What are we watching? A narrative gets created and the crowd buys the story. At some point the sentiment changes, and while the story is still good – there are more Sellers than buyers”

  • Sentiment
    • Inflation is an outcome of economic conditions 12-18 months back. What are the potential impacts of increased interest rates 18-24 months down the line?
    • There is a high probability of widespread food and fuel shortage by Q3’2022. How do higher interest rates help increase the supply of fertilizers, pesticides, availability of fuel, and ultimately availability of food?
    • Uncertain conditions – geopolitics, impact of weather on crop production, uncertainty of labor and fuel availability to distribute food from origin to destination, need high risk investments by producers and entrepreneurs.
    • Head Winds: Strong US Dollar, Increasing Interest Rates, Weakness in financial conditions – stock market, higher Commodity prices (cost to the economy)
  • Commodities
    • Most commodities have traded with and to strength, counter intuitively with strength in the US Dollar
    • Energy: Brent Crude traded $100-$110 during 2012-14 and it is at similar levels now. With all the news flow it seems very imaginable to see Crude oil at $150+, based on supply constraints and current demand for diesel and other transportation fuel. Does $150 ration demand or does the price have to clear higher to inflect utmost pain?
    • Grains and Oilseeds: Unless the crop gets planted, carry out stocks will be theoretically NEGETIVE at the year’s end.
      • If the crop gets planted and assuming acres are not lost to conflict, and weather and soil cooperates, farm equipment, fertilizer, pesticide, fuel and labor will be needed to harvest and transport the crop to the ports for global distribution. 
      • “This also assumes that the domestic politics will encourage exports”. We wrote this on 24th April. India stated a few days ago that they will ban/control the export of Wheat, prioritizing domestic food security over previously stated foreign policy of exporting grains
      • Corn, Wheat and Edible Oils futures prices reflect a premium, which is shy of the levels traded soon after the start of the conflict
  • Dairy: Perishable commodities will get converted to commodities that will enable those commodities to be stored and handled with least logistics resistance. These commodities may be different from those that may be in the highest demand, constraint by availability of materials and logistics.