RICHARD E. HICKS
OCEAN SPRINGS, MISSISSIPPI
Well, at this writing we see a radical change in the geopolitical situation in the world and this, of course, has a commensurate impact on the marketplace. War is usually good for commodity prices and as we can see due to the location of the conflicts fuel concerns are taking center stage. Metals that led the charge prior to the conflicts. Have generated into a volatile nightmare. This increase in volatility has in the past impacted other market complexes and this seems to be occurring at this writing.
This brings us to the grain markets that have benefitted in a lackluster way perhaps due to the conflicts perhaps due to the general concerns about the war. I am going to take a moment to comment on the problems in Pakistan and Afghanistan. The two countries that have never been the best of allies except when it benefitted both nations, seem to have entered into a micro war that may be intensifying. I mention this because in past comments I have highlighted the importance of the emerging effort in Pakistan to increase their share in the world rice trade. War makes for strange bedfellows as we have seen in the China, Philippines squabbles. The Chinese intimidate the Philippines and the Philippines rewarded China with more rice imports. So, the conflict between these two countries is, in my humble opinion, only noteworthy as a potential spreading of a increasing unstable region.
If we take time to look at consumption this area of the world is an important market for the rice trade. At this time, I do not see a big leap in demand until the conflicts wind down. Luckily or unluckily a large percentage of the worlds production appears to be secure from the conflict. This does have an impact on rice prices as I believe some of the recent increase in rice values have come on the heels of the moderate increase in the price of corn wheat and beans. The old saying “a rising tide lifts all the boats” is as good an excuse to increasing prices as any other explanation. Given the fact rice consumption in the mid-East is both of historical and cultural significance we can see how this conflict could have a major impact of the market.
Firstly, let us look at the major rice consumers in the Middle East. Iran, Iraq, Bahrain, UAE, Oman, Lebanon, Kuwait, Jordan and Israel. As we can see from the list present circumstances could favor a disruption in both supply and demand. Total demand has been hovering around twelve million metric tons per year. If I am not mistaken, and I am doing this from memory, demand peaked in 2019 at about thirteen million metric tons but do not quote me on that one. Iran is the major consumer at nearly five million metric tons per year. This demand is to say the most likely disrupted. People, however, do not stop consuming so even though the demand picture there is sketchy. In the long run we could see a double down effect. If you recall, during Covid demand for everything tanked. When we simply shut down the worlds’ economy like turning off a light-switch we saw the results. Well, in my humble opinion, that is what we are exactly doing with the demand picture in the Mid-East.
After Covid, pundits had a fairly negative outlook on the marketplace. Even the USDA predicted we would have a billion-bushel carryout in soybeans after we slowly reopened the world. This did not happen. Demand soared, the reason was simple, yes, the supply was disrupted but the demand continued to build even though no products were moving. Demand is not stagnant even if you cannot deliver the product. Once we started moving again demand soared. Why? The larders we empty, and end users were not about to go through that scenario again, so they rapidly filled the bin. Food is a weapon and most of these countries in question are floating on a sea of oil which means a pile of money. A sea of oil is a wonderful thing but worthless without something to eat.
In the short run, the demand picture is cloudy, but the demand is there regardless of the disruption in the supply. Sooner or later the chaos will slow down and as things become more normalize the focus is going to be getting things jump started as quickly as possible. In the long run I do not see the people of the region stopping eating. The demand is there and will continue to grow.
We have not addressed the potential for an increase in the scope of the hostilities. This is a very real possibility and we have already seen the destruction expand to all corners of the region. Wars are a very hard set of circumstances to control once the first round is fired. The potential for this conflict to expand region wide is very possible Pakistan and Afghanistan are already in a somewhat shooting war for reasons I cannot figure out. This could be a flash point for a wider conflict. Iran’s proxies have given no indication of slowing down their contributions to the chaos and our fair-weather allies are once again showing their true colors. This is fascinating as the Strait of Hormuz is a Euro/Asian problem. The products that flow through the strait generally go to Asia and to Europe through the Suez and the Med. Should the conflict continue to spread we could see war premiums spread to other markets in a big way, panic always trumps reason in a crisis. No one can predict the spread, but it does appear that is exactly what Iran is hoping to do. They cannot win so take everybody down with them.
The present circumstances seem to be pulling in all directions. If we are lucky enough to see a cessation in the hostilities things could return to more normal conditions. In the event of a continued spreading of the conflict it is not possible predict the outcome.
In conclusion, input costs are going to be on the rise and will probably be the biggest concern in the industrialized mechanized production regions. As I have jokingly alluded to in the past a water buffalo eats less than a tractor so production cost increase will land squarely at our door. This year has already proved treacherous and It will probably continue to be so stay alert. ∆
RICHARD HICKS IS THE MANAGING DIRECTOR OF THE R.E. HICKS GROUP LLC AN NFA REGISTERED INDEPENDENT IB.
I can be reached at 618-301-2244, 618-363-0252 sat phone 1-254-219-7336.
Note: Past Performance Is Not Indicative Of Future Results.