Season’s greetings to all. It’s that time of year again when dusting off the crystal ball is a popular pastime. For what it’s worth I would like to share my thoughts on what may be coming at us in the next 12 to 18 months. As I’ve mentioned in the past, for this exercise I try to look past the noise of day to day movements and consider the big picture, management impacting possibilities.
I know it’s a contentious topic but I do believe inflation will continue to be one of the greatest considerations. It will be our friend when it comes to what we produce but not so much for what we use to do so and not if we carry much debt. I do not see a sign of a top anytime soon for physical commodities and expect volatile weather and investor desire to hedge against inflation as driving forces for further advances to come.
Leading off, king corn looks poised to push higher with an ongoing La Nina inspired drought in South America providing fuel. The USDA is as bad as farmers when it comes to optimistic forecasts making everything better next year. They have predicted a slight increase in world corn carryover but used a 30 MMT increase in S. American production to do so. Given the current drought there, that seems quite unattainable at this point. It would be reasonable to expect export demand to switch to the US, tightening the balance sheet there. With forecasts suggesting La Nina could push drought conditions further east into the heart of the Midwest next summer, there is little to suggest a test of all time highs of $8.43/bu can be ruled out.
Wheat is a little more difficult given the tight supplies of quality product in export hands being offset by ample world stocks (consisting of lower quality or in Chinese hands and inaccessible). That said, the saucer on the monthly chart suggests a significant rally remains ahead. Whether it’s fueled by a Russian invasion of Ukraine and resulting embargos, ongoing drought damage around the world or demand by inflation hedges, it looks like the resistance at $9.50 (Chicago wheat) will be tested and likely surpassed. Such a move would help Minneapolis push higher.
The oilseeds look strong as well but leadership may shift to soybeans and meal from oil and canola. Soybeans are impacted by similar factors as corn (S. American drought resulting in increased US exports) suggesting the highs of 2021($16.67) will be tested and likely surpassed. Regarding canola, I see no reason to believe canola will stop short of testing the $1100/t record (approximately).
Live (fat) and feeder cattle futures look poised to rally as economies continue to get back to normal with the drought reduced breeding herd impacting the calf supply for years to come. A significant portion of the cow/calf sector can be found in states that were severely impacted by drought in ’21 with high cull rates resulting. A return to 2014 highs for fats would be quite reasonable with feeders a little more questionable given the feed outlook.
In the non ag world, energies and metals continue to look strong with pullbacks in the energy sector looking like long hedging opportunities and the saucer on the monthly gold chart giving all the (gold) bugs reason to buy.
All of this inflationary outlook should come at a cost in the form of higher interest rates. Currently the treasury markets are consolidating due to the uncertain impacts of the omicron strain but that should give way to falling prices and higher rates. At this point it’s unclear how high they (rates) may go longer term but protecting oneself should be on managers minds for the foreseeable future.
All of this optimism in No Way suggests one should become complacent. To the contrary, a high price - high volatility outlook should compensate managers well for spending time on marketing and risk management (given sharp corrections along the way will be a given).
And with that, my New Years’ wish to you is that this opinion is worth more than what you paid for it.
Happy New Year to all!!
Mitch Miller
I know it’s a contentious topic but I do believe inflation will continue to be one of the greatest considerations. It will be our friend when it comes to what we produce but not so much for what we use to do so and not if we carry much debt. I do not see a sign of a top anytime soon for physical commodities and expect volatile weather and investor desire to hedge against inflation as driving forces for further advances to come.
Leading off, king corn looks poised to push higher with an ongoing La Nina inspired drought in South America providing fuel. The USDA is as bad as farmers when it comes to optimistic forecasts making everything better next year. They have predicted a slight increase in world corn carryover but used a 30 MMT increase in S. American production to do so. Given the current drought there, that seems quite unattainable at this point. It would be reasonable to expect export demand to switch to the US, tightening the balance sheet there. With forecasts suggesting La Nina could push drought conditions further east into the heart of the Midwest next summer, there is little to suggest a test of all time highs of $8.43/bu can be ruled out.
Wheat is a little more difficult given the tight supplies of quality product in export hands being offset by ample world stocks (consisting of lower quality or in Chinese hands and inaccessible). That said, the saucer on the monthly chart suggests a significant rally remains ahead. Whether it’s fueled by a Russian invasion of Ukraine and resulting embargos, ongoing drought damage around the world or demand by inflation hedges, it looks like the resistance at $9.50 (Chicago wheat) will be tested and likely surpassed. Such a move would help Minneapolis push higher.
The oilseeds look strong as well but leadership may shift to soybeans and meal from oil and canola. Soybeans are impacted by similar factors as corn (S. American drought resulting in increased US exports) suggesting the highs of 2021($16.67) will be tested and likely surpassed. Regarding canola, I see no reason to believe canola will stop short of testing the $1100/t record (approximately).
Live (fat) and feeder cattle futures look poised to rally as economies continue to get back to normal with the drought reduced breeding herd impacting the calf supply for years to come. A significant portion of the cow/calf sector can be found in states that were severely impacted by drought in ’21 with high cull rates resulting. A return to 2014 highs for fats would be quite reasonable with feeders a little more questionable given the feed outlook.
In the non ag world, energies and metals continue to look strong with pullbacks in the energy sector looking like long hedging opportunities and the saucer on the monthly gold chart giving all the (gold) bugs reason to buy.
All of this inflationary outlook should come at a cost in the form of higher interest rates. Currently the treasury markets are consolidating due to the uncertain impacts of the omicron strain but that should give way to falling prices and higher rates. At this point it’s unclear how high they (rates) may go longer term but protecting oneself should be on managers minds for the foreseeable future.
All of this optimism in No Way suggests one should become complacent. To the contrary, a high price - high volatility outlook should compensate managers well for spending time on marketing and risk management (given sharp corrections along the way will be a given).
And with that, my New Years’ wish to you is that this opinion is worth more than what you paid for it.
Happy New Year to all!!
Mitch Miller
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