Four Seasons – Q1 2021 Market Commentary
Market Commentary for Q1 2021
Agricultural markets have completed monstrous seven-year bear moves for good reason. Consider that we’ve had four years in a row of record or near-record crops, generally benign growing seasons in North America, ever-larger crops in South America, a strong dollar, and a trade war that focused on agricultural products. End-users around the world became accustomed to buying “hand-to-mouth” for good reason — big crops, low prices — no need to go to the store and stock up in a world of surplus.
Suddenly, the trade war was over and a black swan in the form of a global pandemic landed on our pond. Governments began clearing out their stored grain as commerce slowed, and as the global economy recovered, rather suddenly we were met with shortages. We needed more animal feed to nourish depleted livestock herds, we needed corn and soybeans to manufacture ethanol and biodiesel, and we needed more foodstuffs and meats to restock grocery stores and restaurants.
Fast forward to the first quarter of 2021 and we find a slow harvest in Argentina, dryness in Brazil which is breaking 40-year drought records, an amazing recovery in a hungry Chinese hog herd, and a crazy bullish USDA acreage report on March 31. Yet another big factor is the Biden administration’s focus on climate change, which includes support for ethanol and biodiesel expansion and an increase in the Conservation Reserve Program acreage (“paying farmers not to plant”). At this writing, you can add to the equation very tight soybean stocks, declining Argentine and Brazilian production, and Midwestern soils that are a little too cold and dry to do well with corn seed. The bottom line is that the U.S. has absolutely no room for crop adversity and we have just now begun to start watching North American weather closely.
Four Seasons Commodities has tried to navigate these historically high prices and the attendant volatility by playing the spreads and options. Our accounts have done well, particularly in terms of risk/reward, but there is more to come. I think we are entering a period of prolonged higher prices for agriculture, particularly if the South American production is as diminished as it seems. Certainly, there will be brutal corrections, if you can recall Newton’s Third Law: For every action, there is an equal and opposite reaction. Yet with a smaller global production scenario and excellent demand, the era of hand-to-mouth consumption is over for a good while. These will be good markets for at least two years, and we’ll keep riding the tiger.
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Opinions expressed in this commentary are intended solely as a general market commentary, do not constitute investment advice or a guarantee of returns, and are subject to change without notice. Past performance is not necessarily indicative of future performance. Commodity trading is speculative and involves substantial risk of loss.Back