Ags - Commodities 2022

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You're one of my absolute favorite posters on this site so I really appreciate your taking an interest in Ags!

At this point, it feels like the market is reacting only to the war and not to the actual cash/physical demand. I'm in wheat at an ABCD and from what I'm hearing, it sounds like just about all of the cash buyers in the market (flour, export and feed) have moved to the sidelines. We're actually looking at using CBOT delivery as a backstop in some situations, which is definitely unique. Also hearing that people are paying up big on margin calls for short WK/WN/WU positions that they're maintaining and at some point their banks may ask them to just flat out liquidate those futures in a market that's increasingly looking like it could very well be quite illiquid in the near term.

I really don't think the food crisis will be worse than 2008, though. While importers and flour buyers seem to be holding off on locking in new contracts at the moment, we're expecting to see a rather drastic correction at some point in the near future and plan to take further advantage of the basis movement that such an event will offer. That correction will likely come from seeing managed money leave or short the market once they realize that Russian and Ukrainian wheat will surely have a home in China and South Asia, regardless of the atrocities that may occur over the coming weeks and months.

If pricing like this persists into the Summer, there could frankly be some pretty incredible opportunities in the equities markets. Traders like ADM and Bunge are well positioned to gain here, while customers like Smucker's and General Mills are about to get hammered on flour pricing very soon.

With the collapse of the Ruble, and Russian domestic wheat prices skyrocketing, I have heard speculation about Russia banning wheat exports. Gotta keep the population able to afford food. Add in that with Ukraine potentially not getting their crop harvested and who knows what the limit is on this.

From the Oilseeds complex, I think its going to be interesting to see what happens. We already had a tight balance sheet to begin with with crush margins stupid high even at the elevated SB prices before the whole Ukraine stuff. Now with global energy prices pulling the prices of oils this is only going to perpetuate the problem. Crush margins are still $2+ even with soybeans at $17 at most crushers in the midwest US and biodiesel margins improving definitely doesnt seem like this is going to go away. The only thing that I see working to curb it would be changes to biofuel mandates, but even the effects are limited on a global scale and who would want to piss farmers off going into an election year in the US. 

@Goodbread and other metals traders we need you in this thread now. Or make your own.

Ehhh there's a lot to say but I'll try to go quickly. 

US is an exporter country, it should do far better than importers. Europe will be a disaster. Producers are starting to limit exports. China stockpiled like crazy and will be fine. Sunflower complex relies heavily on Ukraine and that's out of the market. It's generally a primary substitute for the soy complex, which is the preferred protein so you'd think soy would have a great season.... except that South Am is having one of the worst crops ever in Brz,PGY, Arg. Futures hadn't priced South Am fully before the war, so there's quite a lot more to go. USDA report will be out today and market should start price in more the soy issue, though USDA lately has been mostly bs.

Noteworthy, lack of protein should have pushed wheat higher regardless on the grain side. Funds were short CBOT long Matif; that short will have to be covered at L, then the market shot up and there's more room to go. Politics can and and I suspect will make things worse. 

Saw the update from Yara basically saying they are shutting down operations in Europe this week. Getting quite ugly indeed here. 

Firstly, thank you for this post and for taking interest in this area of the market! I've been looking into this over the last week and this is probably too much to even mention, but here's my summary of this. 

Here's what we know, Ukraine is one of the 5 most important economies in Ag (US, Brazil, Argentina, and India are other four). The base case for Ukraine will be a total write off, with increasingly likelihood, due to limited ability to maintain labor and import fertilizer (and there's a war!). Russia additionally will face trouble importing fertilizer which may lead to reduced crop yields due to the harshness of Russian soil and due to potential sanctions. This represents as much as 30% of global wheat exports, 20% of corn, 33% of barley, and 80% of sunflowers. As many as half a billion people are dependent on these yields, which may lead to instability. Weather issues in the recent months in South America have additionally driven prices up alongside the war, so renormalization may occur in 2022. 

A true black swan event could occur in Brazil later this season due to getting 50% of its fertilizer from Russia and due to Brazil's consistent need for soil also due to poor soil quality, contrasting the United States. Brazilian lack in fertilizer would lead to an immediate reduction in yield. (This also has to do with how Brazil transforms pasture land into agrarian land, which requires 3x fertilizer. This has been important since they keep using more land for more farming regularly. The ability for this to happen will be greatly reduced for years to come, which in turn means we're going to have $7 corn for years to come.) 

What does this mean for stocks? I think a lot. I'm uncertain exactly since I think anything well connected to agriculture is on the table for a review. 

• Mosaic, CF, Nutrien in fertilizers give the most upside and most downside. They're high risk, high reward stocks that will may see significant shifts in the coming years, due to their exposure to ag macro. Nutrien also has a very stable retail business, which may make it more "recession-proof" which may cause it to have lower downside. 
• Bunge, ADM and other grain traders are more middle-of-the-road with respect to risk vs. reward, but I have a feeling they might do alright due to potential explosion in origination margins. Usually these companies do better when there are supply chain disruptions. 
• Lower risk-lower reward would be chemical companies related to agriculture like FMC and Corteva. I think these may also see improvement in the coming years due to possible $7 corn continuing into the future. I just think these also have limited downside since they are going to be more "recession-proof" should we see normalization in corn prices or a recession in 2023. 
• I'm betting protein stocks like Tyson Foods are going to do poorly due to sustained duration of high corn prices.

This won't be a shock, I don't believe. We were practically at peak ag to begin with, and now prices are even higher. Prices will just mostly stay raised into the medium term. It's just hard to see how this gets solved, I just don't think that's reasonable (unless there's incredible improvements in weather globally).