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Soft commodities are ‘pulling back’ on recession fears, commodities analyst says

Rabobank Senior Commodities Analyst Michael Magdovitz joins Yahoo Finance Live to discuss key agricultural commodities, recessionary fears, ongoing droughts, record heat waves, and the outlook for inflation.

Video transcript

[AUDIO LOGO]

AKIKO FUJITA: Well, the fallout from the war has been devastating for soft commodities, but that's not the only factor. Record heat waves, ongoing droughts, and skyrocketing fertilizer costs have seen cereal prices soar this year. We are well off our highs for the year. But where do we go from here? Michael Magdovitz is a senior commodities analyst at Rabobank. Great to have you on today. Let's start by talking about where prices are now, because you said that even though we've seen a discount from the highs, that's not going to bring a whole lot of comfort when you consider where the dollar is now.

MICHAEL MAGDOVITZ: No, it's not. If we look at prices, we're in the-- we've seen a two-year bull market for soft commodities, since around when COVID began in April of 2020. And prices, for example, for the BCOM Index rose as much as 138% from that time period before seeing a pullback, which you described, which has to do with several aspects. The most important of them, though, are the economic headwinds and the shifting consumer sentiment that we're seeing, whether it's people opting for chicken instead of steak, or whether people are not driving on the road. Recall that gasoline is actually 10% ethanol, made out of corn.

So what we are seeing is soft commodities pulling back with these recession fears. And a strong US dollar is part of that because the fact that we've seen a pullback, well, the US dollar, the DXY, is at a 20-year high. And it's cold comfort to a lot of these importers to have to be paying for these goods in dollars, and it offsets a lot of the pullback as well.

AKIKO FUJITA: I want to get into more of the inflation and climate impact. But let's talk specifically about the impact from Russia-Ukraine. We are obviously marking six months since the war began today. Obviously, you know, grains, fertilizer, there's certainly a number of things that we have seen push higher on the back of what's been playing out. How much of that you think has already been priced in? Because there is still no certainty as to how this all plays out months from now.

MICHAEL MAGDOVITZ: Well, the impact of fertilizer has been enormous in contributing to inflation, and actually causing acreage itself in the United States, for example, to decline. So the principal user of-- the principal crop that we use nitrogen fertilizer for in the United States is corn. And corn production will be down this year probably 5% to 6%. And considering the US is the paramount exporter of corn to the world, that's extremely problematic for animal protein prices and for other prices. But talking about Russia and the Ukraine in particular, Russia is obviously a large producer of wheat and natural gas.

The Ukraine also is an agricultural powerhouse in different areas. But the big impact here is natural gas, I think, from Russia. If you're looking at the price of natural gas for Europe, which relies heavily on Russia, it's about 15 times where it should be for a summer period. And that has an impact on anybody from a baker to a brewer. I know we are talking about soft commodities, but the impact of natural gas for a baker is much more important than is the price of wheat. So definitely something to consider. Yeah, so in terms of Ukraine--

AKIKO FUJITA: Yeah--

MICHAEL MAGDOVITZ: Go ahead.

AKIKO FUJITA: Yeah, I mean, Michael, I'm looking at your notes here. You say that the price of natural gas has brought bread prices up 25% to 50%. I mean, that is an incredible increase when you think about where the costs have gone up down the line. I want to hit on the climate bit here because we have seen record temperatures, droughts play out across the US, but not just in the US.

We're getting these reports out of places like Texas, which has been suffering a drought, where we're hearing that ranchers are really cutting back. And in many ways, they don't have enough feed for their livestock, which is why they're sending more cattle to slaughterhouses. I mean, what is the impact down the line? Sure, that increases the supply for now. But there's got to be a huge supply crunch waiting on the other end, right?

MICHAEL MAGDOVITZ: Oh, yes. I could walk you through so many examples of climactic conditions that have actually impacted different crops. Texas, you know, you touched on cattle, but I could also point out that cotton has been absolutely decimated and stands to-- at the end of this next year, reserves in the US of cotton stand to be, I think, at their lowest on record, which can impact the price of your shirt.

And so we are seeing corn impacted. We're seeing cotton, cattle. And in South America, we're also seeing the impact of another issue called La Niña, which is a phenomenon that causes massive drought in Brazil and in portions of Argentina. And that is certainly impacting the price that cattle ranchers have to pay for their feed.

AKIKO FUJITA: And, Michael, finally, getting back to that point you made about inflation in sort of the tradedowns that we're seeing, or maybe it's just different options that consumers are considering. Because beef is so high, maybe it's chicken. Maybe it's one product for another in terms of produce. What do you see is the biggest beneficiary on the back of it? What are you watching really closely in terms of the inflation impact moving forward?

MICHAEL MAGDOVITZ: Well, we're already seeing consumer sentiment change in a big way. If you look at gasoline consumption in the United States, AAA has referred it to a COVID-like circumstance. And of course, if you were looking at $5 a gallon a few months ago, much of the reason why we've come off is because of less consumption. And it's a similar story if you look at grains, feed, oil seeds, et cetera. We are seeing people move down, for example, the animal protein chain. You know, it costs a lot more grain to feed a cow than it does a chicken.

And so we are seeing people looking for-- consumers looking for respite in lower intensity and lower cost products. So there is a consumer behavior certainly shifting. It's causing a downsizing in terms of use. And I think that's one of the ways in which you address inflation. Certainly, if you look at places like Aldi's, if you look at consumer behavior, you're seeing a pickup in footfall for discount chains that can provide basically more affordability for your dollar.

AKIKO FUJITA: Michael Magdovitz, senior commodities analyst at Rabobank, good to have you on today.