October 04, 2022

Commodity Insight: Push-and-pull marketplace

There were three news stories this week that dominated the headlines and caught the attention of investors, traders and ag producers.

One was the Federal Reserve meeting held in Jackson Hole, Wyoming, where everyone was hoping to get a clue about further interest rate hikes.

The second big story involved the annual tour by Pro Farmer to gauge the quality and size of this year’s corn and soybean crops.

The final story was about the nuclear power plant in Ukraine that was on the cusp of being a catastrophe.

This week was all about the push and pull of the marketplace amid such news items and the impact it could have on stocks, bonds, currencies and commodities.

Here are just a few of the headlines that greeted investors, traders and agriculture producers regarding the nuclear power plant in Ukraine: “Nuke Plant Meltdown Risk,” “Ukraine War Grows More Dangerous,” “NATO: World On Cusp of Catastrophe” and, from The Sun, Britain’s largest newspaper, “Europe’s biggest nuclear power plant was disconnected from the power grid for the first time ever amid fears of a Chernobyl-style disaster, Ukraine’s state energy firm said.”

And on Aug. 26, with a weekend looming large, this headline caught my eye just as I was about done for the day: “Fears of a potential nuclear disaster in Ukraine are intensifying.”

Such a headline did not send me into the weekend with confidence that the crisis is ending. I view the Ukraine nuclear situation as a ticking — and wildly bullish — time bomb for the grain markets.

When a similar crisis took place with Chernobyl 36 years ago, wheat prices soared upward by nearly 50% in short order.

Can a similar scenario unfold again? Time will tell.

The Jackson Hole Economic Symposium has been an annual event held in Wyoming since 1981 and sponsored by the Federal Reserve Bank of Kansas City. It is one of the longest-standing central banking conferences in the world. It is a big deal.

A year ago at the symposium, Fed Chair Jerome Powell expected inflation to ease because the nation was still hampered by the COVID-19 pandemic.

But, as we all know now, Powell and the Fed were woefully wrong with such a forecast. Now, inflation is running at a 40-year high and the Fed is pushing up interest rates at a clip not seen in four decades.

In his long-awaited Jackson Hole speech, Powell said: “While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

When Powell’s words hit the newswires, virtually every market turned lower, led by the stock market.

The weakness with stocks spilled over to the metal markets and crude oil. There was also red ink with a host of other markets, as well.

The weakness was not much of a surprise since Powell did say forcefully that higher rates will “bring some pain to households and businesses.”

In the world of economics, pain is bearish, plain and simple. And Powell used the word pain twice in his speech.

The Pro Farmer tour predicted that U.S. corn yields will average 168.1 bushels an acre, down from the U.S. Department of Agriculture forecast of 175.4 a month ago. Soybean yields were pegged at 51.7 bushels an acre, only down 0.2 from the last USDA estimate.

I view the data as longterm bullish corn and less than bullish for soybean prices. Still, it is the USDA’s estimates on corn and soybean yields that matter most. And the USDA will not weigh in on yields until the September World Agricultural Supply and Demand Estimates report. It remains to be seen, in other words, if the USDA will agree or disagree with Pro Farmer data.

In my view, the big story is the Fed is on course to hike rates higher to fight inflation. One of the oldest and most accurate sayings on Wall Street is, “Don’t fight the Fed.”

The reason is simple.

Historically, the Fed always gets what it wants. If the Fed wants lower inflation along with a slower economy, more unemployment and pain for consumers and businesses, they will get what they want.

In such an environment, markets of all stripes will struggle to rally. And the only force that can trump the Fed would be a nuclear catastrophe in Ukraine that sends grain prices soaring upward.

The push and pull of the marketplace will only intensify in the period ahead.