Do Fundamentals Even Matter to the Commodity Markets? A Key Lesson From 2022

As the new year brings fresh market action, volatility continues to be the main theme to enter the new year.  The main market trends continue to dominate the markets to kick off 2023, and analysts say that's why there are some keys lessons to keep in mind from 2022.

Both Chip Nellinger of Blue Reef Agri-Marketing and  Arlan Suderman of StoneX Group reflected on how the markets performed in 2022, and according to Suderman, there are three main things the market taught us last year. 

“First of all, we saw geopolitical realignment across the globe,” says Suderman. “And that had to do with China and with Russia, most specifically with Russia, but now China aligning with Russia. And so, who you do business with depends on who you're friends with a net changes, freight increases – the cost of freight -  it decreases the efficiencies of the market and created a lot of anxiety in countries became less comfortable with just-in-time supplies.”

Suderman says as a result, we started to see some countries hoard commodity supplies during the first half of the year, which spurred the run-up in market prices. That also created a tremendous amount of volatility. However, 2022 produced another key lesson in the markets, one in which could carry into 2023.

“And then a third thing is, it was the year of the algos, which totally changed how we use the derivatives markets. Traditional specs stepped aside from the market, especially in the wheat market and some of the others, as well as we saw overall volume spike, but open interest go to multi year lows long term lows,” says Suderman. “So, the market price, the derivatives market, was primarily driven by the algos, which really changed the behavior, the market and the way we approached the market.”

Algos, which is an abbreviated term for algorithmic trading, is also referred to as automated trading and black-box trading. This method of trading is done by a computer program that follows a defined set of instructions - or an algorithm - to place a trade. The trades happen quicker than what can be done by a human trader.  

Nellinger has a different take on the overall market action. He says even with the algos having a strong hold of the market, 2022 reminded us fundamentals still matter.

“I think one thing that we learned this year is the market still work, they still are going to, you know, respond to supply and demand and demand fundamentals,” says Nellinger. “They may become inefficient at times because of the algos and the massive amount of money flowing in and out of our markets, but that provides opportunity at times to both on the upside and the downside.”

Related Story: Jerry Gulke: 2022 Was a Year for the Ages, What Awaits in 2023?

Nellinger points out the markets still can overreact to both sides of the market, but he says it’s all in response to the fundamentals.

“We've seen that, you know, across the board on corn, beans and wheat at different times of the year,” adds Nellinger. “We've seen the market respond to tightening supplies and increasing demand. That is going to be there going forward. It's been the bellwether to our markets and what makes them function in the past. And in spite of a lot of algo money and speculative money coming in and out of our markets at times, the fundamentals still matter.”

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