New COVID variant upsets the markets, analyst says
Since Thanksgiving, world equity and commodity markets have been in turmoil as a new COVID variant, Omicron, has shaken the markets.
Energy and equity prices seemed first to respond, and it was not a pretty picture as prices plunged. Crude oil futures trading near $80 per barrel dropped $15. The Dow Jones Stock Index was down more than 1,000 points in one session, losing about 4.5% in a matter of a few days.
The new variant, in theory, is said to be more contagious than previous strains and has world leaders concerned enough to begin implementing travel restrictions. One large pharmaceutical CEO suggested current vaccines may not be able to offer much help.
Agriculture commodities sold off as well, with soybean oil following crude oil lower. Concerns of reduced demand for energy had traders shedding long bio-energy related contracts. Many other contracts followed suit.
It could be argued that agricultural commodities were due for a price correction after strong gains posted in the second half of November. Nonetheless, this new COVID news again has markets on edge, with long-term uncertainty of its impact nothing more than a guess. It is the uncertainty that markets do not like.
While it seems that the world is better prepared than it was nearly 18 months ago when all markets collapsed, one can’t rule out another wide-scale sell-off. The key at this time is knowledge that something new and, perhaps more concerning, is on the radar. This adds additional uncertainties that farmers will face in the weeks and months ahead.
When uncertainty flares up and its impact is unknown, turn your attention to strategy. Trying to outguess one more variable is likely not going to favor you. Instead, if holding grain in the bin or if looking ahead to next year, consider how to shift risk so that, if prices plunge, you are not caught in landslide (what we witnessed in spring of 2020). This might mean making more cash sales sooner than later.
If wanting to own, do so with fixed-risk call options. If wanting to hold cash grain, then consider puts. These same strategies apply to the livestock and milk markets. Take time to pencil out the risk and reward of doing nothing vs. using strategy. Create a balanced approach that can allow you to participate in a rally yet have shifted downside price risk.
If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing, 800-334-9779.