Use caution when considering a “new normal” for markets

Limit 2 per person for iceberg lettuce, 2022

As we look back on all that has happened in the agricultural commodity markets over the past three years, there’s plenty to digest.

Depending on where you farm, farmers have felt regret, moments of luck, angst, and joy over decent margins during these turbulent times. The question for me is always, now what? Where do we go from here?

Increasingly we have been hearing from farmers and some analysts that the current range for commodity prices is the “new normal.” But what does that even mean?

A new normal is a state to which an economy, society, etc. settles following a crisis, when this differs from the situation that prevailed prior to the start of the crisis, says Wikipedia.

Much has changed since the beginning of 2020 and you can argue that these new variables have buoyed the price of the raw agricultural commodities which is reflected in the futures market. If you consider the above definition of “new normal” it makes sense that this opinion would have traction. The pandemic, labour strife, food price increases, and Russia’s invasion of Ukraine have been just a few of the disruptions that still have not fully settled.

Just this week Chuck Penner, founder of LeftField Commodity Research, broached “new normal” in an interview for RealAgriculture.

I do not mean to be overcautious but “new normal” verbiage makes me shudder.

History suggests that when we settle on a new plateau of expectations, we are often reminded that reality can be different. Just like the hype over cannabis or crypto currency markets, it was only a matter of time before reality set in. In both of these examples, there were winners and losers, financially. The winners exited the market, while losers were those that expected the high times would live forever and that both markets would sustain long-term and price performance.

Now think back to the early 2000s and the dot com crash. At that time, analysts talked about new ways to evaluate stocks without earnings and how earnings per share or dividends were old school and no longer relevant. Our RRSP accounts all learned a hard lesson over that one.

I can remember in university taking a fourth-year derivatives class and the professor raving about the “new accounting” techniques being used by Enron, and how off-balance sheet financing was the wave of the future and Enron was the leader in this innovative space. Oops! That didn’t end well.

Anecdotally, members of the RealAgriculture audience have said that “prices should return” to the spring 2022 highs. The RealAgristudies September results of the Canadian Farmer Sentiment Index back this up. In terms of the outlook on markets, 64 per cent felt that farmers should hold their crops because prices are headed higher. This positive sentiment towards future prices was much stronger in Western Canada than Eastern Canada.

There is a good argument that wheat, canola, soybeans, and corn will not return to more historical lows and this “new normal” is here to stay. But, in my mind, in regards to forming a marketing plan, this “new normal” should be viewed as a possibility, not a sure thing.