‘Mayhem’ in the global commodities markets: farm crisis, soft options and oof!

John Deere: shares have shot up

(Image credit: Luke Sharrett/Bloomberg via Getty Images)

published 17 March 2022

Farm crisis

In the weeks since the Russian invasion, the West Midlands dairy farmer Ed Hemming has slaughtered 26 cows, said Sam Chambers in The Sunday Times – a tenth of his herd. The unplanned cull was a sad but straightforward economic decision caused by “mayhem in the global commodities markets”. While Hemming’s bills for fertiliser and fuel needed to sustain his herd “almost doubled overnight”, he reports that “the price of culled cows has gone through the roof”, due to high demand for meat from McDonald’s and other outlets. “I am depleting my herd to generate quick cash to cover bills.

Soft options

Should you attempt to trade soft (or grown) commodities like grain? Investing directly – say, via an exchange traded fund (ETF) tracking prices – is best left to “sophisticated investors”, said David Rodeck and Benjamin Curry on Forbes Advisor. Since market prices can spike and fall rapidly, you need a high risk tolerance to “stomach short-term losses in pursuit of long-term gains”. One safer option is to check out a managed agricultural fund. Another is to look at stocks that benefit, directly or indirectly, from rising agricultural prices. It worked for me, said Ian Cowie in The Sunday Times. I bought into Archer Daniels Midland (ADM) – one of the biggest distributors of agricultural commodities in the world – in 2016 at $42/ share. The value of the stock has now doubled to around $85. Another good bet has been tractor-maker Deere (DE), whose price has shot up from $194 last August to $388 last week.

Oof!

For evidence of how swiftly sentiment can turn in commodity markets, you need only look at this week’s “vicious selling” of energy and metals, said Dominic Frisby on Moneyweek.com. Oil plummeted from a high of $140/barrel last week to close to $100 on Wednesday, taking gold, palladium, copper, aluminium and iron ore with it. “Don’t try to make sense of it.” The fundamental case for higher metals prices remains: “even without this war, many years of underinvestment were leading to supply shortages”. But the speculative spikes created by “panic and frenzy” have now given way to a “wash out”. The only question now is where “prices find their floor”.