Commodity markets are facing a bearish 2023, according to most analysts, but bull markets should remain in a number of agricultural commodities.
Unfortunately for farmers, that gleaming outlook is tarnished by the outlook for fertilizers, which are predicted to remain strong and will continue to suck away much of the potential profitability of crop production.
But still, if you’re going to be a commodity producer in 2023, growing crops seems like the best place to be.
As ING notes about wheat in its 2023 Commodities Outlook, “global wheat markets are likely to tighten over the 2022-23 season. Meanwhile, there are already several supply risks building for the next marketing year, which should support prices through 2023.”The report, subtitled Stormy Seas Ahead, doesn’t find the same strength beneath the price outlook for most other commodities.
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That’s a bearish outlook shared by most analytical shops, which have been trotting out their 2023 outlooks in the run-up to the new year. Analysts see weakness across the commodity spectrum, outside of agriculture, due to rising interest rates, weakening global growth and a host of national and regional economic problems.
For those gauging the health of the world economy in 2023, certain key commodities should provide a window into underlying conditions.
Copper is the classic barometer for industrial economic activity because it is used heavily in construction and capital investment. As the world has slid toward recession, copper prices have fallen, matching and revealing weakness in construction and investment around the world.
Copper prices have fallen by one-third since its peak in the summer.
Often described as “Dr. Copper” because of its ability to diagnose the state of economies, the red metal’s price has recently been showing symptoms of economic weakness and a lack of global investing.
If that weakness continues into 2023, that will be seen as bearish for industrial and energy commodities. If copper rebounds, that will be seen as a possible beginning of a recovery. Other commodities will likely follow copper’s lead.
Similar to copper, crude oil is a key signal and symptom of worldwide economic activity and often the leader of the commodity pack when it comes to price action.
In the past year West Texas Intermediate, the U.S. base price in futures and cash markets, peaked above $120 per barrel as economic activity and inflation surged, but has now fallen to $73.
Analysts don’t see much upside to oil prices until the current global economic weakness is past. That should keep other energy commodities restrained, outside of local situations such as natural gas in Europe. However, there isn’t much downside foreseen because Russian crude is having trouble getting to market, OPEC is likely to reduce production and the U.S. government is likely to refill its Strategic Petroleum Reserve whenever crude falls near $70 per barrel.
Whenever crude prices begin steadily moving up, that will be seen by many as early signs of economic recovery, something that can lead beyond a self-reinforcing rally in oil to a broader rally in growth-related commodities.
The mess in fertilizer markets is likely to be a major influence on the crop markets this year. North American farmers most notice fertilizer prices when they have to pay for it and when they calculate profitability, but the impact in less developed regions and nations is different.
In places where farmers are smaller, poorer and don’t have access to credit, higher fertilizer prices often lead to farmers buying and using less.
That has an impact on the crops grown not only in that year of production, but often in subsequent years, as soil fertility degrades. That leads to less crop production, which should strengthen crop prices.
For farmers who can afford to buy all the fertilizer they need and get a good crop, that sets up excellent prospects for profitability. One farmer’s fertilizer unaffordability is another’s increased profit potential.
With wheat supplies tight in the United States, production in Ukraine imperilled by war and crop production challenges hurting the prospects for a number of crops around the world, wheat prices head into 2023 with a firm basis, most analysts believe.
If general commodity weakness continues in the new year, that won’t help wheat and other crop prices. But if the world’s soft patch is passed and commodities begin to recover some strength, crops could see yet another price rally.
