January 18, 2022

Commodity Insight: The world still has a supply problem

The very first column I penned for this newspaper in 2021 was entitled “The World Has A Supply Problem.” In the opening paragraph I wrote about how bullish the grain complex suddenly turned out to be in the first three trading sessions of the new year with soybean prices jumping $1.20 a bushel while corn tacked on 50 cents. The reason for the stiff rally, I argued, was because, “The world has a supply problem as global and domestic supplies of soybeans and corn are razor thin.”

I went on to state, “Here are some thoughts to consider regarding the theory the world has a supply problem with grains. Brazil is the world’s largest exporter of soybeans. On Oct. 20, it announced a need 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.”

Deeper in the column above I wrote, “This 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 basis front month futures rallied up to $.70. And you wonder why I am convinced a supercycle for commodities is underway?”

Flash forward to today. The media, as usual, touts how well stocks did in 2021. They are correct as the Dow rose 19% and the S&P was up 27%. However, few in the media point out just how well the commodity markets did in 2021.

The CRB index is to commodities as the Dow Jones is to stocks. The CRB index is made up of a basket of 19 commodities, with 39% allocated to energy contracts, 41% to agriculture, 7% to precious metals, and 13% to industrial metals. I always say, the CRB is weighted towards grains, livestock and crude oil, in that order.

In 2021, the CRB index rose 40%, greater than the performance of the Dow, S&P and Nasdaq. The CRB did exceptionally well and again remember the index is weighted more heavily towards grains and livestock. American farmers and ranchers did well producing products the world wants desperately amid a pandemic.

In my first column of 2021, “The World Has A Supply Problem,” I also wrote, “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.”

As 2022 arrives, I say with conviction the world still has a supply problem. As always, the key to grain and oftentimes livestock prices is Mother Nature. Right now, the major grain crops in Brazil and Argentina are experiencing drought-like conditions and the same can be said about the U.S. Plains. With grain and livestock values already elevated in 2021, any further supply problems in South America will send prices higher in 2022.

The impressive gains this year with the CRB that far outpaced stocks and precious metal markets did not go unnoticed by the infamous commodity funds, the “algo boys,” or the high-frequency traders. Now, they all want to “buy stuff.” They all want a piece of the action that will unfold sooner than later, depending on the weather in South America. It is a given the funds are now buying breaks, not selling rallies.

A year ago, I was bug-eyed bullish commodities because it seemed clear as gin the world had a supply problem with a host of basic markets, grains and livestock. As it turned out, I was dead right with such a bold forecast. However, with 2022 about to unfold, the world still has a supply problem because the fundamental forces that were firmly in place in the opening days of 2021 are in place now with the new year at hand.

I cannot recall a year with so much upside potential for grain and livestock prices as the year ahead. And all because the world still has supply problems that carried over from last year at this time.