After listening to the first 45 minutes of a 2010 energy and grains outlook webinar yesterday, I felt a little like I did the other day after my two year old daughter ran up to me and jumped onto my midsection, causing me to exclaim in pain and explain to my wife why I was screaming. Now whenever my daughter sees me lying on the couch or the floor she tries to recreate the event, which she gleefully refers to as “Kicka in da nudz!” after hearing how I described what she had done to me.
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The energy analyst for PFG Best, an American futures brokerage, described the present commodities complex as inflated by the massive stimulus efforts of governments around the world, and oil and its siblings being both a vessel into which some of the billions of dollars have slopped and a hedging vehicle for investors worried about inflation.
Phil Flynn said never in history had central banks around the world coordinated such a massive inflow of cash into the markets, and that had shown up in the commodity complex. Look at the chart below of the CRB Index, which contains all the world’s major commodities.
Flynn said this rise from March was mostly due to the stimulus efforts, so when that binge of government spending ends and the market begins to look at underlying supply and demand fundamentals, oil and most other commodities will fall. There’s almost a glut of oil on the world market and that’s true of a number of other commodities.
So, everything seemed grim and Flynn seemed to set up a rotten 2010 outlook for farmers. But grains analyst Tim Hannagan followed Flynn with a refreshingly bullish outlook. Grains should rise through the winter and spring as supply troubles evolve and the world’s markets wake up to the notion that there may be less crop in store than thought, because so much was damaged during the long harvest this year.
How could Hannagan be so generally bullish for grains while Flynn was so generally bearish to commodities? That’s what I wanted to know. So I called Hannagan today and asked him. Those two “are oil and water,” he said of the fundamental difference between crop commodities and virtually every other commodity. They have different supply situations, different production systems and different demand structures. The factors that dominate the demand for oil and other commodities often don’t mean much to the grains, he told me.
That’s a relief for farmers, if they believe Flynn’s bearish energy outlook for 2010, because farmers already suffered through a massive price slump in 2008-09 as all commodities moved as one and don’t need to hear that it’s going to happen again, even in a more moderate form. Even if the stimulus buzz wears off, grains and oilseeds won’t necessarily suffer the same hangover that Flynn thinks is coming for the other commodities.
I found it a relief to hear this as well, because I’ve always believed that agricultural commodities are fundamentally different from other commodities in terms of production, demand and cyclicality, but many commodity complex analysts don’t seem to agree. They try to fit the ags into the same frame as all the others, but the others commodities don’t depend on weather, which can massively skew production results one direction or another, regardless of the amount invested. No doubt weakening global economic conditions would soften demand for ag commodities, but since people have to eat, the demand response would not be the same as for the other commodities, unless things really go bad.
So even with a generally bearish outlook on the world economy for 2010, the folks at PFG Best are calling for generally stronger crop markets in 2010. It’s nice to be able to separate our water from the oil, and hopefully 2010 will be better than a “kicka in da nudz.”
