Some interesting factors are currently affecting commodity prices. Supply chain bottlenecks, unpredictable demand from economies reopening, geo-political tensions, climate change policies are just a few examples.
I find it helpful to review the state of the commodities market periodically. In this article, we will examine Lumber, Cash Crops, and Iron Ore.
Lumber Mills have done their best to increase timber supply in 2021, with production hitting a 13-year high to meet the unpredicted demand from new house builds and renovations. After reaching a peak of over US $1,600 per thousand board feet in May this year, Chicago Lumber Futures have retraced to US ~$640 per thousand board feet as of early November. It could be said that the psychological level of US $600 is very supportive of this commodity. November 2021, and January and March 2022 Future prices are also trading above this level.
Speculation is rife that Lumber is due for another price run-up, with Sawmills cutting production to counter the gluttonous output earlier in the year. One indicator supporting this theory is Chicago Lumber Futures increasing by just-under ~40% since plateauing in August, at one point hitting US $820 in mid-October.
Corn and many other grain Futures are currently trading at premiums or multi-year highs, including Wheat and Oats. As of writing, Corn, Wheat, and Oats are trading at 555 USd/Bu, 781 USd/Bu, 716 USd/Bu, respectively.
Several factors have led to inflation in grain prices. For one, we can thank (or curse) the high cost of crude oil. Due to WTI and Brent trading US ~$80 per barrel, demand for ethanol has been pushed to the extreme. It is important to note, that in the US, Ethanol is produced predominantly by fermenting Corn (25% of the Corn grown in the US is used for ethanol production).
Kluis Commodity Advisors does not believe the prices of grains is sustainable, even in the short term. The Advisors go so far as to suggest that farmers should be hitting the sell button right now to make the most of the grain rally. Butting up against this prediction are forecasts for a continuation of unfavourably dry weather, which have already put the supply of Cash Crops, including Wheat and Oats, in a precarious position.
From mid-September until the end of October, Iron Ore appeared to have found a safe space above US $100. Now, after a steep decline beginning October 27, 2021, Iron Ore has started to test May 2020 lows, close to US $90 per metric tonne. The commodity is grating against predictions by ANZ Bank (ASX: ANZ) for it to “find a floor around current levels”.
Demand (or lack thereof) from China is what has driven the price of Iron Ore sub-100 dollars. Chinese authorities have ordered its steel manufacturers (large consumers of Iron Ore) to cut production to meet targets to reduce energy consumption and pollution across its provinces. China’s production restrictions are scheduled to last until mid-March 2022.
According to S&P Global, Iron Ore outlook is unfavourable, with “pricing risk is to the downside” as supply tends to increase in the latter half of the year.