Jeremy's Blog 1st April 2022: Commodity Markets

This article by Jeremy Moody first appeared in the CAAV e-Briefing of 31st March 2022

“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” (James Carville, Political Adviser to US President Bill Clinton)

From the Chancellor to the supermarket and from the farm to the household, present circumstances and the last few months show the raw power of commodity markets. Resolving supply and demand, now in today’s tortured supply chains, new prices for energy, fertiliser, grains and oilseeds may be driven by US recovery, Chinese buying power and Russian war but the prices created simply become enormous facts with world-wide consequences.

The Chancellor cannot tackle all these pressures while the retreat from globalisation anyway means higher costs. In the Spring Statement he was yet again diverted from his intended and necessary focus on improving growth to fire-fighting forces larger than the government.

Supermarket buyers might be seen as a terror to suppliers but they have no sway over commodity markets. The prices in global markets of grain, vegetable oil or skimmed milk powder are simply what they are. Supermarkets, competing with each other and on fine margins, are now caught between hard-pressed customers and hard-pressed suppliers. The contest lies in the direct negotiations with producers (as with milk and vegetables) or domestic processors, allocating margin and risk. That tussle, long wanted by suppliers and now imperative, may only be in its early stages with reports of some suppliers achieving significant increased returns. Its outcome will, in turn, shape our food economy.

The farming outcomes from both input and output prices with the consequent changes in practice and business (including responses to fertiliser prices) may also dictate the outcome of Government offers for the environmental management of land. Wheat at £100/t in 1980 would, adjusted for inflation, be some £600, double the £300 now seen as extraordinary. That erosion of value encapsulates the pressures for the restructuring that has re-shaped farming across those years. It also enabled a public policy approach of supporting farming finances in exchange for some land use actions. However, were markets to be stronger, many would see the prospect of profits from farming outweighing the inducements of schemes. Yet the growing impact of climate change and other challenges will still need to be tackled.