Market Commentary from Kottke Commodites – Commodity Capital CTA – Kenneth Stein kottke-Logo-300x61

Grain and oilseeds prices continue an abrupt transition from high-priced relative famine of the last five years to a low-price feast of plentiful supply. Farmers who did not prudently hedge before the big decline would say “overly plentiful,” but government subsidies will restore much of that. Recent years of demand growth undeterred by high prices had encouraged every farmer to plant and fertilize more, followed by Northern Hemisphere weather rivaling perfect greenhouse conditions. The result is the spectacular yields that high-tech seed companies advertised.

The magnitude of turnaround in supply underway has futures contracts still searching for the new level of market-clearing price. Until that becomes more settled, the spreads and intermarket adjustments on which the managers focus have lesser independent function. Commodity Capital did little more than hold its own during the month, but continued to keep the number of profitable trades at over 50% of transactions.

We have in this column been critical of Brazil’s failure to invest in transportation-system improvements despite great profits earned from soy and corn exports in recent years. Now that prices have fallen back, Brazil’s ability to compete is seriously impaired by continued dependence on poor roads to move bulky commodities over long distances. Costs of over $2 per bushel for shipping to market doesn’t leave much for a corn farmer with current futures price in low $3 area.

So to be fair we’re compelled to comment on the explosion of such costs to equally-high levels in the U.S., despite its sophisticated barge, railroad, and highway network. Very sharp increases for shipping grain by rail and barge appear caused by massive acceleration of demand for these services by the oil and gas industry. The Administration’s opposition to pipeline construction has forced huge and still-expanding output from new wells onto the rivers and rails, crowding out other industries.

Despite the lesser impact on the environment and other industries of shipping liquids by pipeline, and fact that both the U.S. and Canada will develop these energy resources regardless, the Administration has stuck to an essentially vindictive posture where everyone loses as the price of political grandstanding. It will reduce the earnings of U.S. farmers, offsetting the artificially-enriching impact of the Renewable Fuel Act (2006), which mandated huge corn ethanol use. It’s not the first time distortions generated by different federal policies have clashed to produce a third, almost unimaginably negative effect. But not to worry – Congress has always provided more farmer subsidies.

The upshot of the above is that since transportation costs apply equally to a bushel of corn, wheat, and soybeans – where nearby futures prices are $3.30, $4.90, and $9.37, respectively – high costs impact each in decreasing measure. In the next crop cycle, world production of corn will decline in favor of wheat and oilseeds – generating price change the managers will likely continue to express in your account.