Commodity Markets Facing Significant Supply Questions

Corn Combine

The first four months of 2022 have seen a lot of upward pressure in some commodity markets, especially corn. Mike Zuzolo, president of Global Commodity Analytics, says supply chain issues likely aren’t one of the reasons behind the sharp rise in the corn market.

“I would say not at the raw material or the corn-supply-chain level, from getting it from, say, the United States or Brazil over to China or over into Europe. I think it’s more of the refined products that are finding difficulty on the supply chain, and then the latter parts of the supply chain, whether it’s a feed-type material that goes into the livestock industry or something like that, that you run into the supply chain issues. I think it’s the supply chain that’s down the line, more than anything.”

He says there are a lot of negative demand features in place in the markets.

“The trade just can’t get a bearing on what the supply is, so they don’t know if the demand is being rationed aggressively enough at this point because they don’t know if the supply has stopped going down yet. What I mean by that is avian influenza, that High Path Avian Influenza, it’s in 20-some states, at this point, in the United States. We’ve got a hog herd that is shrinking as of the March Hogs and Pigs Report on the quarterly numbers. We’ve got a cattle supply and a cattle herd that is seeing a drop, almost weekly, of one to three pounds on a dressed basis. And I think we’re only about four or five pounds above where we were a year ago. And this is the beginning of what could be one of the worst droughts in cattle country.”

Zuzolo talks about the possibility that the U.S. might have to ration exports if supply-side challenges continue.

“In terms of food, I don’t think that’s going to be necessary. I mean, obviously, Mother Nature is going to dictate that, and we are seeing, by these big drops, I mean, we lost eight million barrels of crude oil this past week. It wasn’t because our demand is so strong. It was a three times bigger drop than what the trade was expecting because we’re exporting it out the door. So, if we can’t bring up the rig counts here in the United States and start producing more domestically to meet both our domestic needs and also the Ukrainians’ needs, then we do need to start thinking about rationing and export issues like that. So, I think this is something that will have to be discussed within the next three to six months if this war expands, if this conflict gets any bigger than it already is.”

It’s going to be hard to predict what’s ahead in the commodity and energy markets for the rest of the year.

“Yeah, it will be, and I think I’m going to stick with what I’ve been talking about for probably six months now, and that is because this is a supply cost-push, weather-induced, inflationary move, and even the war in Ukraine is more supply-lead than it is demand-lead, I still feel as though that the first half of the calendar year of 2022 is the best time for grain hedgers to get their hedges in place. And yes, I do think they need hedges in place because it’s not demand-led and that we are, I think, on track for a recession, a higher probability greater than 50 percent, by the fourth quarter of this year.”

Livestock and poultry producers will see a better opportunity to hedge for better profits in the second half of this year. High grain prices will likely pull down livestock weights, and the Highly Pathogenic Avian Influenza outbreak will cut down on the nation’s poultry flocks.

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