If you can get the inflation versus deflation trade right, it will go a long way toward understanding how all markets could move.

The commodity and consumer price inflation of the past few years started in 2020, with COVID-19 inducing food hoarding. That was followed by the 2021 drought across the Prairies.

Then there were the impacts of war, and its associated trade sanctions, in a major food, energy, fertilizer and mining region.

It would take one or two events with similar impact to push prices back up, since commodity prices have been drifting lower since last summer.

The broad-based Bloomberg Commodity Index, which encompasses energy prices from diesel to natural gas, food from grain and meat to sugar, as well as metal industrial prices, has been in a downtrend since last spring.

Energy costs that underlie almost all economic and social activity are changing as crude oil, diesel and gasoline prices continue to drop. As of this writing, oil was trading around US$65 per barrel.

Could that drop to $60 or $50? Of course it could. As always, never say never when it comes to the markets.

Turning to grains, over the past half century we’ve had about a dozen significant grain price spikes. In every case, with one exception during the 2008 commodity super-cycle, prices fell back to where they started. 

While there has been a series of positive announcements from agriculture and the energy industry, recent global policy in energy, food, trade and environment suggests the momentum for crop prices is going the other way.

For example, at one point there were seven new renewable diesel facilities in Canada under construction or proposed over the next five years. That would have increased potential canola crush demand by 50 per cent, or almost six million tonnes.

Grain food processors have also announced canola crush expansions or new facilities across the Prairies. I’ve read that crush production capacity is growing even faster in the U.S.

At the same time, one of those Canadian companies has now shelved its renewable fuel project. It’s unclear if more will follow.

In Germany, government is considering a phase out of biofuels produced from food or animal feed crops by 2030. The EU has already announced it will ban soy and palm oil use in biofuel production this year due to food security and deforestation concerns.

Likewise, the soybean sector was disappointed by a recent U.S. Environmental Protection Agency renewable fuel proposal, which put proposed soybean crush projects into question.

As a result, the relative value of soybean oil compared to soybeans, as well as soybean crush profit margins, dropped.

U.S. law changes state that Canadian biodiesel producers who once received a blending credit for selling fuel into the U.S. will no longer be eligible for the new producer’s credit. That will only be available for American-based production, including heavily subsidized U.S. biodiesel and renewable diesel exported into Canada.

With all this going on, keep in mind that cheaper crude oil prices could change the economics and enthusiasm for all those renewable fuel alternatives.

The growth of grain processing and food manufacturing will continue, but there will always be supply and demand bumps along the way. And, as we’ve seen in the past, the cure for high prices is high prices, and downtrends can last for a long time.

When canola and other grain prices are high, you don’t want to bank on those numbers staying up there forever.

With canola futures falling below the important C$800 per tonne level and Minneapolis wheat futures breaking below the important US$9 per bushel support level, attention needs to be paid.

Bottom line, I hope I’m wrong, but history doesn’t paint a pretty picture of what grain prices could look like going forward. For producers, the risk is always lower prices.

We won’t know the trajectory markets will take, so take advantage of flexible grain option hedging strategies. They can help capture farm revenue opportunities, manage downside risk and sleep better at night.       

The post What goes up… appeared first on Manitoba Co-operator.

Not necessarily, but it often works that way in the markets and in specific situations in the stock market.

Last year was a very weak year for global equities, so what will stock markets do in 2023? Will they bounce back given the big drop last year? Or will it be another down year with existing trends drifting lower as rising interest rates and high inflation take their toll? Maybe stocks go nowhere as the economy and investors work through all the issues facing the markets.

If we use history as a guide, we can at least see how markets reacted in the past and provide glimpses into the future. The first question is what typically happens the year after a big drop. How many times have markets fallen for two consecutive years?

Going back to the 1960s, the S&P 500 has fallen two years in a row only three times; once during the 1973 oil embargo and then twice following the 2000 dot com bust. Going back to the 1950s, the Toronto Stock Exchange Composite has recorded two consecutive years of negative returns four times.

In the few years that the S&P 500 declined 20 per cent or more, it gained in the next calendar year every time, with an average 27 per cent increase. Likewise, when the Canadian market had a big drop, it was up on average 12 per cent in the following year.

As we can see, it is rare for markets to fall for two years in a row and it often bounces back after a big drop. Trading history suggests 2023 should look better than 2022.

Political history also indicates that stock markets are set for a stronger 2023. In year three of the four-year presidential election cycle, as we are entering in 2023, the S&P 500 has increased about 80 per cent of the time with an average return of nearly 15 per cent. This makes sense, since presidents will focus on boosting the economy to help get re-elected. As a result, stocks tend to do well.

Each year equities will be affected by different things that have little to do with presidential politics but, combined with the fact that markets tend to rebound after a big down year, 2023 could be a good year for stocks. However, certain stocks and sectors will do better than others. Which ones?

It is often said that part of the market’s job is to surprise as many people as possible. And often a sector that has significantly over- or under-performed in prior years will go in the opposite direction in the following year or two, and vice versa.

Last year, only the energy sector was notably higher. Actually, energy shares have been the top performer for two years in a row. Meanwhile real estate, technology and consumer discretionary companies providing non-essential goods and services like appliances, cars, entertainment and luxury items, were down around 30 per cent last year.

Could we see a flip-flop in 2023 where these trends are reversed? Crude oil has been in a downtrend for about eight months and natural gas for six months. Maybe those weak physical commodity prices will start to infect energy company share values.

On a similar note, we have been inundated with negative news about the technology sector so perhaps those stocks will bounce back in 2023. In fact, technology indices are already up 13 per cent as of mid-February.

Likewise, real estate assets often go down when interest rates go up. Last year real estate stock indices were down 25 per cent in Canada and almost 30 per cent in the U.S. With this big drop last year, some of the traditional higher cash flowing real estate investments such as equities, REITs and their bonds are now paying six, seven and eight percent, or more, while you wait for capital appreciation.

Defensive sectors like utilities, health care and consumer staple companies that provide the necessity items we need every day, held up well last year. Could they be ignored this year as money moves into other more beaten-down sectors?

Bottom line, it is rare for markets to fall for two years in a row but each year equities will be affected by different factors. Markets tend to rebound after a big down year and combined with the strong third year of the presidential political cycle, history suggests 2023 could be a good year for stocks.

Remember though, history is a guide, not a guarantee and we could be surprised by what the marketplace delivers this year.

The post Where are markets moving? appeared first on Manitoba Co-operator.

You can start 30 years ago with the Asian currency crisis, Russian debt default and Long-Term Capital Management hedge fund collapse in the late 1990s as examples of explosive events in financial markets.

Then, as we entered the new millennium, the dotcom bubble that had been building for more than five years finally popped, with many technology companies going bankrupt. (Remember Pets.com and its famous sock puppet mascot? That’s OK, neither does anyone else.)

The overall tech heavy NASDAQ Index dropped 80 per cent in the following few years. Most major stock markets around the world dropped in half.

After a painful hangover lasting several years, fast money and leverage eventually found a new place to party: the housing market. At the same time, a broad commodity bubble was brewing. Investment money rushed in to bid oil up to US$140 a barrel, soybeans to $16 a bushel and copper to $4 per pound. All these markets eventually fell back to earth when the 2008 mortgage lending bubble exploded.

After another lengthy hangover, the party moved to techno raves lasting more than five years, from around 2015 to 2021, with bitcoin and other crypto currency revelers staying way beyond closing time.

Bitcoin started at pennies, moved higher to almost $70,000 and eventually dropped back to the $20,000 level we are at today. Interspersed between these crypto parties was a huge pot party with marijuana stocks taking off as countries around the world loosened regulations.

When the lights came on, reality set in and things didn’t look as good as everyone wanted to believe.

These are all classic patterns of a price surge followed by the inevitable collapse. So, are commodities undergoing a similar bubble today with air now slowly leaking out?

For grains in particular, the recent bout of volatility started with the initial COVID collapse and subsequent surge in 2020, the drought in 2021, and finally the Russian invasion of Ukraine in 2022. With inflation now forcing interest rates higher around the world, are the wild times in commodities and other assets coming to an end?

While there are signs we are experiencing asset bubbles, it’s harder to know when those bubbles will end. It is equally hard to tell how low and for how long prices will go afterwards.

So, is it possible grain prices will fall back to where they were from 2015 to 2020? During that time, canola traded in the $500 range, wheat futures were mostly around $5 per bushel, corn was near $3.50 and soybean futures fluctuated around $10 a bushel.

Or with high inflation worldwide and tightened global food supplies, have we reached a new higher plateau for commodity prices, as happened following the inflationary 1970s?

As we saw earlier, three separate, unique and low probability events caused grain prices to rise this time: pandemic, drought and war. It would require at least one or maybe two events like these to push prices back up substantially.

While unlikely, never say never when it comes to the markets. However, history suggests financial gravity will continue to keep grain prices in check.

Regardless of what happens, we should at least think about trends in both directions and be prepared for either, just in case.

With this in mind, markets have passed through a three-year period of high volatility, levels not seen since the 2008 global market meltdown. And a question on most farmers’ minds is what are farm-related commodities going to do?

I like looking at longer-term charts to help tell the story. Most commodity prices tend to rise and fall together, meaning input costs like fertilizer and energy like diesel and natural gas are now drifting lower, as are many crop prices around the world. And to take the analysis a step further, it’s also the margin between revenues and expense, or inputs and outputs that ultimately rule the day.

Keep a close eye on the interplay between metal prices, energy feedstock and inputs compared to crop prices.

Bottom line, the medium-term commodity price uptrends peaked last summer and have been drifting lower since. Will another leg higher develop? Or will prices continue lower?

Since farmers’ risk is to the downside, that’s the direction we need to focus our marketing and hedging strategies. While we all want to see canola above $20 and wheat at $13 or $14 again, hope is not a strategy.

Low prices hurt more than high prices feel good and remember, you have to feed a bull every day, but a bear can hibernate for a long time.

The post When markets burst, it’s never pretty appeared first on Manitoba Co-operator.

They have been around as long as humans, markets and trade have been around. They are all just another way of trying to figure out what the heck is going on. The study of price behaviour over different time periods can help because some patterns do recur. And while it is true that history doesn’t always repeat itself, it often does rhyme.

If long-term market prices are just made up of a series of short and medium-term activity, then getting a sense of what happens over various time frames gives us a clearer picture of where we’ve been and where we might be going.

In the long run, commodity grain prices tend to gravitate toward the lowest cost, most efficient group of producers. But in the short and medium terms, a lot can and will happen to throw prices all over the place. Since history is a guide, not a guarantee, consider this a guide to what grain prices have done, as well as provide some insight and understanding into what they may do over the next several months and years.

[RELATED] Prairie cash wheat: Bids drop with U.S. futures

It is often said that the cure for high prices is … high prices. Following a global disruption caused by war, coordinated government energy or interest rate policy change, or major financial bubble, commodity prices can undergo a dramatic shift higher for months or up to a year or more. As they reach previously unthinkable levels, collective global resources, human ingenuity and profit seeking behaviour are marshalled to deliver that commodity at those high prices. And voila! You have the cure for high prices.

A great example occurred in the early days of the Russia-Ukraine war when European natural gas prices surged dramatically to all-time highs. More recently, however, there were 30 backlogged liquefied natural gas floating storage tankers circling terminals in Spain. There are also potentially dozens more, just waiting to unload their liquid gold since plants are already at maximum capacity. Dutch natural gas futures are now down 70 per cent from their highs in August.

Grain prices were similarly influenced by the panic-induced buying last spring following the Russian invasion, but have since been drifting lower. And while prices may not go back down to the levels of a few years ago, there is still more ground that could be given back.

As for the medium term, we’ve often seen commodities stay in a wide price range for three-to-five-year periods. This can be because of minimum demand requirements, consumer behaviour, available supply capacity, productive infrastructure constraints and government policies.

Canola, corn, wheat and soybean prices were essentially trading in a tight range for five years until the drought last year and then the Russian invasion this year. Canola traded between $400 and $550 per tonne from 2015 until 2020. During that same time, spring wheat futures traded narrowly above US$5/bushel but rarely more than $6.

In fact, we’ve seen this similar pattern numerous times over the past few decades. Will we be entering a new sideway range for grain prices over the next several years? History suggests yes, but history doesn’t always repeat itself.

[RELATED] StatCan data show smaller Canadian canola, durum production

Over the longer term, technological changes, consumer spending habits, social preferences, evolving scientific breakthroughs, environmental and energy policies and buildup of excess production capacity can all combine to sustain a new defined level of commodity prices that can last decades.

It happened following the inflationary and geopolitical triggers of the 1970s that gave way to a new range of prices that lasted more than 30 years. Looking back at history, the impact of the 1972 Soviet grain robbery and high inflation of the 1970s marked a historic turning point in global commodity prices.

Wheat, corn and soybeans, as well as most other commodity prices, never returned to the low levels of the early 1970s – ever. Just as the inflationary 1970s ushered in a new level of higher grain and commodity prices, will the impact of recent droughts, the Russian invasion of Ukraine, pandemic induced food hoarding, low grain inventories and now renewed global inflationary pressures bring about the next step up in the long-term staircase of rising global prices?

Has the world changed so much that we have established a new and possibly higher range of potential prices? Will $700 per tonne be the new floor for canola futures? Or US$8/bu. for wheat futures, $5 corn and $12 soybeans?

Are we entering the next level of grain pricing just like the last time we had major inflation in the 1970s? Are we going back to the future for commodity prices?

Bottom line, will continued high grain prices still be the cure needed to ultimately bring down food inflation? Maybe we are in a very wide and volatile range for agriculture crop prices for the next several years? Or could this just be the beginning of a new long-term pricing environment where the highs of the previous 15 years become floor price levels of support going forward?

There are a lot of questions and not all of them have answers at this time. Since no one knows for sure where prices are going, farm marketing plans with built-in adaptability, including flexible options and futures hedging tools, can help your business thrive in a world full of strange economic behaviour.

The post Watching patterns of grain pricing appeared first on Manitoba Co-operator.

The 1929 crash that precipitated the Great Depression, Black Monday in 1987 when the Dow Jones dropped close to 25 per cent in one day, as well as the worst month of the 2008 mortgage bubble and financial crisis all happened in October.

While October can be volatile, historically it has often marked the bottom and turnaround of a down trend. Seasonal analysis makes note of the classic stock market pattern of strength from fall to spring, or roughly October to May, resulting in the famous saying “buy when it snows and sell when it goes.”

As I write in the middle of October, this current bear market takes on even more significance. How will history repeat itself this year?

Since 1928, there have been 28 bear markets lasting nine and a half months on average and giving up about 35 per cent, on average. This current bear market has already been going on for 10 months in a year greatly influenced by the continuation of war in Ukraine with its impact on commodity supplies, higher consumer prices and rising inflation, all leading to higher interest rates around the world.

[RELATED] Competition Bureau to probe soaring food prices

As a result, the S&P 500 U.S. stock market index is now down almost 25 per cent.

Given markets are a forward-looking machine, what could a potential turnaround look like? Over the last 70 years, after U.S. stocks drop 20 per cent or more, it took on average 19 months to recover. But the deeper the bear market, the longer it usually takes to get back to where it was. Some recoveries have taken as much as four, five or almost six years.

If we are in a typical bear market, it could take up to a year and a half to two years to reach new highs after we hit the bottom. However, history is a guide, not a guarantee and rising interest rates can make for a different investing environment.

Long-term analysis shows that even during the last eight rate rising cycles since 1970, which have lasted on average about two and a half years, the broad-based U.S. stock market still moved up on average around seven per cent during those tightening phases.

Furthermore, even six months to a year after an initial rate increase, U.S. stocks have still moved up around five per cent. Based on past trading patterns, rising interest rates may not have as much of an impact as we fear.

[RELATED] Smaller interest rate hike signals ‘the end of the front loading’

At the same time, concerns of recession continue to build. So, with all this in mind, will the stock market downturn continue? Have we reached a bottom? Could it ultimately take one, two or three years to recover?

Let’s take a look at how long and how high the subsequent bull markets usually go. While so many economic, social and political factors like the levels of interest rates, changing technology and wars will all affect the performance of stocks, history provides some interesting insights.

After a bear market, when stocks are finally ready for their next move higher, bull markets have lasted five years on average but can be as short as two years or as long as 11 years. During those bull runs, the average annual return has been about 21 per cent but has ranged between 14 and 36 per cent annualized.

Once again, history is a guide, not a guarantee and every bear market is different. This one has seen a very dramatic and quick increase in interest rates, making for the fastest rate rise in history, the highest inflation in 40 years, along with a major war between Russia and Ukraine.

All this makes for some unique dynamics from a historical perspective. Assets have gotten cheap, and may get cheaper, but good long-term solid investment opportunities at reasonable prices will emerge.

So, will the stock market downturn continue? Have we reached a bottom? Will it ultimately take one, two or more years, or less, to recover? How long will the next bull market last?

We don’t know the answers but doing a bit of homework and planning can help prepare you for the long-term.

The post Financial markets will recover, but when? appeared first on Manitoba Co-operator.

For many businesses, the price of those inputs and outputs are relatively stable. In farming, where outputs are volatile agricultural commodities and inputs are made from equally volatile energy, mineral and metal commodities, managing both sides of the equation can be challenging.

Fertilizer is one of the largest farm expenses, often around 25 per cent of revenues. So, when thinking about fertilizer purchases, you can also think about grain marketing to capture a profitable margin between the two.

Historically, fertilizer prices and grain prices tend to move together. The correlation or connection between the two is very high, around 90 per cent. This is not surprising given they are on either side of the same farm economic equation.

But it’s not just the outright prices of fertilizer or grains. What really counts is the direction of the difference or spread between the two.

The price difference between fertilizer inputs and crop outputs has been relatively stable over the past 20 years. As seen on the chart, the spread is usually from about even money to times when fertilizer reaches about US$100 per tonne more than crop values.

There have been two notable exceptions when fertilizer prices spiked to extremely wide levels over crop prices. The first was in 2008, near the end of the commodity investment bull market, when grain prices doubled but fertilizer quadrupled in value.

Shortly thereafter, as the world descended into the mortgage and financial collapse, the ratio of fertilizer to grain prices came back into line and more or less normalized, until last year.

This time around, the mini commodity boom in agriculture was caused by the 2021 drought and then the Russian invasion of Ukraine. Grain prices doubled and fertilizer quadrupled once again. As of mid-September, the extreme pricing of fertilizer compared to grain prices has settled down a bit but the spread is still well above the typical high end of the range seen in the past 20 years.

Will fertilizer ratchet down to the level of grain prices or will grain prices rebound to balance things out? Fertilizer prices have been drifting lower since June but so have grain prices. The previous 2008 scenario is just one data point, so it doesn’t mean the spread will follow the same path.

When it comes to fertilizer production and supply, Russia is a wildcard. It is a major producer of potash, phosphate and nitrogen fertilizers, producing 13 per cent of the global total. In particular, the country accounts for 23 per cent of the global ammonia export market, 14 per cent of urea, 21 per cent of potash and 10 per cent of processed phosphates.

North America imports approximately 20 per cent of its urea from Russia, but Brazil gets about 47 per cent of its potash, 20 per cent of urea and 30 per cent of monoammonium phosphate fertilizer from Russia. I’ve read some estimates that say 90 per cent of the potash used by Ukrainian farmers comes from Russia and Belarus.

Another wild card is the natural gas feedstock for fertilizer and those supplies are heavily influenced by Russia. It accounts for two-thirds of Germany’s natural gas imports, providing 50 per cent of the natural gas supply to Germany and 40 per cent to all of Europe. This natural gas is delivered by two pipelines through Belarus and Ukraine.

In the past two years, European natural gas futures have increased 30-fold and U.S. natural gas futures have tripled during that time. The effect is that some fertilizer companies are cutting production of ammonia in Europe because of high gas costs.

Bottom line, it’s not just whether grain prices go up or down, or fertilizer prices go up or down. It’s the spread between them that’s also important.

So, as you make fertilizer purchases for next year, think of new crop marketing as well. Since we’re still harvesting this year’s grain and are far away from next year’s crop, and face weather risk and price fluctuations, no one wants to commit much grain for delivery.

This is where option strategies can help fill in the marketing gap. They give the needed downside revenue protection with the upside potential desired, without having to promise any production.

The post The grain-fertilizer balancing act appeared first on Manitoba Co-operator.

We’ll take this mid-summer opportunity to do a 2022 halftime financial review of where we’ve been, what it means and where we might be going.

After the first six months of the year, the main European and U.S. stock market indices are down about 20 per cent, while the technology-heavy NASDAQ Index is down 30 per cent. With a group of commodities indices having been up by as much as 50 per cent at one point and still up around 20 per cent, the commodity-resource-intensive Toronto Stock Exchange Index is off only about 14 per cent. 

At the time of writing in mid-July, the Canadian dollar is down almost three cents versus the U.S., continuing its downward trend of the past 12 months. Meanwhile, a measure of the U.S. dollar against a broad basket of global currencies, including the euro, Japanese yen and British pound, is up 13 per cent.

Inflation and interest rates have been grabbing a lot of attention. Consumer prices are up almost eight per cent across Canada, nine per cent in the U.S. and nearly nine per cent throughout Europe. This has forced the Bank of Canada to raise central bank rates from 0.25 per cent to 2.5 per cent. The U.S. expects to see similar increases.

Let’s focus on interest rates for a moment. They are important because they price time, money and therefore almost everything else, from mortgages and consumer purchases to business loans and government debt. This is, in turn, the case for stocks, commodities and real estate. 

Likewise, relative interest rate differentials between countries will affect the value of one currency against another. Rates can also help forecast economic activity. 

The Federal Reserve of San Francisco notes that the difference between long-term and short-term interest rates is a strikingly accurate predictor of future economic activity. Every U.S. recession in the past 60 years was preceded by an inverted yield curve, whereby short-term rates were higher than long-term rates. 

Given we’ve been flirting with a yield inversion for the past few weeks, a recession would extend the duration of the current stock market correction. Although the odds of a recession have increased in the past few months, the strong employment conditions in both the U.S. and Canada might suggest a milder, shorter-lived slowdown.

So how about stocks going forward? Historically, stock markets tend to do well in the years after rates start to rise. In fact, even when interest rates were rising, the S&P 500 U.S. stock market index had a total annualized average return of just over nine per cent throughout those cycles and was positive in 90 per cent of those periods. 

This time around though, we are moving up from a 50-year general downward trend in rates, which culminated in near-zero interest rate policies from many central banks around the world. As rates rise, the boomerang effect of higher interest costs and inflation could be more volatile than history would suggest.

At the same time, stocks typically do well during periods when the U.S. federal funds rate is rising because this usually means a strong economy and increasing corporate profits.

Most of what caused the current inflationary conditions — including years of quantitative easing and money creation going back to the 2008 crash and, more recently, COVID-19, the ensuing pandemic-induced government spending, supply chain disruptions and consumer hoarding — have already reached their end.

As much as financial liquidity was expanding over the past several years, it is now starting to go in the opposite direction. In particular, the U.S. Federal Reserve is now in a quantitative tightening mode, raising interest rates and reducing liquidity. 

How much will this slow global markets and the economy? With stocks down 20 to 30 per cent, some economic slowdown is already being factored into the markets. 

Will there be continued equity weakness? Are the U.S. Federal Reserve and other central banks still behind the inflation curve, forcing them to continue to raise rates a lot higher? Or maybe we will be surprised to see inflation and rate increases come down by year’s end. 

Interestingly, Canadian and U.S. short-term interest rate futures curve charts already show rates peaking by the end of 2022, with expectations they’ll be lower next year.

The path forward

Bottom line, where do we go from here? Often, what goes up comes down, or what goes down comes up, so maybe all the attention inflation and interest rates are getting will have run its course. 

Or perhaps, just as the inflationary dislocations of the 1970s ushered in a new level of higher commodity prices, maybe the impact of recent droughts, the Russian invasion of Ukraine, pandemic-induced hoarding and renewed global inflationary pressures will bring about the next step higher in the long-term staircase of global commodity and consumer prices.

These are a lot of questions without answers, but having a farm marketing plan that includes options and futures hedging strategies can help you navigate the fluctuations and uncertainty. On the investment front, well-priced, moderate risk, big blue-chip companies with long-term histories, as well income investments with steady dividends or interest payments linked to rising interest rates, can be a good way to hedge your investment portfolios in this environment as well.

The post Dealing with a murky financial future appeared first on Manitoba Co-operator.

Markets are just a series of interconnected economic, political and social dominoes that act and react with one another as they drift through time and space together. What happens in one area can have a large or small effect on another area right away, or over time.

Currencies, grains and energy markets are particularly interlinked because of their more immediate influence on each other. With all three markets attracting a lot of attention lately, it’s important to understand their past to better understand their potential future. And while this is nothing new and that past performance may not be indicative of future results, an update of the facts and figures can keep these important market connections top of mind.

Crude measure

The king of all commodities, crude oil, has a natural connection with oilseed crops because they are both energy sources, and increasingly so from rising biofuel industry demand. For example, about a third of all palm oil, the largest oilseed crop worldwide, is used by industry, most of which is the production of biodiesel, based on USDA figures. Likewise, for canola or rapeseed, over a quarter is destined for the industrial market due to its high oil content. And for soybean oil, industrial consumption makes up 20 per cent of demand. Fuel prices will in turn pull up corn and to some extent wheat for their ethanol value which supports other grain markets like oats, durum and specialty crops because they are all food items.

Relationships

Recent research by the CME Group further shows these inter-market connections. Their report, Crop Prices and Inflation: What is the Relationship?, points out that while “crop prices often move independently of overall inflation, sharp rises in crop prices coincided with higher inflation occasionally, notably in 1973 and 2021. The surge in inflation in 1973 coincided with two other events: the Arab oil embargo, which sent the price of oil from $3 per barrel to $14 almost overnight, and the U.S.-Soviet Union wheat deal.” Then in another instance of these close interrelationships, “beginning in 2002 there was a global rally in commodity prices that was driven by the exceptionally strong growth of the Chinese economy, as well as investment flows from commodity and hedge funds that pushed up commodity prices.” Also, “the close connection between crop and energy prices is driven by both the supply-and-demand side of the equation. On the demand side, higher or lower energy prices can raise or lower the demand for biofuels. On the supply side, higher or lower energy prices can increase or decrease the cost of producing agricultural goods which involves energy at almost every stage, from planting to harvesting to shipping.” A long-term chart of both crude oil and corn price going back to 1995 certainly bears this out.

Greenback

And finally, what about the U.S. dollar and grain prices? Typically, a strong U.S. dollar has been an anchor holding back grain prices denominated in U.S. dollars. In fact, 30 years of history show a negative correlation or inverse connection of about -60 per cent between the U.S. Dollar Index and a basket of wheat, corn and soybeans futures. This means that most of the time, corn, wheat and soybean futures move in the opposite direction of the U.S. dollar, often going up when the U.S. dollar goes down and vice versa. Over the long haul, this inverse effect of a strong dollar can have a powerful negative impact on commodity prices. And, with the United States currently the only major economy with decent forward momentum relative to other large countries, this U.S. dollar uptrend could continue.

So now we’re in an unusual situation where both grain prices and the U.S. dollar are trending higher. Keep in mind that grain prices would still be high right now regardless of the foreign exchange markets given the Russian invasion of Ukraine, global inflationary pressures, persistent drought conditions in some growing areas around the world, excess moisture in others with a lot of the growing season and weather still ahead of us. But since the currency market is massive compared to the global grain trade, will grain prices blink first?

Two to watch

Bottom line, keep a very close eye on both crude oil and the U.S. dollar since history has shown that these two have a major influence on grain prices. The real value in this is not just in knowing this information but incorporating this analysis into your marketing plan. Then together with flexible options and futures hedging strategies, it can really help you navigate the current marketing environment, regardless of whether the existing shorter-term trends persist or if the historical longer-term patterns prevail.

The post No market is an island appeared first on Manitoba Co-operator.

It’s hard to say it better, but Dan Gardner’s book, Future babble: Why expert predictions fail — and why we believe them anyway, may just do that and a lot more. 

At the essence of it, the book outlines how forecasting politics, markets or societies is like predicting who will win the NHL or NBA championships. So many unknown things will happen during the regular games and playoffs that it makes early-season predictions almost useless. Players will get injured or traded, a weak team will suddenly start to click or a powerhouse team won’t gel. Truly unbelievable buzzer-beater baskets from half court will go in, or a team will give up a five-to-one lead in the third period. 

Likewise, for markets to be predictable, politics, social change, weather and the advance of science and technology would all have to be predictable. They aren’t, of course, so price forecasts routinely fail. However, there are things you can do to be more comfortable with the unknown and allow you to adapt or adjust to take on the future as it unfolds. 

Firstly, the book explores how “certain styles of thinking and decision-making do a far better job in dealing with the future to find a path ahead.” 

“Experts who did particularly bad were not comfortable with complexity and uncertainty,” the book reads. “These experts are also more confident than others that their predictions were accurate. Also, knowing too much can actually make things worse and can result in overconfidence. Experts who did better than the average drew information and ideas from multiple sources and sought to synthesize it. They were self- critical, always questioning whether what they believed to be true really was. And when they were shown that they had made mistakes, they simply acknowledge they were wrong and adjust their thinking accordingly. The experts who were more accurate than others tend to be much less confident that they were right.” 

A second factor to be aware of is that news and events are random. How people react to them are random, and the interactions and feedback loops of all these series of events will be complex, chaotic and random as well. However, “we treat random results as if they are meaningful and we consistently over- look randomness to see patterns everywhere, whether they are there or not. 

“We even go looking for patterns in randomness. Data mining is now a big problem for precisely this reason. Statisticians know that with plenty of numbers and a powerful computer, statistical correlations can always be found. These correlations will often be meaningless,” Gardner says. 

Finally, there is a “tendency to take current events and project them into the future.” 

Trends are called trends for a reason, but they don’t apply forever. 

“The further we look into the future, the more opportunity there is for current trends to be modified, bent or reversed,” the book reads. “Predicting the future by projecting the present is like driving with no hands. It works while you are in a long stretch of straight road but even a gentle curve is trouble.” 

It will always be difficult to make forecasts and predictions of where markets will be tomorrow or next week, let alone next month, next year or in three years. So, you have to keep your eye on the road and be ready to shift gears and change direction when the path ahead weaves in and out or traffic patterns change. 

Bottom line, as a final point, the book points out that “a good decision is one that delivers positive results in a wide range of outcomes.” 

This is a role that options play in farm marketing. With them, you won’t be forced to just guess or predict. Instead, use option strategies to replace opinion with process so you can capture opportunities while still managing the risk, especially in this very volatile environment of record-high prices.

The post The perils of the crystal ball  appeared first on Manitoba Co-operator.

Everyone has been talking about inflation and interest rates and yield curve inversions lately, so what does it all mean? While a lot has been written about the effects on the stock market when interest rates rise, what happens to commodity prices, consumer price inflation and currencies? What about the influence of higher interest rates on longer-term bond yields?

To set the stage, there have been nine periods of rising central bank rates in the U.S. since the late 1960s. They have typically lasted just over two years and increased on average five full percentage points. However, subsequent to the dramatic rise during the late 1970s and early 1980s when Paul Volcker was head of the U.S. Federal Reserve, rate increases have averaged only around 2.75 per cent. Some of these periods were as short as a year with one lasting just over four years during the height of the inflationary period from 1977 to 1981.

We already know the history of U.S. stocks during these periods of rising rates because here’s what I wrote about stocks a couple of months ago in this column. Six months to a year after an initial rate increase, U.S. stocks have still moved up around five per cent. Furthermore, longer-term analysis shows that even during the last eight rate-rising cycles since 1970, which have typically lasted about 2-1/2 years, the broad-based U.S. stock market, as measured by the Wilshire 5000 Index, still moved up on average around seven per cent during those tightening phases. Based on past trading patterns, rising interest rates may not be as much of a concern for stocks as you think.

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Now what about other areas like commodities, inflation, currencies and long-term interest rates?

During these previous rounds of rate increases, U.S. consumer price index (CPI) inflation registered at about five per cent. Considering inflation is currently running above that at around 6.5 per cent in Canada and 8.5 per cent in the U.S., we could match that historical average annual inflation rate of five per cent or even more over the next couple of years. Likewise, commodity prices rose over 15 per cent on average over the course of these rate-rise periods, or just over six per cent annualized. Of note, commodities were up almost 100 per cent from 1972 to 1981, which was greatly influenced by the 1973 oil embargo and then the 1979 Iranian Revolution. Perhaps we’re seeing echoes of this today with the Russian invasion of Ukraine and resultant economic and trade sanctions that are constricting agriculture, energy and metal commodity supplies.

As for currencies, the U.S. Dollar Index, which represents the U.S. dollar compared to a basket of other global currencies, didn’t really show any particular trends either way although it had swings of five or 10 per cent, both up and down. But this is nothing out of the ordinary compared to any random one-, two- or three-year period.

This is likewise true of the Canadian dollar versus the U.S. dollar. There was not much change most of the time, moving five per cent or less, which isn’t significant movement for a currency over a two- to four-year period. However, the Canadian dollar did have a few bigger 15 per cent moves both up and down. Overall, though, rising rates in the U.S. did not produce any specific directional trading activity for the U.S. dollar since there are just too many other outside factors that can influence the direction of global currencies.

Finally, what have longer-term rates done when short-term rates move higher? In all previous instances, 10-year U.S. Treasury bond yields did increase and did so fairly consistently, moving up around 25 per cent by the end of the cycle. So, if 10-year U.S. Treasury rates were around two per cent before the Fed started raising rates, a 25 per cent increase would bring it to 2.5 per cent. Since the yields are already almost three per cent, they could eventually reach three per cent, four per cent or maybe more, with similar levels in Canada.

Bottom line, the fluctuations of stocks, bonds, currencies and commodities during periods of rising interest rates are not always as dramatic as you might think. The main exception was the high inflationary period from 1977 to 1981 which was certainly the most disruptive of all the time periods. Historically, commodity and stock market activity were the most consistent. Both these asset classes generally moved higher during interest rate hikes while currencies had big moves both up and down.

So how will history repeat itself this time around? No one knows for sure but it will have its own unique characteristics. There are no rules when it comes to how various commodities, assets and currencies will react during each interest rate rising cycle. So much will be determined by unknown and yet-to-occur political, military, economic, monetary, social and weather events.

As always, never say never and use all the grain-marketing tools available to you, especially option hedging strategies, to capture price opportunities, manage downside risk and minimize delivery concerns.

The post How widespread will interest rate fallout be? appeared first on Manitoba Co-operator.