Turner's Take Ag Marketing | Time to Deleverage?

By: Craig Turner, Senior Risk Management Consultant

Mon, 13 Jun 2022, 14:59

Turner's Take Ag Marketing

Craig Turner

Senior Risk Management Consultant

Turner's Take Podcast

MACRO MARKETS | The S&P 500 is in bear market territory (down over 20% from the peak) while the NASDAQ is down over 30%. Bonds are lower as interest rates continue to rise. The market is now thinking we could see a 75-basis point increase on Wednesday.

The current administration and Federal Reserve were caught off-guard by the rampant inflation we have seen this year. I think there are two things going on at the same time. One is structural and one is transitory

Structural Inflation - This is from low interest rates, the nearly $9 trillion Fed balance sheet, and government stimulus acts. The money injected into the system creates demand for goods, services, and assets. It can lead to a situation where there is too much money chasing too few items.

Transitory Inflation - Structural inflation is usually caused by the oversupply of money. Transitory inflation is usually caused by shortages. Labor and manufacturing shortages were caused due to COVID shutdowns, and some parts of the economy have still not fully recovered. Logistics and supply chains are still trying to get back to where we were before the pandemic.

Energy is transitory if you view it from a policy perspective. If the US and Canada were more friendly to fossil fuels as they continue to develop renewable fuel solutions, energy prices could be cut in half from where they are today.

Food prices are high due to shortages also. Global oilseeds are tight and getting tight and not expected to ease until next year. Vegetable oil is the main component of renewable biodiesel and that will be a demand driver for years to come. Feed is expensive and that makes beef, pork, poultry, and fish more expensive too. Fertilizer and chemicals made from natural gas are very expensive and that drives up the cost for field corn and feed wheat. The war in Ukraine is making matters worse for corn and wheat.

A resolution in the Black Sea will help lower feed and energy prices. US and Canada could change their energy policies. Eventually S. American and N. America will have average to above trend crops. Those will all be bearish factors and send prices lower. The problem is none of them are happening right now. Until these issues are addressed it is hard to see inflation come back down to normal levels.

OUTLOOK | Since the subprime crisis central banks and government have been proponents of quantitative easing (QE). It has been almost 15 years since the subprime crisis in the US. We are now entering a phase of real Quantitative Tightening (QT). No one knows for sure how this changes stocks, agriculture, energy, interest rates, housing, or the labor market. My recommendation is to use less leverage and focus on fixed risk/low margin strategies. If you are bullish energy, look at buying calls spreads and selling put spreads. If you are bearish soybeans, look at buy put spreads and selling call spreads. In a market like this you need to always know your risk exposure.

Craig Turner
800.958.9470 Toll-Free
312.706.7610 Local
312.706.7510 Fax
craig.turner@stonex.com
@Turners_Take

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