Price volatility extreme in all commodities
The positive aspect of the volatility that we are seeing now is that the beef and pork industry should be much more profitable over the next six months, says Richard Brock of Brock Associates
By Richard Brock, Brock AssociatesFirst, let’s just start out with some bullet points on what we see happening across the board.
Cattle and hog prices have washed out and are making a bottom. Prices should bounce back quickly.
Corn prices are headed lower. Since harvest time, a very significant portion of the corn crop has moved into the marketing channels on DP contracts. In some areas of the Midwest, at more than double the normal amount. That in itself is bearish because now the buyer owns the corn and does not have to bid up to get it. Shortly after the first of the year we look for more corn to be moving to market, basis levels will soften, and the overall price structure will be weak.
Soybean prices and particularly soybean meal will continue to be soft and head lower. A big share of the move is already over. The strength primarily came from drought conditions in Brazil. That’s now built into the market.
Now let’s take a look at the world outside of agriculture. Wars are inherently inflationary. Many companies and individuals are making vast amounts of money over someone else’s misery. Not a good situation but this is a reality.
Much of that money and increased wealth is having a profound impact on the stock market. The overall market has rallied 14% or more just since November 1! The move is not over.
Inflation at a moderate level is here to stay. Two driving forces of inflation are energy prices and labor rates. The oil market has been under pressure for a couple of months, but we believe this market is now making a bottom and buyers of fuel should be aggressive. The market went to much lower levels than was necessary. In regard to labor rates, once they go up, they hardly ever go down. When hamburger flippers are paid $18 an hour, it is tough to hire people if hourly rates start going down. Will not happen.
This relates to another very hot topic and that is interest rates. In the graphic below, we make a comparison of the yield curve at various times over the last couple of years. As you will note, the current yield curve is flat for the next six months and then starts down. While this is not an exact predictor of rates, it should be close. The indication is that rates will drop three quarters to one point within the next 12 months. We don’t believe that rates will drop by a full percentage point, but three quarters of a point is realistic.
The Bottom Line: Extreme volatility in all markets makes it difficult for anyone to make long-term decisions. It has been said many times that price volatility creates opportunity and flat markets thus offer very little opportunity. That is true, but volatility also adds to emotional pressure, making decisions difficult. The positive aspect of the volatility that we are seeing now is that the beef and pork industry should be much more profitable over the next six months than it’s been over the last six months. Have a Merry Christmas!
