The wonderful, wild world of commodities

It’s been an exciting time to be in the commodity markets, which applies to all open market crop growers.

That’s true as well if you mine copper, extract oil, smelt silver or play with Bitcoin. (I see Bitcoin as a commodity, not a currency.)

The world’s glutted situation since 2014 has suddenly evaporated, at least in buyers’ and investors’ minds, and that has people all over the planet scrambling to stock up on commodities that could become scarce in coming months.

That’s all commodity markets need to move. They don’t need the scarcity to become “real.” They need future scarcity to become a generally shared perception, or the risk of scarcity to become something hanging in front of buyers’ and users’ minds. That’s probably why the Chinese are being such aggressive purchasers of many commodities, including farmers’ crops and meats. The Chinese government is focused on stability and careful management of the domestic economy, so any possible shortages or price spikes become public policy matters taken very seriously by China’s leaders. So too are various other countries stocking up on crops and other commodities more than they usually would. In today’s pandemic-ravaged world, social and political stability can be badly shaken by shortages of food and other basic products. Remember how the Arab Spring began ten years ago? It had a lot to do with the last time crop prices soared and poor, hand-to-mouth families across the Arab world found it hard to get enough to eat. Parents with hungry children aren’t likely to suffer in silence.

For growers it has been a pleasant return to the pre-2015 world, which from 2005 onwards offered farmers good prices, excitement and harrowing volatility. Thousands of farmers made lots of money over those years, helping most to overcome the cancer of the previous two decades, when prices were low, dull and unprofitable. In OK years farmers did OK. In bad years thousands more would be pushed or forced out of the business. Good years often just helped many linger on until the next bad year.

I remember covering the early 2000s crop markets, which was torturous most of the time. I remember one winter taking part in a grain pricing competition, an online thing, and over the course of a winter prices barely budged. That was typical of those years. Stocks were ample. Nobody was scrambling for product. Active farm marketers focused on selling into rallies and keeping their debts low. It was the grinding life of marginal returns – if you were lucky. Farming seemed like a losing proposition for any but top operators, and the very lucky.

The 2006-14 commodity bull market changed all that, and it was a delight to cover. Not only were farmers making money, but the markets were exciting, with incredible volatility and violently moving parts. It reminded me of my boyhood days in 1970s Regina, when farmers were in a unique situation of profitability and optimism. Just like in the 2006-14 period, I remember projections and predictions of permanent prosperity for farmers and Canada being bandied about, which was a nice fiction to believe in.

Of course, that 1970s-1982 period was just a commodity bull market, as was 2006-14. (The overall commodity bull market, excluding grains, ran longer, from the early 2000s to 2014.) It was a period of extended good times for commodity producers, and extended hard times for commodity consumers.

What’s the nature of this commodity bull market? Is it a long term commodity bull market? Is it a one-year or two-year phenomenon produced by temporarily tight stocks? Is it a permanent new condition? Is it merely an artifact of the COVID-19 impact? There has been lots of debate about that, and nobody knows. For a particularly good case that this is a lasting bull market, check out Goldman Sachs’ argument and explanatory discussion on a recent Odd Lots podcast episode. It’s the best recent discussion of commodity market dynamics, now and in the past, that I’ve heard.)

For farmers, there should at least be a few months of excitement ahead. The volatility already seen in this rally is likely to continue. Just a few weeks ago some thought the market had reversed and the market top was in. That was after crop futures fell strongly for a few days. Then futures recovered and it was back to bullishness again. These markets will shove you around to get where they’re going. You just need to stay on your feet.

I’m looking forward to covering this. I hope you’re looking forward to living through it. Whether it lasts for a year or ten, we have exciting times ahead.

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