After a three-month absence for unexpected health reasons, this writer is back seeing a whole new commodity world! Grain and oilseed prices surged in the interim, the livestock markets appear to be following suit, while energy has reclaimed much of the ground lost following the onset of the pandemic and the travel industry’s collapse.
The pandemic is not over and a new regime in Washington comes with a continuing bias against trade. From a commodity perspective, the biggest change is a 3.1 per cent projected stocks/use ratio for soybeans and 10.6 per cent for corn. This means, as we’ve already seen in the past few weeks, that prices will continue to be extremely volatile (and options extremely expensive!) until stocks get re-built.
Hang on, it’s going to be a wild ride.
Grain and oilseed markets surged, swooned briefly and are rallying again, while energy markets, sugar, and the loonie took another leg up.
> Grains: Grain and oilseed prices rallied in December and January on strong Chinese demand, very little inventory in Brazil, expanding drought in the U.S., dry weather in Brazil and Argentina, and record high long positions, especially in corn, by spec funds. Then it rained in South America!
> Corn: July corn had already rallied from $3.45 to $5 when USDA’s January report dropped average 2020 yields by nearly five bu./acre, dropping projected stocks and the stocks/use ratio. Prices ran to $5.40, but the rain took them to $4.90 support, back to $5.10 currently. All in nine days!
Chinese demand is spurred by expansion of the hog herd following ASF. New facilities use commercial feed, replacing “back yard” facilities that fed table scraps, drawing down China’s corn inventories that are now being replaced. The question is how much, how fast.
We suggested covering above $3.50, then $3.63 on December. If you took profits or rolled forward, remain covered above $4.90 barring major topping action around $5.40. If you have no position, cover above $5.40.
> Wheat: Wheat stocks are much higher than corn and beans (39 per cent in the U.S.), but falling and Chicago prices benefitted from rallies in the other products as well as from Russia’s export tax. Prices are capped by good winter weather in Russia and Ukraine. U.S. exports are barely above last year. Australia has a huge crop and EU prospects look good at this early date.
July rallied from $4.96 to $6.70 before dropping to $6.33 currently.
We suggested covering above $5.80 on Dec. If you rolled that, we would look for topping action around $6.70, but be covered above it.
> Soy oil: Since May, July bean oil rallied from $0.264 to $0.421 before falling back to the current $0.417. The rally is, in part, sympathy with the rest of the complex, driven by crude oil, a result of strong demand after the first stage of the COVID-19 pandemic and difficulty harvesting palm oil because of COVID-19-infected workers in Malaysia and Indonesia.
We suggested buyers be covered, and still do. In particular, be covered above the $0.421 resistance area.
> Sugar: Sugar’s rally is modest compared to grains and oilseeds. After COVID knocked it back from $0.14 to $0.105 in May, July moved to $0.15 before the current $.146. The rally was sparked by a short crop in Thailand, dry weather in Brazil and funds taking net long positions. Brazil’s recent rains curbed some of the enthusiasm.
We suggested that buyers be covered against the rally. We would be covered now above $0.15 resistance.
> Natural gas: NG has been the most stable commodity among those we discuss, trading between $2.40 and $3.01 on the July contract, with some short-term volatility mainly resulting from air temperature and weather events and their effect on heating demand.
The incoming administration clearly favours climate protection. Many industries are developing plans to move to or toward net zero emission targets designed to reduce demand over time. Simultaneously, there is a move to limit federal gas and oil leases, thereby reducing the supply side.
The net effect of these moves is likely to put upward pressure on price. We would be covered above $3. Alternatively, as we argued for several months when NG prices were at or below $2, it makes sense to hedge or contract as much as possible for as long as possible if prices fall to this range. We strongly suggest hedging or forward contracting if prices drop back to this range.
> Crude oil: Since early November, four factors have combined to cause Brent crude prices to rally from $36.80 to a recent high of $55.88 on the March contract. The four factors are: OPEC has tightened supply; a recovery of demand, especially in China; rapid development of vaccines; and the possibility of a large U.S. stimulus that would also aid demand.
If all four factors continue to come together effectively, we would expect pries to move at least to the 62 per cent retracement at $59.25.
We would protect above the high of $55.88 or, if the market moves back to $54, we would forward contract or hedge a large portion of any unpriced requirements.
> Canadian dollar: After the COVID-19 pandemic hit, the U.S. dollar steadily declined against the loonie. One suspects this was related to the unpredictable behaviour of the former President. Subsequently, the market is weighing the prospect of another $1.9 trillion stimulation against the U.S.’ ability to pay, and finding the U.S. wanting. So, the loonie isn’t rising; the $US is falling. From a Canadian perspective, it keeps commodity prices down in our own currency.
We still like protection against a decline in the loonie. We suggested $0.75 / $0.775’s would likely be appropriate now.
Volatile commodity prices will continue.
Market Trends is prepared by Dr. Larry Martin, [email protected] or 519-841-1698, who offers a course on managing risk with futures and options. For more information visit agrifoodtraining.com
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