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What I'm Watching This Week In The Grain Markets
By: Barchart | March 19, 2023

Last night we watched “Margin Call” for what is probably the 100th time, and to be honest it hit a little differently watching it this time with all that is taking place in global banking sector currently.

For those of you who haven’t seen it, it is basically the story of an investment firm early in the late 2000’s banking crisis that discovers only after the markets start moving against them substantially, they are far too over-leveraged and must unwind their positions in a fire sale to avoid an absolute implosion. This of course, using the benefit is hindsight, is the start of the banking meltdown that resulted in the Great Recession.

Waking up this morning to news that UBS has made an offer to buy Credit Suisse for pennies on the dollar as the embattled investment bank barely hangs on, prompted me even further to look back on what started the banking crisis and what happened in commodities after.

While no two trading years are the same, they do have similarities, so to start my research journey I looked at past commodity supercycles and what their ending’s had looked like. In doing so I quickly learned we aren’t in a supercycle as defined, as a supercycle is a period of surging demand, surging supply and surging prices. While one could argue we had seen a surge in demand post-covid, the global demand curve for agricultural commodities in the months and years ahead is relatively flat.

Supply is most definitely not surging, in fact much of the increase in price was caused by supply loss or supply bottlenecks. We are seeing global supplies potentially stabilizing, but one could argue it is too early to say that as we must confirm the Brazilian safrinha crop and all of Northern Hemisphere production, something we’re at least 5 months away from doing confidently.

Prices have flatlined as of late after a tremendous surge as well, meaning that though we have experienced a pretty significant boom in agricultural commodity values, the argument we have entered a supercycle or will maintain one is moot.

My memory tends to blur together when looking back at the banking crisis that began in 2006 and its subsequent impact on commodity prices. I had started my career in 2005, when grains were on their 10th year of depressed values. In fact, my first day on the job I was instructed to call every farmer on a list (landline numbers only) and offer them $1.85 picked up for their corn.

Looking back of course, worries over the housing market and what that meant for the world economy started far before I remember even having it on my radar. I always feel like it started in 2008, when it fact it started 2 years prior with the collapse of the sub-prime lenders and the subsequent ripple effects caused by their demise. The collapse of these lenders and the worries over where money should be put that could be considered a safe sent investors running to commodities.

Up until recently I was somewhat under the impression that the current economic situation was similar and that the recent move in commodities was like what we had seen in the first decade of the millennium, an illusion I think a lot of us are wrongly living under.



The run up in price in 2008 came from incredible outside market volatility and uncertainty in the face of zero percent interest rates. There were no other safe havens that could provide growth potential with limited risk of loss. Agricultural commodities were also relatively cheap comparatively speaking to other investments at the time, with December corn starting the year in the mid $4.00 range, therefore taking cash and parking it where loss was seen as limited had value.

Speculators and managed money had avoided being significantly long commodities ahead of the housing crisis. It was not a money maker for them, and therefore was not a focus. Of course, their move to get long commodities in 2008 was supported by stories of growing demand, both for ethanol and in exports.

While the recent run up in price here that began in late 2020 was started with the idea inflation was inevitable and exacerbated by La Nina and war impacted supply reductions. This while a surge in demand for global grains that could be likened to the rush for toilet paper we saw in the early days of the pandemic, turned the situation into a price powder keg.

Looking at this year, the fund length has now been exceptionally present in the market for 3 years, with 2023 being the third year in a row of big commodity length—until recently you could say in corn and wheat.

Many want to push the idea that commodities will continue to benefit from outside market interest because they are considered a safe haven. But I will argue they are only truly a safe haven in times of low interest rates. Otherwise at these price levels without a significant supply disruption, they are an investment that will tie up a lot of capital at a time when it’s best to keep cash on hand, this not mentioning their limited potential for return compared to other investments as they remain near multi-year highs.

Of course, everyone loves to talk about 2008 and the subsequent market crash like we didn’t maintain lofty and volatile prices for the next 5 years before supply stabilized versus demand and investors felt comfortable putting their money elsewhere.

Without the luxury of knowing yet whether supply has stabilized versus demand, it is far too early to argue for anything to happen direction-wise in the market, as fundamentals remain incredibly uncertain.

But in the end, when it comes to what’s driving my Sunday Scaries this week, the fact that managed money could be leaving agricultural commodities soon sits at the top of the list. I don’t think we have to go much further back than 2019 to see what trading solid fundamentals without speculator interest looks like, as that year we faced the biggest potential loss in production since 2012 and could only get December corn to trade to $4.73.

I’m not ready to say the ag commodity story is over just yet, but I truly feel like it is something we should be willing to talk about, as the implications could be huge, especially when taking rising borrowing costs into consideration on the farm.

Other things I’m watching this week, the Black Sea Grain Corridor was extended over the weekend. Russia continues to say it is for 60 days, while Ukraine says its for 120 and the UN and Turkey remain somewhat quiet as tiebreakers. Experts say legally without amending the agreement in writing, it is good for 120 days, so I guess we will see as we look out to the end of April whether Russia is serious about 60 days or not.

Chinese President Xi is making a bold move in traveling to Moscow tomorrow. This is something we will want to watch closely as China is trying to broker peace in Ukraine and Xi is likely the only one powerful enough to convince Putin of anything. With the situation between the US and China still on thin ice, especially after recent accusations from the US that China is thinking about providing lethal aid to Russia, this meeting could have a major impact.

We are less than 2 weeks from the planting intentions report, with feet of snow still on the ground in the Northern Plains. Planting needs to get off without a hitch this year, so I’m definitely going to be watching weather as well.

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