THE OLD ECONOMIC AXIOM STILL HOLDS: LOW PRICES CURE LOW PRICES.
2020 will go down as one of the strangest years in history.
A worldwide pandemic, something that has not occurred for over 100 years is, without question, the story of the year. The impact and ripple effect may take years before analysts are comfortable with knowing what exactly happened. In an amazing effort to curb Covid-19 and keep world economics intact, the United States and foreign countries took extraordinary measures, most of which where thought of, designed, and implemented in days or weeks. There will be plenty of critics.
If the world emerges from this pandemic in the next 6 to 18 months, it will be because of a rapid response. Inflation could be an issue, yet monetary policy enacted was necessary to keep the world from falling into a depression. The issues that won’t be talked about are ones that never happened, thanks to aggressive government action.
In the commodity world, much like the equities, great uncertainty leads to wild volatility. Energy prices dropping into negative territory and milk prices dropping sharply only to rally to all-time new highs illustrate the dichotomy of just how demand (or perception thereof) ebbs and flows at unprecedented speeds. These are just two examples of many markets that experienced extreme price moves.
Ultimately, the need for a steady flow of commodities to the world is paramount to avoid unrest, uprisings and worldwide famines. Ample world inventories of commodities in early 2020, in particular grains and meats, will be thought of little in the years ahead. In hindsight, these were likely responsible for calming markets and providing confidence that, once logistical problems were addressed, normalcy (in part) returned to the marketplace.
The old economic axiom still holds: low prices cure low prices.
Because of ample inventories in 2020, prices were able to sink, rather than rise. The need to ration supplies was avoided. Those who needed food and staple products were able to secure them. Ultimately, however, demand grows when prices are low. The new need may be for additional supplies to meet demand. Any disruption to the supply chain, and prices will be reflected in high volatility.
The U. S. corn and soybean markets dealt with lower inventory after the 2019 growing season due to a wet spring, which led to a smaller crop. Covid-19 pushed prices lower, a benefit to the end users. Now, in late August, weather disruptions are pushing prices back to pre-Covid levels, as last year’s smaller crop and shrinking crop for this year have markets paying attention.
The world still has (what would be termed) ample inventory of agriculture products. Trade deals, a growing hog herd in China, and the need for countries to secure inventory in case of an additional Covid outbreaks in fall or winter of 2021 all suggest that commodities are moving from supply surpluses to demand-driven markets. A reason commodity prices often trade in a sideways price pattern occurs when a demand driver is lacking. Additional demand drivers in the months ahead will be a rebounding world economy, supply disruptions due to weather, and the need for end users (domestic and worldwide) to cover needs more intentionally that in recent years. There is a renewed sense of urgency to ensure inventory is on hand. The model of just-in-time inventories will likely be abandoned. Volatility will be on the rise and both producers and end users will need to be prepared.
Become familiar with the tools in your marketing toolbox, whether a buyer or seller, and how they work. The next leg of volatility could mean dramatically higher rather than lower prices.
Sellers need to learn how to sell and retain ownership. buyers will need to know how to shift risk, in particular longer term. Be prepared for future price volatility.
If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-top-farm, extension 444.
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.
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