Market Commentary from Kottke Commodities – Commodity Capital CTA – Kenneth Stein
Most of our expectations are really just knee-jerk reactions to day-to-day details, but today’s headlines rarely reflect tomorrow’s reality meaningfully. How many tectonic changes in how many different areas of our lives have and continue to occur, only dimly perceived even by those attentive to broadcast, print, and internet? Indeed most “experts” seem equally oblivious, leaving mainly to historians the task of describing change.
What’s inside our many electronic devices, the origin of what’s on our dinner plates, and most everything else in modern life was literally either undreamt of or the stuff of science fiction, if not comic strips, within living memory for many. We live through what is today an accelerating continuum of mostly positive change without grasping it. The reason why investing in general and trading futures markets specifically is so difficult is that they price future events rather than today’s information flow, which mainly consists of yesterday’s statistics.
The USDA’s Intended Plantings report, in which U.S. farmers are surveyed as to the area planned for each crop, was issued at month end. It delivered a message with broader implications than just the coming year’s prices. Corn-acreage intentions were radically larger than expected, in fact the average of “expert” predictions was off by a wider margin than ever before. We confess to being part of this herd, but always reduce our clients’ exposure prior to release of important USDA data.
All grain-market analysts pay careful attention to the price of soybeans relative to corn, the two main alternatives for the farmland between Nebraska and Ohio so prominent in world food production. A ratio of 2.3 corn to soybeans has always been near if not above the “indifference point” for the average farmer. The price ratio on the date of the USDA survey was about that, but it’s shocking results showed corn to be far more attractive than soybeans, setting previous cost assumptions on their ear. That the equivalent price of soybeans over corn, in competition for land-use, now appears to have abruptly leapfrogged to 2.4 may seem a trifle – but it’s of great import to food economics. What happened to make 2016 so different?
In a word, “fracking,” the new drilling technique that reduced petroleum from over $100/bbl less than two years ago to under $40 today, and natural gas from over $4 per thousand cubic feet to under $2. Beyond today’s price, this technique has put a lid on energy prices because more wells can easily and quickly be brought on stream if price rallies – in contrast with “the sky’s the limit” on energy prices that bedeviled forward price expectations and affected investment decisions for the last half-century. That, and not the ’08 recession or subsequent eclipse of actual business activity by that of central bankers, is the lead economic story so far in the 21st century.
The key to today’s super-high plant yields required to feed a growing population demanding improved diets is use of fertilizer. It’s the basis of the “green revolution” which not only ended millennia of hunger, malnutrition, and frequent starvation in the Indian subcontinent into the 1960’s and beyond, but turned it into a net wheat exporter at present. It’s one of the 20th century’s triumphant (and American) stories which earned a Nobel Prize for Norman Borlaug.
The most important single plant nutrient is nitrogen, required for corn but unneeded by soybeans which fix it from the atmosphere. High-nitrogen fertilizer is produced from natural gas, and corn needs other compounds derived from petroleum. The diesel required by tractors and farm implements is of course a variable factor. Prices of these expensive major inputs to corn production have all declined, making it much cheaper to grow, both in dollars and compared to soybeans.
An equally dramatic grain-cost reduction, on the order of 10@15% for those in populous Asia who import food over a distance of 10,000 miles, has occurred in transportation costs. This is the result of both cheaper fuel and overbuilding of new ships.
The result is an historic reduction in production costs of the most expensive-to-grow product we trade, with further savings in the delivered price to consumers – a notable advance in industry’s contribution to reducing dietary as well as income inequality. Contrary to populist dogma, that cannot be done by redistributing the current food supply, but by finding ways to produce more at a lower price that more people can afford.