“Corn, rice, and wheat together make up 51% of the world’s caloric intake.”
Source: https://www.worldatlas.com/articles/most-important-staple-foods-in-the-world.html
Interest rates and liquidity are some of the key drivers of the global stock market.
At present most of the world’s major central banks are in rate cutting mode, while it appears as though the Fed (the most important one) is about to restart its rate cutting cycle. Of the 90 central banks that we monitor, between 10 and 20 have cut rates each and every month for the past year. That has been a key support for global equities (+12% this year), and only during crises has that number been higher (e.g. recently in COVID and the GFC).
The continuation, and extent of those cutting cycles, though, will depend heavily on the outturns of inflation across the globe. Food prices are, of course, a key input into headline inflation rates. On the latest data, US food price inflation (at the consumer price level) came in at 2.9% Y-o-Y (& 0.0% M-o-M). UK consumer price food (& non alcoholic beverages) inflation was 4.5% and accounted for 0.5pp of the total headline inflation rate of 3.6%. While central banks focus primarily on core inflation, and to an extent ignore food prices, they do matter (politically, and also for second round effects). UK consumer food prices, for example, are 36% higher since the start of COVID. For lower income consumers, this is a significant setback (& a set of prices that they are notably sensitive to).
Troublingly, though, western food inflation has continued to go up, despite the GSCI grains price index recently reaching its lowest since mid–2020 (fig 2). Speculators have been driving the market lower, as they have become increasingly net SHORT.
That is illustrated by our grain futures positioning model, which consists of positioning in the three main grains. That is corn, wheat and rice. Together, as the quote above states, they make up 51% of the world’s caloric intake (so a key input for food prices). As the chart shows, speculators are at their most net SHORT in 12 months (and close to record 10 year+ net SHORT levels).
More liquidity, though (as rates are cut further) has the potential to reverse some of that positioning and drive food commodity prices higher. Equally, weather and harvest challenges can add to those upward price pressures.
What is clear, therefore, is that while the rate of ‘ag prices’ has already been edging higher, heavy net SHORT positioning in grains (coupled with interest rate cuts) create a backdrop whereby there could be an acceleration of that upside grain prices move. One to watch closely.
FIG 1: US CPI food inflation vs. world ‘ag prices’ (advanced 6m, both Y-o-Y %)
FIG 2: Grains* net speculative positioning vs. GSCI grains index
*comprised of wheat, corn and rice CFTC net positioning.