Our economy has undergone dramatic changes over the past two years. This should come as no surprise to grain and oilseed producers across the country, especially as they grapple with high costs and lucrative commodity prices amid unprecedented market volatility.
To be clear, fundamentals are always going to reign supreme when it comes to price discovery in agricultural markets. But more importantly, it has brought many outside influences to commodity markets that farmers typically overlook.
Inflation is one of the main drivers at play in agricultural markets. The personal consumption expenditure index that the Federal Reserve uses to gauge inflationary pressures recorded an annual increase of 6.3% in May 2022 after peaking at 6.6% in March. This is the highest inflation rate the country has seen since January 1982.
Inflation and Ag
Rising energy costs, abrupt shifts in consumer buying habits, generational and pandemic shifts in the workforce, disruptions in inventory management, supply chain bottlenecks and extra government money are all to blame.
CFO of restless retailer Bed Bath & Beyond, Gustavo Arnal, summed up this dynamic in a company earnings call in late June, noting: “There was a lag between when demand was estimated, when where the supply actually happened, compounded by the supply-chain challenges in the industry.
Farmers have obviously held up better over the past two years than Bed Bath & Beyond. And this is largely due to the nature of the assets they produce. Commodities are a hedge against inflation, and since they are typically used as raw materials in final products, they tend to act as the canary in the coal mine for future inflationary pressures.
In hindsight, the agricultural commodity price boom that began in early August 2020 was the canary. After this point, outside investors began to flock to the agricultural futures market to appropriate food assets to offset potential losses due to inflation.
But as the Federal Reserve raised interest rates by the widest margin since 1994 in mid-June to quell inflation, these fund managers began selling in agricultural commodity markets, contributing to declines. spikes in grain and oilseed prices in June.
The message for commodities is clear: if the Fed wins its battle against inflation and puts the brakes on rising prices, then commodity prices could suffer losses.
To be sure, tight global grain stocks and ever-increasing demand will keep commodity prices profitable for farmers for at least a year, especially if La Niña causes harvest difficulties in the Southern Hemisphere this winter. The Bank of America research group particularly likes “the limited correlation between the global agricultural cycle and the business cycle,” which is likely to keep some hedge funds in the agricultural sector.
Identify price gouging
But if/when inflation starts to come down, will farmers first feel the effects on income or income statement expenses?
Rising prices are on everyone’s mind as fertilizer prices hit new highs. Two outreach reports from Iowa State University and the University of Illinois released in June find little evidence of price increases at play in fertilizer markets today, noting that rising production costs and logistics issues are the main drivers of high fertilizer prices.
“The argument that fertilizer companies could take advantage of inflation to raise prices raises more questions than answers at this point,” the ISU report posits. “Nevertheless, these are good questions for which we need more data.”
One data point that could indicate a potential price boost is the fertilizer companies’ second quarter 2022 earnings reports due out in late July and early August. The fall in Wall Street stock indexes in the first half of 2022 would suggest that companies are not reporting profits high enough to justify higher prices.
But this is where farmers need to pay attention on Wall Street. High profits in the second quarter could potentially indicate that fertilizer producers are increasing their revenues faster than their expenses, which could make the rise in prices suspicious. Nutrien posted another quarter of record net profit during the first quarter of 2022. Mosaic’s first quarter profit was 71% higher than a year earlier.
If fertilizer producers make another quarter of their record profits, farmers could reap some of those profits by buying stock in those companies. Unraveling price gouging may not be easy, but buying into these companies – the same way fund managers have bought commodities – is a great way for farmers to offset risk. income inflation.
Share prices of fertilizer companies have depreciated amid the commodity market’s sell-off in recent weeks. “Investors and analysts are trying to decide now whether fertilizer stocks have been swept away by the market selloff and could reverse course, or whether they were too high in the panic after the invasion of Ukraine. by Russia and fell even further,” writes journalist Pia. Singh in a the wall street journal article published in early July.
The article points out that prior to the recent hedge fund sell-off, fertilizer producers Mosaic and CF Industries were among the top performers in the S&P 500. “Competitors Nutrien Ltd., Corteva Inc. and CVR Partners LP traded arcs similar,” observes Singh. .
While some on Wall Street may be increasingly bearish on fertilizer companies, Tracey Allen, commodity strategist at JPMorgan Chase & Co. thinks there are still good reasons to be long on fertilizers . Even as inventories build up ahead of the fall application season, demand from farmers is expected to remain strong as global food and fertilizer supplies remain tight and fuel prices remain high.
“Fertilizer prices are going to be a very important driver of agricultural prices going forward,” Allen told the WSJ.
It’s redundant but still significant: we are living in unprecedented times in our economy. Attitudes are changing on risk, especially as fears of a global recession weigh on the economy. Supply chain issues are still not being resolved smoothly. The agricultural economy is very exposed to these big financial problems, so be sure to watch more than crops this summer.