more willing to sell price advances. Expectations that adequate U.S. crops and increases in Southern Hemisphere production in the year ahead will also keep bullish enthusiasm in check. There is less concern today about grain movement out of Ukraine than at any time over the last seven months.
This year’s crop is still in need of good weather to finish. Bottom line: it is not in the bin yet. To anticipate a major drawdown in production could be a mistake. Though we are not stating that prices cannot or will not rally, we are simply suggesting that price rallies are likely to be limited in scope. Yet, if supply shortages were to occur or the war prohibits grain flow to the world, the price picture may look much different. As producers, use price advances to incrementally sell ahead. Consider purchasing puts if you intend to store grains. Strive for a balanced approach among cash sales, price floors for unpriced grain, and longer-term fixed-risk re-ownership strategies. Talk to a professional about the tools that can help you prepare for any scenario, and understand the risks and rewards of the tools.
If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.