Renewable commodities, particularly those grown, are habitually in bear markets. Unlike stocks that trend higher over time, commodities trade sideways in the long run. This is because, despite inflation, technology and scientific innovations enable producers to be more efficient. In the case of grains, we've seen a new player emerge and, on many accounts, dominate the landscape.
Brazilian soybean production is about ten times what it was in the early 1990s. The South American country now plants more acres than the United States, and produces a higher per-acre yield than domestic farmers. As a result, they are the largest soybean producer in the world.
When I first started in the commodity business (the early 2000s), the focus was on U.S. fundamentals and weather. What happened in Brazil didn't necessarily move the needle at the time, but today that's different. The Brazilian planting and harvest seasons are opposite the U.S.', which leaves traders on the hook for fundamental and weather analysis all year around, as opposed to just half of the year in North America. It also means the term "weather market" applies to the first few months of the year, not just the traditional summer months. As you can imagine, this keeps prices volatile most of the time (as the included monthly chart depicts).
Given their success in gaining global market share in the soybean market, South American growers probably have their hopes set on a repeat takeover in the corn market. There is a saying in commodities, "complacency kills." This is true of speculators, growers, and marketers. If the U.S. continues to shrug off the threat of grain market competition without preparation, there could be a lot of pain ahead.
Both China and the U.S. are reluctant trading partners; Brazilian growers have recognized this and are taking advantage of it. This is what capitalism is all about; instead of getting mad, we should prioritize being competitive. The largest grain buyer in the world is China, which cares only about price and convenience. China wants quick and easy grain; quality is less of a concern. After all, the definition of a commodity is a fungible product, or more specifically, interchangeable with other goods of the same type leaving consumers with no preference for one over the other.
It won't be easy, but we must ensure we are players, not prayers. It makes sense to take some of the lessons learned by U.S. shale producers about global commodity competition and market flooding as a blueprint. In March 2020, an OPEC price war and the Covid shutdowns caused prices to collapse to near zero (or below in some instances), wiping out many U.S. producers and deterring investments in future production.
I suspect South American growers have lower breakeven points due to lower input and labor costs; thus, they can withstand discounted prices with less stress than U.S. growers might. Commodity markets can and do, get flooded, particularly after periods of high prices. Thus, hedging price risk will be critical going forward to avoid a repeat of what we witnessed in the oil patch.
Governments and central bankers can't control everything, but they have a lot of influence over the economy, inflation, and currency valuations. Based on my observations, I'm neither a politician nor an expert in this field; avoiding the overstimulation of the economy and employing weaker dollar policies would be a step in the right direction to help our grains become competitive globally.
Obviously, intentionally weakening our dollar has unintended consequences, so there are no easy buttons. I'll leave that to those in D.C., but I hope they are paying attention because the floor is moving underneath our feet, and we need to be ready to pull the rug. I spoke about this topic (in a Vegas Golden Knights Jersey, of course) on The Cow Guy Close on RFD-TV this week; click this link for the archive - https://cdn.jwplayer.com/previews/c85JacJx .
