Commodity market pullback is illogical and fear-based, says analyst

(Lara de Moissac/RealAgriculture)

Watching the commodity markets was exciting for many producers, until it wasn’t. The decline of prices that we’ve seen over the past week has been a blow to the optimism for this year’s crop; however, it may be more palatable if there was some overarching reason as to why the sell-off. But any clear reason is seemingly missing from the current equation.

The latest push for higher prices largely stemmed from the volatility and food supply shortage brought on by the Russia-Ukraine war, something that is still ongoing with ports yet to open. The war, along with projected yield and other factors which all were pushing towards higher commodity prices, are all still present and roughly in the same shape as they were when prices were much higher, so it begs the question, what is the cause of the fall?

Arlan Suderman, chief commodities economist with StoneX, is calling the recent decline a collapse rather than a pullback and says it’s illogical and the byproduct of fear on Wall Street.

“We’re not trading fundamentals right now, I guess you could argue that the markets are looking at the macro fundamentals of trading a recession, of a serious recession, a global recession, that would be serious enough that people would quit eating and animals would quit eating. That really doesn’t make sense,” says Suderman. “It’s about fear on Wall Street, it’s about losing so much in the equities that they have to be able to pay their bills and liquidate some of their hard assets. And charts are turning lower. And then the momentum starts to turn. And then everyone’s running for the doors trying to put their money into the safe haven assets, which would be the U.S. dollar and government securities.”

He says that not only is it the fear on Wall Street, but it’s also a reshaping of the markets.

Traditional traders, being producer hedgers and end-users, are essentially sitting on the sidelines, which means the majority of the trading that we are seeing now is being done by algo-traders, also known as black-box traders. These are computer programs that make trades based on specific instructions, or algorithms, which pay attention to headlines and abide by generated technical analysis or chart analysis.

In turn, we are seeing these black-box traders driving the markets during the day, exiting at day’s end and then jumping back into the mix the next morning. This has left the number of open contracts at a historical low, all this while trading volume is still high.

For those who may be playing the shoulda-coulda-woulda game in their minds right now looking at the markets, Suderman says the harder the fall, the bigger opportunity there is for a rebound.

“Part of it is going to be what’s going on in the outside markets that’s really driving the sentiment. But if we could ease back the fear that’s on Wall Street right now, then I think the opportunity is there for some refocus on the fundamentals for going into corn pollination time we’re going into critical time for for the summer crops to develop,” says Suderman.¬† “Now there’s weather risks that are still out there, putting some of that risk premium back in there. I mean, essentially, we’ve totally erased all of the Ukraine war premium right now. And there’s no fundamental reason to justify that. So I think there’s plenty of buyers willing to come back in if they feel like it’s safe to do so. And we need to get a little bit of stability for that to happen.”

In the meantime, Suderman encourages producers to be defensive in their marketing strategies. To weather the storm, he says, it’s always advised to protect your downside and equity, while leaving the upside open. The volatile storm that many have been treading through may not lift for the 2023 crop either, he says. With the threat of natural gas prices and a potential shortage, soaring crop input prices may trudge through into next year, something producers should be wary of when evaluating financials, this year.