I’ve monitored commodities in this column through excessive moisture and drought, maneuvered through excessive wet and drought and the pre- and post-phase-one periods. The mainstream media, including land grand universities, have focused on our backyard U.S. stocks of grain (supply). But I have realized for decades the rising importance of the global situation. The rise of our new competitors in Russia, Ukraine and South America were mere figments of our imagination when I first started writing for Top Producer.
Through the myriad of factors that affect price discovery, the price action itself as depicted in charts has been a constant bell-weather forecasting market directions both short and long term. Chart analysis, as a reliable guide in determining outlook, is more of an art than a science, which may be why very few do it.
A review of where we have been and the impact at this juncture is warranted.
CRUDE OIL
Crude oil has been in the news as it relates to inflation recently, but its influence has been around for decades. The rise this year followed the washout of 2020 and the 2020 election price of $35 per barrel and the immediate attack on fossil fuels last January.
The U.S. has gone from being self-sufficient and a net exporter of energy to begging OPEC for oil, asking for a release of 50 million barrels of oil from our strategic reserves. That has been touted by the media as a major deal when in fact for the U.S. it is about a three day’s use, and it will take likely until after Christmas and the year-end holidays to take effect; sufficient time for “big oil” to capture the bulk of consumer holiday traveling, including Thanksgiving. This I another reaction by politicians rather than pro-action.
The warning of an imminent release of reserves allowed big oil to hedge off $85 before slipping $10 and right back at a price point where we have been before over the years. The picture depicted in the chart below is obvious. We’ve either topped the price of crude for reason not yet revealed or it is a pause before rising back above the October/November highs, further taking inflation out of control ultimately affecting our U.S. and global economy. Should that happen, “Econ 101 will solve the negative effects of inflation that affect the very people (middle and lower income) that we are promised won’t be affected by the continued tax and spend focus of previous and current administrations.
The outcome likely won’t be pretty and will ultimately hurt the those who had little to do with the naïve action by government. A monthly natural gas chart looks similar! The bottom line suggests energy is at a reflection point that will affect your economic well-being.
INFLATION
The U.S. Dollar Index does not include South American currencies but includes other majors of the world. The bottom line is we are in essence making everything we sell more expensive to buyers and thereby exporting our inflation making us less competitive, and directly increasing food inflation for buyers.
I suggested months if not a few years ago that it was high time that importers should assume some of the responsibility to build strategic reserves in times of surpluses instead of leaving surpluses in the U.S. It seems COVID-19 has done that and China is/was the leader, making them a market price maker with much more control than just a year ago.
GRAINS
An equally important outlook can be found in the grains we produce and the livestock we consume. That will be depicted through price analysis. Prices topped for corn, soybeans and wheat last May due to many of the fundamental reasons that were revealed after the warnings depicted pictorially in this column (price charts) over the months.
If there is any old crop left in bins it has lost significant value and now can be considered as new crop, joining the crop harvested in 2021. The price volatility proved to have a major impact on gross income. A self-analysis of looking at the price of new-crop soybeans dropping nearly $3 per bushel or $150 per acre based on national average, is jaw dropping at its extreme. Figuring just half the move is equally concerning.
Prices are enjoying a one-year anniversary from when it all started on Dec. 1, 2020, and the question was asked and answered whether China was for real and would continue to buy. They did and the prices topped just as we were completing planting in early May and price thereafter wouldn’t add or detract planted acres in an appreciable way if prices did rise further.
Prices had risen to levels last seen in 2011/12 when we had historical precedence of what happened to demand and how it stimulated new supply. Prices have since continued to drop to levels typically seen in previous times as support or decision points. Should prices move below those levels, the result will significantly impact the bottom lines of producers.
Wheat was the first to breakout to new recent highs over the spring top and as is seen so often in typical “global” supply concerns, can move in a logarithmic fashion. The charts below do not depict proprietary studies that can aid in depicting trend changes.
Price action once again will predict the future financial state of agriculture well ahead of the revelation of events that will ultimately be blamed by the media as the rationale. A good yearend exercise to perform is to review financials by pulling out the Trump/Biden tariff offset monies and stimulus checks from the profit and loss statement to get a better view of cash flow and your ability to compete with global entities that do not have the luxuries of government support that we do.
The reality is China remains the big gorilla in the room and directly can control the prices we receive. Talk is cheap and the media bobbleheads are good a surmising but lack a global focus and reality that we may compete locally for costs, but the global perspective dictates the prices we receive.
The market doesn’t care in the short run about our personal situation regarding whether or not we have land, rent or machinery obligations or that we now “need” $5 corn or higher to cash flow. Few will admit to the fact it takes after-tax cash flow to make a principal payment on the ever-increasing cost of land. While a good investment long term, debt obligations need to be minimized.
Can I compete with anyone locally or globally in a low or no-debt environment? You bet, but not if I have blinders on or believe agriculture is too big to fail. Let’s hope that in the short run that inflation of costs and/or even inability to get our hands on sufficient inputs will make 2022 a year where we chose the commodity to grow that will lose us the least, not make us the most.
Jerry Gulke can be reached at (707) 365-0601 or by email at Jerry@gulkegroup (be informed on a daily basis).
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Check the latest market prices in AgWeb’s Commodity Markets Center.
Jerry Gulke farms in Illinois and North Dakota. He is president of Gulke Group. Disclaimer: There is substantial risk of loss in trading futures or options, and each investor and trader must consider whether this is a suitable investment. There is no guarantee the advice we give will result in profitable trades. Past performance is not indicative of future results.
