Tom Reichstein
This season, global commodity markets have faced dynamic forces like they always have, but with a heightened amount of ‘noise’. The key driver behind all commodity markets are the fundamental basics and volatility of supply and demand. These constantly change due to the risk management of macroeconomic influences, such as the environmental conditions or the geopolitical landscape at that time.
As we were introduced to COVID-19, the world quickly changed, and so did markets globally. Supply and demand elements were stripped back to necessities, highlighted by the amount of panic buying that was occurring. Supermarkets shelves were emptied of staple foods like flour, rice, bread and pasta, inflating prices internationally. Perceived luxury goods and services like wool, lobster, faba beans and cruises all took a back seat due to poor tourism and decreased need for indulgent items while a pandemic spread. Oil prices were reduced to record lows, with much of the world moving into lockdown.
For agricultural markets moving forward, what is it we need to be wary of?
Investors are enthusiastic about the news of promising vaccine trials, which gives support and a positive outlook to industries that have struggled through the pandemic. But this could take months, or even years, to be rolled out and for trade routes, tourism, international travel and, even just, general day to day business to have a pre-COVID feel.
Another layer to the supply and demand pie that is always dominant for commodity markets are the geopolitical risks, which continuously fester in the background. Australia has been caught up in a tirade of tariffs and trade exemptions from China, as they flex their muscle on the international stage. Also, the world is watching the transition of US President Elect Biden into office. His stance on trade relationships, monetary policy and spending within the US will have huge role to play in how markets will react moving forward.
From here on, assuming a gradual vaccination program is successful, slowly but surely the world we have become used to over the past year will fade away. Rushing to the supermarket to buy staple foods when cases break out will ease. The need to go back into lockdown to stop the spread should subside, leaving the oil market open to less volatility than it is usually used to. As the global oil market strengthens keep an eye on fertiliser and diesel prices, which may also rise.
Other farm input prices may also be affected as broader commodity prices change. As the global economy gradually firms there could be an eventual increase in interest rates. In addition, the speed that different economies recover will have an influence on exchange rates. In Australia this will often influence machinery prices, not just simply our export commodities, so is certainly something to keep watching.
In the meantime, an approach to mitigate these risks is to seek some diversity in your marketing strategy. If a commodity is heavily reliant on a particular market, having some alternatives will lessen the exposure and, therefore, the subjected volatility that will follow. ‘Picking’ a market or price is hard enough without all the external noise. That’s why working to a well thought out marketing strategy focused on your business needs, can allow for peaks, troughs and everything in between.
As life moves on, the question is, will we ever get back to what we considered a normal world again? Only time will tell. The main thing to remember is that Australia will continue to be export focused for much of our farm produce, so we need to be prepared for the market volatility that comes with it.