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Turner's Take Ag Marketing | Stagflation, Energy and Ags

By: Craig Turner, Senior Risk Management Consultant

Stagflation, Energy and Ags
 
Craig Turner
Senior Risk Management Consultant
craig.turner@stonex.com

Macro Markets

The latest debate on Wall Street is if the US is heading to a 1970s style stagflation. Stagflation is a period of stagnant economic growth and high inflation.  Their is a good opinion piece about it here in Reuters today The inflation of the 1970s was a result of the expansive monetary policy, rising energy prices, and government regulations restricting the supply of goods. In other words money was being printed at an accelerated clip as debts increased rapidly, the oil shock and rising energy prices made all goods and services more expensive, and government regulations were limiting economic productivity (i.e. supply).  More money in the system, higher input costs, less production = Inflation.  The higher input cost and less production naturally stagnates economic growth.  Stagnate economic growth plus monetary inflation = stagflation.

The analysts who think stagflation is a possibility argue the following points.  The first is the US and the world are printing money and issuing debt to try to either stimulate economies or support their citizens. The second point is the price inflation we are seeing in energy, food, housing, and manufacturing.  The third is the continued COVID, energy and other economic restrictions hampering economic growth.  Their augment is when you combine all three you run the risk of stagflation.  It might not look exactly like 1970s stagflation but as Mark Twain said "history does not repeat itself, but it often rhymes." 

If the US does enter a period of stagflation there is only one way I know of to get out of it.  The government has to dramatically increase interest rates (causing an instant recession) while also cutting as much regulation as possible to make it easier to increase production.  That sounds like no fun at all, but this is what can happen if you have decades of easy money and policies that limit economic growth.

Energy

Natural gas tested $6.40 a few weeks ago, traded to $4.85, and now we are back up to $6.15...and it is only October.  I like NG but getting long futures is not for everyone. If you are looking long exposure this winter I would take a look at the $6.50 call for 1.400 and then sell either the $7, $7.50, or $8.00 call and make it a spread.  The 6.50/7.00 is going to cost about $1100. The $6.50/$7.50 is about $2100. The $6.50/$8.00 is about $3000.  If you want to collect some premium you can sell the Feb $4.00/$3.80 put for about $700.  

Each $1.000 in NG is $10,000, so 10 cents is $1000 and a 1 cent is $100.  It is a big contract so if  you don't want to trade the standard futures contract there is a mini that is 1/4 of the size or we can look into buying call spreads and selling put spreads.

Ag

Corn rallied today and took just about everyone by surprise.  Corn had been trading higher overnight and in the early morning as traders speculated on Chinese export interest and a possible break out over the 100 day moving average. The bullish ethanol report showed more corn use than expected. The combo of all three factors sent Dec Corn to an intraday high of $5.6325.  The demand outlook for corn looks bullish for ethanol and if China starts buying corn again then spot futures could rally to $6.00

Higher crude oil prices are bullish for ethanol and corn.  Higher natural gas prices are driving up fertilizer costs.  Corn acres were expected to be 93 million and soybeans 87 million next year but the high input prices for corn could see the mix be closer to 90mm/90mm for corn and soybeans.  Corn should be supported on the breaks.  We still have an order to sell new crop soybeans at $12.50 basis Nov 2022 futures.  I still like being long March Corn with a put for protection.  On the next pullback we should also look into buying soybean oil.  Vegetable oil should be in tight supply for another marketing year.

 

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