January 25, 2022

Commodity Insight: World has a supply problem

Grain prices on the final day of 2020 ended on a bullish note seldom seen in the final trading sessions of any year. But in the first week of 2021, the new year, grain prices moved even higher. In fact, the first three trading sessions of 2021, soybean prices rose as much as $1.20 bushel and corn prices 50 cents.

The reason for the stiff gains is as clear as gin. The world has a supply problem because global and domestic supplies of soybeans and corn are razor thin.

From www.agriculture.com is a headline that blares, “Soybean Market In ‘Rationing Mode’ Amid Dry Argentina Weather, Cargill Exec Says.”

The article states: “The soybean market has transitioned into ‘rationing mode’ as tight global supplies and crop-stressing drought in Argentina have ignited the strongest soy market rally in years, Joe Stone, the head of Cargill Inc.’s agricultural supply chain, said.”

When a commodity market embarks on a “rationing rally,” there is no saying high is high, especially if you add to the mix weather issues such as those now impacting Brazil and Argentina. Just how high do soybean and corn prices have to rise to decimate, or kill, demand to the point where we “ain’t gonna run out?”

Here are some thoughts to consider regarding the theory that the world has a supply problem with grains. Brazil is the world’s largest exporter of soybeans. But on Oct. 20, it was announced it needed to import soybeans to keep domestic prices stable.

Vietnam is the world’s third largest exporter of rice. But this week Vietnam bought rice from India for the first time in decades because domestic prices jumped to a nine-year high.

Last month, Argentina suspended corn export sales until March to conserve domestic supplies, and Russia placed duties on wheat and soybean exports over concerns about rising domestic food prices.

This week, the United Nations stated that global food prices are at a six-year high and headed higher yet. Evidence is growing that the world has a supply problem with food and, in my view, in particular for corn and soybeans.

And from the United Nations with a headline, “UN Warns of an Impending Famine With Millions in Danger of Starvation,” dated late November 2020: “The numbers are staggering — as reflected in the ongoing coronavirus pandemic which has triggered a new round of food shortages, famine and starvation. According to the Rome-based World Food Programme, 690 million people do not have enough to eat. While 130 million additional people risk being pushed to the brink of starvation by the end of the year.”

From my weekly column, “U.S. soybean stocks razor thin,” last fall: “The historic decline with ending U.S. soybean stocks has many whispering, ‘Are we going to run out?’ First, let me state with conviction, in the world of commodities, ‘you never run out.’ What unfolds in a tight stocks scenario is prices rise so high as to simply destroy demand. It goes back to that old saw, ‘the best cure for high prices is high prices.’ But it is a fact, if available supplies of a given commodity are drawn down to razor-thin levels, prices for that commodity can rise to heights that are simply hard to fathom.”

Food inflation is the primary reason China and other importing nations are chasing supplies of corn, soybeans, soy oil and other ag products. However, there are a host of other markets also on the rise due to tight supplies, insatiable Chinese demand coupled with the U.S. dollar approaching a new 2 1/2-year low.

History shows that commodities, per se, tend to head north when the dollar is heading south. In 2020, the dollar experienced its worst decline since 2017 and this year is showing even more red ink.

And how high is high for soybean prices, you ask? Based on history, when soybean stocks are razor thin, if prices rise over $12 a bushel, they tend to rally up to $13 to $13.50. If soybean prices rise over $13.50, they can jump to $17 a bushel. The high for soybean futures this week has been $13.86 basis March futures.

Here is my favorite bullish tidbit for the week: Palm oil prices are nearly at an all-time historic high and only witnessed in 2008. It is estimated that palm oil is used in about half of all supermarket goods.

And in 2008, when palm prices were at record high levels, soybean oil prices that are now around 44-cent basis front month futures were up to 70 cents — and you wonder why I am convinced a super cycle for commodities is underway?

Please check out my brand-spanking-new website by going to commodityinsite.com. Check it out. And drop me a line at 406-682-5010, if I can be of help. I would enjoy hearing from you.