“The charts, as interpreted by Carley Garner, suggest that both wheat and corn prices are headed higher here. Maybe much higher. And that is the last thing we want to see, but we might have to get used to it,” the “Mad Money” host said.
While volatility exists in all asset classes, it can be most unruly in commodities. This is because most commodity market participants are buying and selling on leverage. Leverage is great when things are going your way, but it can be devastating when they aren’t. Thus, the emotional highs and lows for commodity traders tend to be excessive and that roller coaster of fear and greed bleeds into the price discovery process. I’ve been a commodity broker for nearly two decades and I’ve seen a lot…but I’ve never seen this type of market disfunction, illiquidity, and sheer chaos.
On the surface, it seems reasonable to attribute wild price swings in commodities to the geopolitical risk and the subsequent sanctions levied on Russia. But that only tells part of the story. Beneath the fundamental story lies a trail of margin calls, financial strain, blown-up trading accounts, and the need for capital preservation. In other words, the motivation to buy or sell commodities in recent weeks has been dominated by pain and risk mitigation rather than supply or demand. Naturally, this delays the ability of the market to come to an equilibrium price and exacerbates moves on both sides of the trade.
The three commodity sectors impacted the most by the invasion of Ukraine by Russia, and more so by the global response to the event, are the grains, energies, and precious metals. Traders with positions on in all three, regardless of initial directional positioning, likely suffered both financially and emotionally. Let’s focus on the grain market, specifically the price of wheat.