Wendy and Ralph are crying, but I don’t know what it means to you.
Yet.
I hope to now what it means soon, as I go through another round of interviewing commodities experts about the bigger issues of the commodities complex, which is what underlies the heady levels crop prices are floating at these days. (If you are a farmer, you probably just think today’s prices are reasonable and just, and therefore wonder why I’m talking about when I describe current crop prices as “heady,” but if you look at a long, long, long term chart, you’ll realize we’re cruising way high up in the stratosphere right now. (Forget about 2008 for a minute and look further back.) Whether or not today’s prices are justified by fundamentals doesn’t really change that fact.)
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Back to the ballad of Wendy and Ralph: The operator of Wendy’s burger restaurants lost money recently. Why? Commodity prices have surged and the restaurant chain hasn’t jacked-up prices. Ralph Lauren’s margins are suffering. Why? Commodity prices have surged, and consumers aren’t in a mood to pay higher prices.
Recently Kellog’s – the cereal maker – had bad financial results. Why? You guessed it – higher commodity prices and consumers who aren’t keen on spending more on their foods. So everyone’s getting squeezed.
In general, farmers don’t need to care if the consumer or the food producer is getting squeezed. Consumers and food processors don’t care too much about the plight of farmers when crop prices are low, so there’s no moral requirement for farmers to cry a lot of tears when things go the other way.
But farmers do actually need to care now because prices have risen so much – go check out some wheat and corn futures price charts if you don’t believe me – that demand is getting “rationed-out.” That means some people are going to simply stop buying crops, meats, cotton, etc. if prices keep going up. Ralph Lauren ain’t going to stop making clothes for dull people. Wendy’s isn’t going to stop making burgers for adults who have a preference for square patties versus rounds. Kellog’s isn’t going to stop making breakfast cereals. But they might make less. And weaker players in their industries might scale back more. And some might go out of business. That equals less demand, and less reason for peppier prices.
The question of when demand – especially corn demand – starts getting snuffed out is the key question of the crop markets this winter. Other big questions – such as the one about how the battle for acres between corn and soybeans (and wheat) will work out – are subordinate to this one. Commodities bull markets kill themselves off when they murder demand by sending prices too high. That hasn’t happened yet with crops. But everyone’s wondering: How high is too high?
I’m meeting with one of North America’s leading crop market analysts late this afternoon and that’s one of the things I’m going to be quizzing him about. If he has any wisdom to impart, I’ll pass it on to you.
