Home Commodities Commodities Hit a Wall — in a Good Way?

Commodities Hit a Wall — in a Good Way?

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But a World Bank economist, representing as he does all the globe’s commodity consumers in developing countries and everywhere, who must purchase food and fiber and fuel, and must sometimes borrow money to do so, understandably has a different perspective. The dwindling commodity prices of the past two years have been a welcome reprieve for most of the people in this world.

For now, anyway, the dwindling seems to have stopped. Will it stay stopped? Whatever we choose to call this phenomenon — a wall, a floor, a support level — is there any reason to believe it really will prevent commodity prices from falling further in the long term?

Well, those who believe in technical market analysis would of course say: yes. They could recite to you magic numbers or 42% retracement levels below which any market’s chart “shouldn’t” fall on any chart showing price movements on any time scale — weekly, daily, or even minute-by-minute. Honest back-testing of their prophecies would prove them to be incorrect, but it is still possible to find analysts who will prophesy some price levels or “walls” to guide a market from going either higher or lower than a certain number.

Let’s say we don’t believe technical resistance or support levels can be proven to work in efficient markets, where no one’s magic number system can outperform the swift reactions of thousands of other sophisticated traders trading based on thousands of different points of information. Nevertheless, a very long-term chart of commodity prices does indeed show that these markets tend to find comfortable equilibrium price levels over many years, and that those equilibrium prices themselves have changed during distinct periods.

This is less an exercise of predicting what price levels may act as guardrails to wall in a commodity market’s chart, and more a recognition of distinct eras or regimes in commodity markets. A very long-term chart of monthly grain futures prices during the past 40 years would show a long stretch between 1984 and 2007, when corn prices tended to stay “walled” between $1.50 and $5 per bushel. Wheat prices were “walled” between roughly $2.50 and $5 per bushel, and soybean prices were “walled” between roughly $4.50 and $10 per bushel.

Then, in 2008, something changed, and commodities were in a new world with new rules and new “walls.” It wasn’t just the renewable energy boom driving up corn prices to feed ethanol plants, either, because the same shift occurred for energy, metal, and soft commodities at the same time. Call it a commodity supercycle, call it a demand-driven rally, or call it, simply, China. Whatever you call it, in that new regime from 2008 to 2022, the equilibrium prices — or “comfort zone” — for corn now seemed to be between $3 to $8 per bushel. For wheat, it seemed to be between $4.50 and $10 per bushel, and for soybeans, it seemed to be between $8.50 and $17 per bushel.

Now, what the World Bank economist’s “wall” statement has me wondering is this: In April 2024, are we still living in that same regime? Could corn prices dwindle all the way back down to their comfortable equilibrium price of $3 per bushel? Or, alternatively, after the pandemic of 2020, the supply shocks of 2022, and the global inflation everywhere, have grains and other commodities stair-stepped up into a new era, with new comfort zones? Is there really some sort of wall that might keep corn, wheat, and soybeans at or above their present levels (roughly $4.30, $5.80, and $11.40, respectively)? Is there some broad economic force that will similarly keep U.S. crude oil above $70 per barrel and copper above $3.50 per pound?

Certainly, there could be some economic theory behind the new, higher “floor” levels, which would be worthy of future study if those floors really do hold over the long term. Because the inflation of everything — including the labor it takes to mine the copper or farm the grain — has increased the underlying costs of producing these commodities, their long-term equilibrium prices may now be stair-stepped higher, and any dip below those levels might result in production cuts that would cause the markets to self-correct higher, back above the new “floors.”

Inflation is therefore both the cause and the result of these markets’ prices. As Gill also stated, “The world is at a vulnerable moment: A major energy shock could undermine much of the progress in reducing inflation over the past two years.” That would be the worst of all possible worlds for grain producers — higher inflation, higher prices for inputs, but potentially still-low grain prices exploring the limits of which walls might guide their path.

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Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

Elaine Kub, CFA is the author of “Mastering the Grain Markets: How Profits Are Really Made” and can be reached at analysis@elainekub.com or on social platform X @elainekub.

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