Buckle Up: Here's Why Commodity Prices Could Be in for a Wild Ride This Month

Commodity markets were on a rollercoaster ride this week, with a sharp drop to end November and then a recovery to end the first few days of December. Even though markets are typically quiet in December, Dan Basse of AgResource Company says the volatility is here to stay to close out the calendar year.

“When I talk to my big hedge funds, or the big money managers if you will, they are all telling me, it's been a very, very good year for them. They've made lots of money, whether it be in futures, cash markets or even the stock market. They're very protective, and I think that's adding to the volatility because these guys don't want to screw it up,” Basse says. 

On Wednesday, the U.S. confirmed its first case of the COVID omicron variant, which added to uncertainty in the markets. During a hearing on Capital Hill, Federal Reserve Chair Jerome Powell testified saying inflation wasn’t transitory any longer and the Fed will start discussing ways to control it.

“Oh, I think there's so much uncertainty out there that it's causing all this volatility across all markets. It's not just agriculture. It's anything that's traded, and right now we’re trying to figure out what's going to happen in the future with interest rates and with omicron,” says Tanner Ehmke, lead dairy economist for CoBank. “There's so much uncertainty right now that if you're buying any level of inputs, if you're trying to control any level of cost, it's a problem. We need some more information on the new variant before we can start really saying what the impacts are going to be on inflation going forward.”

The price swings this week were extreme, and Mike North of ever.ag says news events can cause the markets to overreact with extreme price swings.

“Any time big news comes out, we definitely move farther than we likely should immediately. Then the market has to reevaluate, and then it can come back,” North says. “We saw that in the trade this past week. Now the question will be, as we learn more, is if that move was justified and should there be more to follow.”

Basse says inflation is also fueling the volatility, which will be something that sticks with the markets into 2022. He thinks that could bode well for some ag commodities.

“The calendar will be important because people want to have stuff in their portfolio, but I'm saying they're worried about inflation,” Basse adds. “They want to show their investors they're invested in hard assets, including agriculture. I do think as we get into the new year you will find more buying than selling. But for the next couple of weeks, it could be really choppy and really volatile trade.”

Inflation has been a concern for months, but even with the Fed’s comments earlier this week, Ehmke says inflation isn’t going away anytime soon.

“We're going to be in this period for quite some time,” he says. "Even after we get through the holiday period where consumers are buying things, and we have all these logistical problems, I don't think our problems will end there. We still have so many people who have left the workforce, and that's going to be driving wage inflation and price inflation for quite some time. That's a systemic problem — it is not transitory.”

Ehmke says while the U.S. economy works to find footing, elevated costs will continue to concern producers. And North thinks grain prices have some of the inflation factors already priced in.

“I think the markets have already been embracing inflation prior to Powell coming out and saying that,” North says. “Inflation indexes were already trading at 3%. We didn't buy into the transitory argument. And I think as we talk about feed costs, it'll show its head there as well.”