A new calendar year presents a good opportunity to look back at the year in the grain markets. Mike Zuzolo, is the President and Founder of Global Commodity Analytics in Atchison, Kansas. He says the 2021 commodity markets picked up right where 2020 left off.
“A cost-push inflationary market for grains where weather and supply-side features continue to put upward price pressure on grain future and cash-grain markets. As we did this, the demand side continued to flatten out, and as we close out 2021, it appears to me that it’s starting to weaken on the demand front.”
As 2021 progressed, buying patterns in the commodity market began to change as inflation pressure rose higher. “Interesting to see that as we closed out 2020 with the Phase One trade deal, high hopes, high expectations, went in the 2021 where the weather took the reign and demand increased, and the inflationary pressures due to the supply side increased demand for the end-users and the commercials to not use that just in time inventory mindset that we’ve had the past 20 or 30 years, but instead, buy ahead, and as they say now just in case type of inventory management where you buy extra and you hoard, whether you’re an end-user or whether you’re a consumer, so I think that’s the major theme. And as we go into 2022 It seems to be the same path and the same trend.”
A lot of the factors pushing the markets higher will likely remain into 2022. “The cost-push, the weather, the supply; those are going to be the major features that are going to allow prices to go higher if they’re going to go higher in 2022. And demand pressures will increase, whether it’s trade policy issues, whether it’s geopolitical issues, or whether it’s just any demand-related issues like COVID or something like that.”
Zuzolo says the wheat market has been the biggest surprise to the trade this year. “I don’t include myself in that. I’ve always felt as the wheat needed to lead the grain markets, and that wheat was the best reflection and gauge to investor sentiment and real food demand sentiment, and supply-demand sentiment. So historically, what tends to lead the grains, and so I think the wheat did a much better job. 2021 became a year of the search for protein, and that’s where the spring wheat and the High-Pro wheat shined a big light on everything. Minneapolis spring wheat was a clear leader in all of this.”
Looking ahead, he says the flattening demand at the end of 2021 will continue at least early in 2022.
“Producers are being incentivized and well-compensated for pushing the envelope on increasing supply. We see that in Argentine wheat, we see that in Australian wheat, we are seeing the battle line drawn now between increased demand and buying extra, as I talked about earlier, with new crop supplies getting ready to come on in the March-April timeframe. As those new supplies come online, my biggest question is do the end-users and does the demand side move back to adjusted time inventory mindset, feeling more comfortable about the supplies, and I think that’s something we need to bake into as a hedger, as a price taker, and producer, we need to bake that into our 2022 marketing plan.”
He also says any trade issues will be more front-and-center early in the new year.
On the livestock side, Zuzolo says he saw some disappointment in the pork sector while beef producers got rewarded during the second half of 2021. “This shows and sheds light on how the market trades in the livestock, especially. It is more, I think, speculatively driven, more fund driven, and those funds tend to play one livestock contract against another. They’ll buy cattle and sell hogs; they’ll buy hogs and buy beans in the pork and bean trade; I think this is something relatively new in the livestock industry. It’s pretty easily explainable from an analytical standpoint for me because you can’t store livestock and meat as well as you can the grains, and you have contracts in the feeder cattle and hogs that are balanced off against the cash index when those futures markets expire, and so, the basis, the premium, the futures, or the premium and the cash can be more readily traded, and I think speculators like that.”
He says the funds will likely continue picking winners and losers in the livestock markets during 2022. The beef markets received a big boost from overseas demand while the pork sector was busy cutting back on supply in 2021.
“So, the goal the second half of 2021 in beef was to encourage cattle ranchers to sell because the demand was going higher, and the recovery from COVID was much stronger than expected by the trade in general. The exact opposite or reverse was the case in hogs. The Chinese decided that they did not need as much pork from the rest of the world; they were going to rebuild their own hog herd; their demand for pork domestically was disappointing. Why? Because they had a zero-tolerance policy towards COVID, and so, they would lockdown and lock-down and lock-down. Well, that ended up hurting the overall consumption of pork, and it allowed the supply side domestically to catch up, and the hog herd to get rebuilt, and that was at the expense of the major exporters in the world like Brazil, Argentina, United States, and Canada. And so now as we go to 2022, we have done the job, in my opinion, in the hog sector of cutting the supplies.”
As of December 1, the All Hogs and Pigs report says numbers were 96 percent of where they were in December of 2020. That means the pork supply should be more able to match up with existing demand.
“I do think that the supply of pork is very well-balanced to meet demand heading into 2022. By the same token, though, we’re already starting to see restaurant sales go down in terms of high prices affecting overall consumption. And the National Restaurant Association just came out with the July through November menu prices were up 2.4 percent. That offset increased sales plus 2.3 percent. So, in reality, if you adjusted for inflation, adjusted for those menu prices, we actually saw a 10th of a percent decline in sales, inflation-adjusted, and so, the best cure for high prices is high prices. We’re seeing that in the beef sector as we close out 2021.”
Zuzolo also talks about the 2022 beef trade. “I see steady demand in 2022 unless we get into a trade battle with a major importer, and until we get to the second half of the calendar year when the physical number of slaughter market-ready animals starts to go down in Q3. But what we’ve seen in the cattle sector, and this is really important to the demand bull out there, and it’s one of the reasons why I was successful in getting some hedges in place when we were running for four or five dollars higher a couple of weeks ago, it didn’t match up that the demand was going to be able to outpace the supply because we were adding dress weights. We have not curbed the feed demand yet, and in just the last two weeks, dress weights in cattle have gone up six pounds. That’s dressed weight, and so, we’re now near where we were last year at this time with dress cattle weights as we close out 2021, even though we’ve got corn prices and corn supply-demand fundamentals much tighter than where we were a year ago today.”
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