January 18, 2022

Commodity Insight: Monitor South American weather

A dominant market force in the new year will be volatility or, if you will, wild price swings. All markets, stocks, bonds, currencies and commodities will be roller-coaster-like regarding values.

Investors, traders and agriculture producers are about to experience historic price swings in an environment that will likely last into 2023, as well. There will not be a market anywhere that escapes the highly charged environment that is unfolding.

Understand, however, that volatility and wild price swings with markets is a two-edged sword. If you are in step with a market that is unusually volatile, a great deal of money can be made.

Unfortunately, if you are out of step in a white-knuckle and capricious market, a great deal of money can be lost. There is no disputing the fact that volatility is a two-edged sword.

This year, which is about to end, also experienced intense volatility with most markets. The forces that spawned such an environment remain in place and will be carried into the new year.

The marketplace will still have to deal with COVID-19, as well as the Delta and Omicron variants. Inflation that soared to its highest levels in 39 years in November will not disappear anytime soon.

And because of COVID, inflationary pressures and ongoing issues with the supply chain, the Fed did a historic pivot, becoming far more hawkish moving forward. When the Fed turns hawkish it means they are growing more concerned about inflation.

From the Federal Reserve Bank of Cleveland: “The Federal Reserve seeks to control inflation by influencing interest rates. When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down. When inflation is too low, the Federal Reserve typically lowers interest rates to stimulate the economy and move inflation higher.”

The Fed intends to hike rates at least three times in the new year. That is its intent.

In my view, there are three scenarios that can break the back of the stock market and usher in a period of wild price swings with the other markets, bonds, currencies and commodities. Those three scenarios are: a war, a recession and/or higher interest rates.

And here we are with a new year dawning and the Fed pledging to hike interest rates at least three times in the new year. The Fed has pivoted to being hawkish and hiking rates.

But the wild card for new year is climate change that I have been worried about for the past few years.

From the World Meteorological Organization in October 2021: “The past seven years are on track to be the seven warmest on record, according to the provisional WMO State of the Global Climate 2021 report, based on data for the first nine months of 2021. A temporary cooling La Niña event early in the year means that 2021 is expected to be ‘only’ the fifth to seventh warmest year on record.”

The WMO went on to state: “Extreme weather events and conditions, often exacerbated by climate change, have had major and diverse impacts on population displacement and on the vulnerability of people already displaced throughout the year. From Afghanistan to Central America, droughts, flooding and other extreme weather events are hitting those least equipped to recover and adapt.”

From “Cold, heat, fires, hurricanes and tornadoes: The year in weather disasters” in the Washington Post on Dec. 17: “While scientists say man-made warming isn’t the cause of most extreme weather events, they agree it is making many of them more frequent and intense. Heat waves are hotter, downpours are heavier, fires spread more quickly. Generally, more energy is available to storms, increasing atmospheric chaos and portending a turbulent future.”

The key to the grain markets is weather. In the U.S. a corn crop is made or broken in July, a soybean crop in August. In the absence of normal rainfall and/or excessive heat as the crops pollinate, a sharp rally can unfold very quickly.

But in South America the key growing period for grains is from mid-December to mid-February. And that period, of course, is right now.

In Brazil and Argentina the crops are now in the reproductive stages of pollination and pod filling. In the absence of meaningful rain or excessive heat, yield losses will mount.

And with ending stocks of grains historically tight, there will be zero tolerance for yield losses or prices will rise like a rocket ship. Monitor South American weather moving forward.