Feb 2022
As 2022 begins, global uncertainty reigns. A new (less severe but much more contagious) COVID-19 variant is sweeping the globe, potentially breaking global distribution chains. Global inflation pain is increasing even as the U.S. Federal Reserve Chairman pledges to “fix” it. China’s swine sector remains a riddle, and global beef supplies are expected to shrink in earnest. Each of these factors, on their own, would drive uncertainty in commodity markets. But all of them occurring concurrently impugns even the idea of forecasting markets. That being said, I continue to analyze and forecast markets. And one thing I have learned is when facing uncertain variables, find and follow the right indicators. Here are some key indicators to watch this year:
Inflation / Consumer Demand – Global governments infused over US$10 trillion into their economies as the pandemic began. More stimulus has been approved since, and spending bills have broken thresholds. This has been the biggest macroeconomic experiment in world history. The U.S. money supply grew +40% in 2 years and is still rising. No surprise that more money lends to inflation. Will inflation run? Will high prices slow consumer demand? The world’s central banks will determine all of that. Central bank action is a key indicator for 2022. The U.S. Fed is now expected to raise interest rates 3 times in 2022. The Bank of England already started with a 25 basis point hike last month. The European Central Bank says no rate hikes this year, but with inflation above 5%, those plans could change. Rising rates globally to slow inflation would dampen consumer spending and cool economic growth.
COVID-19 / Omicron Variant – Research suggests the omicron variant is 3-5x more contagious than previous strains. And data now shows symptoms are far less severe and much less fatal. This is good news. The wave of omicron is spreading a wave of immunity. Between vaccinations and natural immunity, the global population will likely face less disruption from future COVID strains. Right now, there are disruptions in supply and distribution chains. Meat processors globally have slowed in recent weeks. That will likely continue a couple more weeks. But COVID cases are falling like a stone in the U.K. They may have peaked in the U.S.; New York state is seeing sharp drops currently. I expect COVID’s heavy disruption to fade quickly into 2022. The Alpha and Delta cases were 99% survivable; the Omicron cases will be near 100% survivable. Cases and death rates remain the key indicators.
China’s Swine Riddle – Just this week news out of China reported that pork production increased +29% in 2021. Chinese analysts quickly suggested that the successful ASF recovery was in place. The reported numbers show pork production back to 99% of the pre-ASF levels. I see this a bit differently. Heavy production post January 2021 was blamed on disease outbreaks that began in Northern China and likely spread south. By June hog prices had fallen to 13.4 rmb/kg (losing US$-70/head) on disease liquidation. Some price rises and falls occurred over the summer with profits remaining just out reach. A dive in June and again in September took margins deep into the red (10.8 rmb/kg ($-93/head losses). Prices currently sit at 14.1 rmb/hd (losing US$-36/head). China hog farmers have been losing money for 7 months straight now. Corn prices remain above US$10.90/bu in China. A successful ASF recovery would increase pork production in China. So would 12 months of disease and financial loss liquidations. Watch China’s hog prices for a move above 24 rmb/kg this year. That would trigger a return to imports.
Global Beef Supplies Tighten – In an odd sequence of weather, politics, and market demand, global beef supplies are on track to tight in the face of strong global demand. China’s aggressive buying in South America has prevented heifer retention. And rain in Australia led to rapid restocking, just as drought in North America led to culling. The result has been manifest in recent record cattle prices in Brazil and Australia. Australia’s restocking will lead to slight increases in output this year and larger increases next year. But those will be absorbed by the smaller output in the U.S. and South America. On the demand side of the equation, Chinese beef imports will post another record in 2021 above US$12.2 billion (up US$1.9 billion from last year). China is now the #1 beef importer globally by nearly 1 million metric tons. That demand is not going away in 2022 or likely beyond