Market Commentary from Kottke Commodities – Commodity Capital CTA – Kenneth Stein

Those of a certain age will remember the “gas crisis” of the 1970’s, when prices at the pump shot to record highs felt keenly in the economy and individual households. Subsequent skottke-Logo-300x61tatistics revealed  no decline in imports, domestic production, or refinery run times, i.e., no supply reduction had occurred. It was demand that went wild, touched off by panic over statements out of would-be monopolist OPEC. A substantial percentage of motorists simultaneously acted to keep tanks topped up as security, abruptly increasing purchases to a record peak that could not be met. What seemed prosaic to individuals purchasing an additional five gallons per week was collectively a sudden, vast increase in demand far out of proportion to actual miles driven. Gas lines extended for blocks and media coverage fed the impression of a crisis which drove more to the pumps. Congressmen were quick to decry oil-company gouging, point fingers at speculators, and convene official investigations thereto.

World soy-protein demand for animal feed continues along a steep growth trajectory. The main shippers are Western Hemisphere exporters U.S., Brazil, and Argentina, the main importers Asian. The supply chain thus extends for thousands of miles. By last August, so few soybeans remained from the previous year’s crop – an all-time low relative to the expanding demand base – that animal-feed inventories and the volume in-transit along those globe-spanning shipping lanes were dangerously thin. No firm is comfortable with inventories of feed for its animals so small, especially when new supplies are so distant. At the onset of this fall’s U.S. harvest, all customers desired shipments to return to normal ASAP plus more to rebuild inventory back to normal. Total demand far exceeded actual tonnes fed, far outstripping the capacity of U.S. soybean processors (still is at this writing). The result was a big soybean-meal rally and record-high “crushing” margins.

It was not lack of soybean availability, rather quite the opposite: the U.S. crop was record-large and farmers marketed a record volume, enough to permit simultaneous record highs in export and domestic processing volume yet still maintain “carrying charges” in CME soybean futures. Our most profitable November trade was indeed long soymeal via options, but the position was neither large enough nor held long enough to make far more … a mistake.

In the wake of massive sales of soybeans right off the combine at very profitable prices, the U.S. farmer is again cash-flush. All grain markets – soybeans, corn, and wheat – will require additional supplies from farmers after the first of the year. We feel the farmer will be loath to comply, compelling spreads to tighten and perhaps futures to advance. Yet these are marketing lags and simply push disposition and pricing of large world supplies further forward. Prices will have to reckon with that eventually.

In addition: shades of ’56 Hungary and ’68 Czechoslovakia, Russian tanks are rolling in Ukraine, a newly-important exporter of wheat and corn whose economy is at high risk of collapse. Russia itself will experience negative growth and its farmers will have difficulty affording imported seed and chemicals considering the 40% decline in ruble exchange rate this year. And we foresee a new era of financial wherewithal by farmers in Brazil, a giant presence in the world grain trade, which will generate price patterns breaking the historical template that guides most analysts.