Let’s Talk About Commodities

Dan Basse, President of AgResource company; Sean McGovern, Research Analyst at Mcalinden Research Partners, and Phil Streible, Chief Market Strategist at Blue Line Futures LLC, come together to discuss the foundations of commodities.

Contact Information:

https://www.cnbc.com/phillip-streible/

https://www.bluelinefutures.com/

https://www.mcalindenresearchpartners.com/

https://agresource.com/team-members/dan-basse/

Summary – Cents of Security Ep. 6

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson

In this episode, we challenged 2023 summer intern Rebecca to research the role of commodities within the global economy. We chatted to her about things she might like to ask the experts, and then provided her with names and e-mail addresses of commodities analysts that we know. And the result? This episode is a compilation of those interviews.

Rebecca sat down with Dan Basse, CEO at AGResource.com in Chicago. Dan is a seasoned grains and agricultural commodities analyst. She spoke with Phil Streibel, Chief Market Strategist at Blue Line Futures, also in Chicago and widely known for his knowledge on metals and energy futures. And she chatted with Sean McGovern of McAlinden Research Partners. At the end of the interview, Rebecca asked each guest what they knew about commodities when they were her age. Those responses are interesting, especially for those of you looking for ideas on career choices. If you’re inspired by the content from this episode, please check the show notes for further information about her guests.  

Rebecca’s conversation starts with Dan Basse on commodities in general. Here’s Dan Basse. 

Rebecca Degter 

Could you please tell me what are commodities? 

Dan Basse 

Well, commodities are things that you can hold in your hand and sometimes drop on your foot. There’s stuff and so, if we think about the world of commodities, it can be things that we may consume like a, let’s say, a corn tortilla. It can be things that make our automobiles run like gasoline or biofuels. It can be things that keep our houses warm, whether it be lumber or steel or concrete or metals. Maybe it’s precious metals that we’re wearing in our ears or on our fingers. So, these are the things that really make life work. And when we think about stuff, it was really something that I believe was germane to the financial markets hundreds of years ago, generations ago, and this is where trading and everything really embroiled from. So, I really like the world of things and stuff. Kind of emboldens what commodities are all about. 

Rebecca Degter 

That’s great. Thank you. So, can you tell me about why commodities are important as well? 

Dan Basse 

We use them every day. I mean, if you think about an average American or an average European or Chinese, I mean they’re putting gas in their car, they’re putting food in their mouth. They’re doing things in terms of the cotton market, in terms of maybe a t-shirt or a pair of pants. And so, all of this goes into the fabric of everyday life. And so, when I think of the world of commodities and derivatives that surround it, it involves all of that, including, you know, even the meat markets. So, whether it’s the price of hogs in China or the United States, all of this has big ramifications. And if we distill it down, it’s really the reason why, you know, the US Central Bank and world central banks have been fighting inflation because they know that our income goes less far, if we have the cost of things or stuff rising and so this really  plays into the entire financial outlook as we think longer term. 

Rebecca Degter 

Can you tell me a little bit about what the main types of commodities are? 

Dan Basse 

Yeah, they really range and we can, we can divide them down into softs and hards and tropicals. The world that I spend most of my time is in agriculture, and so it’s the things that we eat and we think about the pillars of the food system as being corn, soybeans and wheat. A lot of things are derived from those three commodities that we consume every day. And then we can branch away from those soft commodities and we can go to the tropicals, which may be coffee, cocoa or sugar. Again, key ingredients in baking and lots of other things like chocolate. And then we can go further and we can think about meat, commodities, cattle and hogs and feeder cattle. And then even beyond that, we get into the metals, whether they’re industrial metals like lead or copper or we can make it into the precious metals like silver and gold. And then we’ll transition and have another whole group of commodities called energies, which involves natural gas, crude oil, some of the biofuels and those kinds of things that really make up that whole structure of keeping the world logistically moving ahead. At end of the day, we even have other obscure commodities such as platinum or cotton or some of the other things. Now, commodities have changed dramatically over the years. When I first got in this business 40 years ago, we had things like pork bellies, which is bacon and potatoes, which we ate every day. Now these are not things that are traded any more. So, in the commodity world, we tend to shift from goods that were important long ago, who are less important today. We don’t trade pork or bacon anymore, nor do we trade potatoes, but years yonder they were very, very important to the landscape of the financial markets. 

Rebecca Degter 

Got it. OK. So how are commodities used in our daily lives? 

Dan Basse 

Well, you know, today you probably walked out your front door, which was more than likely made out of wood. And so front doors are made out of lumber and lumber is a commodity that we watch and trade very carefully. If you think about the copper market, maybe you drove to work today in an EV, an electric car. Well, copper wiring is very important in that EV and to keep it all going. And in the electrical charge that went from maybe a utility in your neighborhood into your garage through a copper wire. And then you woke up this morning and you may have had a bowl of Cheerios, which was made out of oats. Or you may have had a piece of wheat bread which was made out of hard red winter wheat produced in Kansas. And then you had maybe a piece of bacon or some kind of a prosciutto or something like that on your toast. And so again as we think about our lives all of these things provide opportunity and provide risk to the producer. And there’s a derivatives market which tries to get into the middle of you as a consumer and the producer. Maybe it’s an Illinois or Iowa corn farmer. Or a hog farmer in Heilongjiang, China. Or maybe it’s a wheat producer in France that’s making a baguette. All of these things played to the importance of the world and we and the commodity world, I think have more relationships to those kinds of things than maybe a stock price of, let’s say, Tesla or IBM, something that’s in the headlines. But the basic commodities are something that we utilize almost every day. 

Rebecca Degter 

OK. So lastly, what did you know about commodities at 20 years old and what would you, what advice would you give to people who are either in high school or college students listening to this podcast? 

Dan Basse 

We don’t mind – one of my big sticks is I grew up on a farm, so my involvement in commodities started at a very young age. And I remember that my father at that point, who wouldn’t pay for my college, gave me a herd of hogs, such that I could pay to go to school back in Madison, WI. Some years I made money. Some years I lost money, and I finally understood that it was the price of those hogs that went up or down that made the difference in my tuition. With that, that kind of got me interested in the market. So, as a 20-year old, I would think about the world around you. Where does your food come from? And I’m not talking about whether it’s organic or non organic. I’m trying to think of it more holistically. You know, does it come from the dairy industry and the milk that you pour in your cereal? Does it come from the copper that comes from the ground in Peru, Chile and these are the things that I think it’s important to understand and it’s really super interesting. To really step back and say, you know, where does this copper wire, where does this rubber come from for my tire on my car. Or where does, maybe the platinum that I’m wearing as a wedding ring originate from and this really has big ramifications, especially if we think about the world as it sits today, with the geopolitical concerns that’s happening with the war in Ukraine, with Russia’s production of crude oil with OPEC coming back to the fore. I think all of you in the 20 to 30s, if you will, the generation below millennials should have a big impact and interest in terms of where stuff comes from. 

Rebecca Degter 

OK. So, Dan, I had some orange juice for breakfast. Is there a futures market on that? 

Dan Basse 

There absolutely is a futures market! It’s one of the oldest ones, in orange juice. In fact, if you remember back to the old movie, I recommend everybody watches, which is Trading Places with Eddie Murphy a long, long time ago, he was one of my favorites. And so, if you think about orange juice, that production has now shifted largely to Brazil, there’s a Brazilian firm named Petrolli that is very important to the world orange juice market. And so not only does it produce orange juice, but we also produce citrus pulp with feed to livestock. And so, there’s a derivative that comes from each of us. You know, orange juice is something that is traded. It’s very important to the world landscape and it just gets again to the fabric, if you will, of the importance of commodities that we consume every day. Also, if you think about weather, Florida weather has been highly important along with disease pressures. One of the reasons the United States has not produced much orange juice anymore is because of the localized disease in Florida called green drop. It kind of decimated the US citrus industry, which then shifted demand down to Brazil. But whether throughout the commodity industry plays such a large role, and as we think about climate change and July 3rd being the warmest day we had globally on record, all of this is going to play very, very large in terms of whether it’s the price of orange juice or the price of corn or even the price of a loaf of bread. I mean, we as Americans today spend 6.7% of our disposable income on food. It is one of the lowest in the world. Yet we do have the abundance, but I really worry that some of this may change if climate continues to be adverse, producing too much rain in some areas and too little in others. 

Rebecca Degter 

Well, thank you so much. Dan, for joining us today. 

Dan Basse 

You’re very, very welcome. 

Andrew Wilkinson

Let’s find out where commodities are used every day, here’s Phil Streible.

Rebecca Degter

Hi Phil, how are you?

Phil Streible

I’m doing great.

Rebecca Degter

Thank you for joining us today. So how are commodities used in our daily lives?

Phil Streible

Commodities are generally described as the raw input and the basic production of a good. It could be something simple as a foundational commodity like agricultural products like corn, wheat and soybeans, which are probably comprised of much of the percentage of the global populations’ diet or even live cattle or lean hogs, things that you are utilizing you, you know, over the 4th of July holiday weekend as far as eating. There are also basic goods like energies, metals, you know like gasoline, natural gas. I would say there’s probably about 27 essential commodities and these are products that you use day-to-day. Anything that you have that’s you know, in your house that are surrounding you right now, or that utilize all the way down to just something simple like a pencil that has wood and lead, paint in it. Those are things that are all basic raw commodities.

Rebecca Degter

OK. So could you tell me a little bit more about why commodities are important?

Phil Streible

OK, commodities because of the fact that the raw input that goes into any type of basic good, pretty much the costs that are involved or the supply and demand or the production of any one of these commodities is going to affect the, the trickle down effect of the of what the price is of the product at the end. Or as maybe the scarcity of a commodity increases, the price of that commodity is going to increase. So when you see something real simple like, a drought occurs, which kind of what we’re experiencing right now in parts of the Midwest, soybeans are going to have a problem growing or corn is going to have a problem growing. Therefore, there’s going to be less of it available once harvest time comes, so the price of corn or one of these basic commodities is going to go up. Just like when we have conflicts that occur globally and you see oil production affected, what happens? Peoples’ gasoline prices go up at the pump, or if there is a some other natural disaster, whether it’s a frost affecting coffee beans or sugar, you’re going to see those prices affect the individual consumer and also and that’s the leader for why inflation is going higher.

Rebecca Degter

OK, so, what role do commodities play in the stock market?

Phil Streible

They’re going to affect everything from almost every area in every company is going to have some kind of exposure towards commodities. Even if you were something very simple like an Internet based company that just provides basic services, writing blogs and things like that, you wouldn’t think that commodities affect you. But electricity is one of the one of the commodities; electricity prices go up and down. You’re utilizing your computer and then your computer; if you need to buy a new computer that has a microchip in it and things like that, like the video or, you know, Intel, whatever you’re using. All the way down to those chips, they have various commodities in them, different metals and things like that, and the scarcity again of those metals, or if you see sanctions or curbs on exports, it’s going to make those particular metals harder to get and it will drive prices up. So almost any business that’s out there, everything from grocers to car manufacturers, they’re all very much impacted by the price of commodities.

Rebecca Degter

How can commodities then disrupt an economy?

Phil Streible

Very easy. Those are oftentimes one of the things that are most weaponized. You’ll see, and we just experienced this, where certain countries when conflicts arise, they’ll shut off exports of things like wheat or they’ll shut off exports of Platinum or Palladium, or reduce their exports of crude oil. And what it does is it has a direct impact on the consumer overseas because many of these different countries out here, they don’t produce these specific things. If you look at platinum for instance, which is found in a catalytic converter of a car, and it’s an essential item for a car, the main producers of it are Russia and South Africa. Well, if Russia curbs their exports, you’re going to see cars not being produced because they’re going to be sitting on the assembly line waiting for those inputs to come in. South Africa, another country that produces platinum, they could be experiencing rolling blackouts because they have not upgraded their electricity grid. And so they will be able to mine in the dark or without electricity. So the supply of platinum could be severely strained causing disruptions from someone simple like a car manufacturer.

Rebecca Degter

What are the ramifications of something like a hurricane?

Phil Streible

Now that one could have that one could have multiple folks. So, me living in Florida, you know, we just experienced Hurricane Ian and when you had a couple things occurred the way that hurricane traveled, it went up through the Panhandle. That’s where, and it was really the northeastern part of the Panhandle, that’s basically Florida’s main orange juice, growing region and between that and the freezing temperatures you saw in California just prior to that, you saw the price of orange juice go up exponentially. Now something else that could occur is there’s almost like a checklist of commodities we look for when you see a natural disaster like that. What kind of impacts will a hurricane have? Is it a category one, category four? What type of area is it hitting? Is it hitting an area that is heavily populated where they’re going to need to rebuild a lot of the infrastructure that’s there? So, you’re going to see lumber prices probably go limit up. You’ll see things like copper, steel, aluminum, concrete, where all these prices are going to go up. And obviously there’s going to be a surge in things like gasoline demand and oil demand because you’re going to need to run generators that rely on those commodities in order to provide that first response assistance to the impacted area.

Rebecca Degter

And as a Florida native, can you speak a little bit more about the orange juice situation?

Phil Streible

Yeah, currently right now, orange juice prices are still quite elevated. They never really came down from this that last hurricane. I mean, if you look at a chart right now, I mean, we’ve been at a 45-degree angle for most of the year and it all really started from last year’s hurricane. So, it takes multiple years for those crops to regrow and re-pollinate and be able to provide the same output. Many of those crops it’s going to take them two and three cycles before they’ll produce the same amount of fruit that’s out there. So, it’s really quite damaging and the lasting effects of the prices tend to extend out multiple years.

Rebecca Degter

Lastly, what did you know about commodities at 20 years old, and what advice would you give to either high schoolers or people in college to know more about commodities?

Phil Streible

There’s a couple of things I was raised a little bit differently: So, we were in Northwest Indiana. So, I was always surrounded by things like corn and soybeans and then also we were really into collecting coins and things like that. Just how my family had raised me. So, I was always exposed to like silver and small amounts of gold and the agricultural products. But really, I would say that someone at like 20 years old or a younger person that they’re they know more about commodities than what they think. Everything from borrowing some gas money from somebody or seeing how gas prices impact, how much you put in your tank. You know that’s you’re already exposed to price fluctuations and supply demand and things like that. Something else about commodities is that, you know, a lot of people are attracted to, like the stock market because they hear quick gains that were made because of, you know, COVID kind of reset a lot of stocks, a lot of the heavily shorted stocks that were just down to a few dollars. You know, we saw these epic squeezes on them and then ultimately, you know, companies like Bed Bath and Beyond, for instance, had gone completely bankrupt. Where I bring this back to commodities is that the price of a cow will always maintain some value. The price of crude oil or grains or silver, or just any one of these various things like copper, they’re all going to hold some value that’s out there. Someone will need them. So, there’s an inherent floor on prices. So, I really think that you know commodities, they’ve got, they’ve got staying power and they also impact the economy a lot more than what a person would think.

Rebecca Degter

Well, thank you so much Phil, for joining us today.

Phil Streible

Thanks for having me.

Andrew Wilkinson

Here’s McAlinden’s Sean McGovern on inherent production challenges given the geographical concentration of many raw materials. 

Rebecca Degter

Hi, Sean. Thank you so much for joining us here today.

Sean McGovern

Hey, thanks for having me.

Rebecca Degter

What are the challenges associated with commodity production and distribution?

Sean McGovern

Well, commodity supplies are typically not something that can be created. They are largely derived from natural resources and therefore distributed geographically. When large quantities of a resource like oil or industrial ores are concentrated in one nation or even one region, a small scale disruption to the flow of those resources can have wide reaching complications across the world. We can observe this in Cocoa’s concentration in Western Africa or petroleum’s particular concentration within nations that are members of OPEC. In both cases, cartel markets have been established for the purpose of controlling the global supply and thereby manipulating pricing.

Rebecca Degter

So, what did you know about commodities at 20 years old?

Sean McGovern

Well, I knew what commodities were insofar as we were talking about metals and oil, any kind of raw resource that could be traded. You know, it really wasn’t until I got into the business that I started getting into commodities so much and understanding the structure of it. So, if you’re 20 years old, I would recommend learning to understand where commodities come from, what kind of cartel markets that are out there controlling the price, what kind of countries governments might be trying to, limit the supply, because that’s really the most important thing understanding commodities, that you can only get them in certain places, and so often times commodities are going to be subject to the whims of governments. And if you understand what a government is thinking, you might be able to derive outcomes for prices and commodities.