What in the world is going on?
All eyes on Ukrainian border troop buildup; price of hogs in China continues to spiral downward; Brazil, Argentina not selling beans.
February 14, 2022
After what seems like a long stretch of calm in world events, we are experiencing a myriad of items that are causing some ripples that have ramifications to our markets. To be sure, we are the tail of the dog in most of these circumstances and understanding/handicapping what is occurring is probably a worthwhile exercise. Let's unfold a few items:
Russia
All eyes are seemingly focused on the troop buildup on the Ukrainian border. The United States is warning of the imminent threat of invasion and rattling sabers of pending economic sanctions and other retaliation should Mr. Putin decide to advance. In fact, on Friday at just before noon, NBC ran a headline that read, "Russia is invading Ukraine next week." Recall, this is the same administration intelligence(?) that was responsible for the recent Afghanistan withdrawal.
Political theatre aside, the implications to our commodity markets is worth noting – about 15% of the world's corn trade originates from that area, an even higher percentage of wheat and barley are represented. A disruption in flow would be felt in the agricultural sector and at least some of that tension has been baked into prices. Note that we have a clear division between food and feed as wheat is trading at a solid $3/bushel premium to corn and any disruptions of wheat trade would not have a significant impact on the corn balance sheet, it would likely influence the trade directionally but not compete directly on the corn balance sheet.
What is more important to the Mr. Putin is the price of energy as fully half of the Russian economy is represented by the export of oil and its derivatives. As of this writing, crude is trading at over $90/bbl ... without a shot being fired or any war casualties for CNN to report. Whether Putin makes a move into Ukraine or not, it seems he is already tilting the board in his favor with the United States playing the reactionary game. Mr. Putin wears a wry smile on most occasions, it may break into a full-scale grin as long as this high-priced oil environment continues.
China
Of direct interest is the price of hogs in China that continues to spiral downward (chart attached). The big profits of 2019 and 2020 began to fade in 2021 and continue today. The price of corn is in excess of $10/bushel, soybean meal is over $600/ton, profits for their domestic production is non-existent. This does have implications on China's prospective importation of corn and soy as well as the negative environment for their importation of our pork. Chinese exports were a boon to the U.S. market when we really needed them in 2020, I do not expect a repeat of the same in 2022.
On the Chinese political front, President Xi has snuggled up to Mr. Putin as they have found a common cause in opposing the United States agenda. If China were to flex it's muscles with a potential skirmish with Taiwan – certainly not until after the conclusion of the Olympic Games – the implications to our markets would be greater. Our trade imbalance with China continues to grow and economic sanctions would mean more on this one; it is not out of the question to think that agriculture would get caught up in the fray.
China has fallen short of its Phase 1 commitments while still posting the biggest commodity purchases in history in 2021. If something were to occur, it would likely be a compression of grain exports from the United States. The "problem" with this in a micro environment is that South America is not availing soybeans to the market for several reasons that will be articulated next, China would find itself in an situation where they need product and the United States would impose as much pain as possible in economic trade, the soy situation may be near the top of the list to exercise leverage. China is a more important U.S. agricultural relative to Russia and Russia is getting most of the news coverage.
South America
While there is no acute political tension, the combination of dry weather and inflationary pressures are manifesting into a scenario that was unforeseen six months ago – the Brazilian and Argentinian farmer are not selling beans during a timeframe when they are normally very active. Reports of continued compression of the Brazilian bean crop (now at 125 million metric tons versus our beginning of the year guess at 144 mmt) – has brought the world's biggest buyer of beans to the U.S. shores for product.
Tack on inflation that is running out of control and the motivation of a South American producer is to hold beans as his hedge against his currency risk. This provides a world balance sheet that appears to be comfortable with a variable (lack of farmer selling) that confounds the situation and leads to higher prices.
Mexico
So far, my evaluation of the world has generally taken the tone of "problems." Mexico is a horse of a different color as it represents a tremendous opportunity. The last 20-plus years of globalization has led to more dependence on countries that are now shaky for reliance. Supply chain disruptions associated with moving product around the world can be truncated when we are moving shipments over the border via trucks and trains. Mexico could become our next Made-In-China label. We already have a trade agreement (USMCA) in place and the motivation to seek alternative relationships, this one is Mexico's opportunity to lose.
Canada
The trucker's strike and subsequent civil disobedience via the blocking of a bridge is one degree away from coming to the United States. So far, we have not seen a huge direct disruption to the movement of pork or pigs across the border, this one needs to be calmed down regardless of the merits of the cause.
Peaceful protest is a hallmark of democracy, the interruption of commerce is – in my opinion – not the proper way to display your frustration. If this blockage was being carried out by the other side of the political spectrum, I suspect we would have all kinds of new adjectives for the behavior. Putting a wrench in the gears of the free market system is not the best tool for reform; the voting booth is the more permanent solution.
United States
Despite all of our scars, we are still the best place in the world to live and thrive. Inflationary concerns will likely have a more to do with commodity prices relative to our traditional models, I like where the pork market represents value to the consumer and how we are positioned in a world market to profit. The elasticity of profit associated with pork production favors revenue above all else. Oddly, inflation helps more than it hurts, even if it does hamper future generations.
Comments in this article are market commentary and are not to be construed as market advice. Trading is risky and not suitable for all individuals. Click here to contact the author.
Source: Joseph Kerns, who is solely responsible for the information provided, and wholly owns the information. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. The opinions of this writer are not necessarily those of Farm Progress/Informa.
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