War and OPEC creating more market volatility, analyst says
The war in Ukraine has escalated this past week. OPEC has decided to decrease production by two million barrels per day, the largest cut since the start of the pandemic. Both events shook the marketplace. Crude oil futures added nearly $10.00 per barrel.
Wheat prices jumped 60¢ per bushel. Equities continued their downward path, increasing the concerns that higher energy prices will mean less profits for corporations. There is a growing view that the world is headed toward a recession. The news is bleak, and it is hard to find positives. Ultimately, the bigger picture could look more encouraging than this past week’s events.
NATO allies are aligning and pushing back against Russian aggression. Reports indicate Russia is spending too much money and resources to sustain (what appears to be) no net gains. Despite near-term escalation, it is possible the war may be close to an end. At least, that is the positive view. As for Ukraine’s agriculture, it will not be business as usual if the war continues. Even if the war ended in short order, reports suggest it will take as long as a year or more to recover back to pre-war production and export capabilities.
For U.S. producers, expect potential price appreciation. At the same time, recognize that the war is not new news. If there are price spikes, they could be limited. Consider taking advantage by selling. Commodities may be reaching levels where high prices will reduce demand. Add to that equation the U.S. dollar at its highest level in over two decades, and importing countries will likely buy less. Expect that South America will be attempting to ramp up production.
Bottom line: sustaining price rallies may be difficult.
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The energy complex is at a crossroads. It doesn’t appear the current administration is having much luck encouraging domestic or foreign production. Inflation and economic concerns may limit demand, yet demand is not going away. Like world grain supplies, there is no room for error with energy production. A drawdown of U.S. strategic reserves with winter approaching is concerning. Higher energy should support the ethanol and biofuels industry, yet it costs more to produce crops. Have conversations with your vendor. Consider locking in half your needs through spring. Currently, it appears there is little reason to expect energy prices to decline.
Recognize that the more things change, the more they stay the same. Marketing is always challenging. With prices at an elevated level, now is not the time to ignore the markets. Perhaps more now than ever before, it will require constant vigilance to take advantage of opportunities and manage risk. Have intentional conversations with your advisor to discuss strategies that best suit your operation.
Editor's Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.
About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.