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Without a doubt, we are in an inflationary market which is a different beast than your old standard bull market. US Governments stats claim that inflation is running at 5.1%, yet independent sources will claim the real rate is closer to 10%. It is probably higher – especially for commodities. Our prices have doubled and many outside markets are hitting all time highs. Yes, supply and demand plays an important part, but this market is much bigger. In the simplest terms there is trillions upon trillions of dollars looking for a home. The real supply and demand equation has nothing to do with crops and everything to do with money. Once again, follow the money.
Why This Matters
Many of us have never been through an inflationary market, so our reference point is weak at best. However, the market doesn’t care. It cares about the market.
Since this kind of market is relatively foreign to most of us in the Ag space it pays to take some time to learn and do our best to try and figure out where this thing is headed.
1. Risk Management becomes even more critical. This is because of the magnitude of the unknowns. Basically, the market can move super-fast against you.
2. Government will make things worse not better. (zero explanation needed)
3. Capital needed may exceed loan capacity. As inputs increase so does the operating loan. What needed 1 million might need 2. Talk to your banker before you need the money.
4. FOMO – (Fear Of Missing Out) becomes an even greater problem. The temptation to speculation on grain becomes even greater than before. Everyday waited is money in the bank. Then BOOM. Over. Markets drop below cost of production.
5. Importance of a plan and staying up to date with the markets is critical. Learning how to be a disciplined seller and buyer (inputs) is important.
This is just a short little list of things to pay attention to in the coming months. These inflationary markets are hard to trade because they are deceptive. It is really hard to gauge market tops as the market is trying to find a new equilibrium. What is going on is the market is in the process of figuring out a new price for goods. Often the price will be overshot and then it will correct. Look at the lumber chart; sky high up to 1400 then crashed to 425 before stabilizing around 600. This can happen to anything.
What makes this year REALLY HARD for Prairie farmers is the fact that there was a BIG production problem. This means we have old supply and demand mentality coupled with an inflationary market. Almost impossible to figure out.
Bulls and Bears
Bullish: Low Supply & Extremely Strong veg oil market
Bearish: Negative canola crush margins. Demand rationing. Big soybean crop
Bullish: World supplies are down. Canada elevator system is short. Ethanol margins at record highs.
Bearish: Massive corn crop US. Corn is flooding into Canada.
Bullish: World Supplies are tightening. Demand is strong. (China crop wreck?)
Bearish: Very few bearish signals. Maybe demand rationing?
The red part is the margin. Since 2017 this is the most profitable ethanol has been.
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