Month End Summary of Commodity Futures and Options

Lenin is reputed to have said, 'In some decades nothing happens, in some weeks decades happen'. We are living this statement at warp speed. Those decades seem to happen intraday. The tariff whipsaw has hit the US agricultural segment particularly hard. April 2nd looms large as the go live date for tariffs. The Atlanta Fed is showing GDP cratering (https://www.atlantafed.org/cqer/research/gdpnow). In general, modern economies do not suffer uncertainty well. More clearly, the market works, that's not the problem, but peoples’ pain tolerances are very low. We have an entire generation of money managers that has not experienced a prolonged (more than 1 year) bear market. Our thought is the hammer shot of higher rates (longer than anyone expected), tariffs and general belt tightening in the federal administration is going to give the economy the 10 count. There is already talk about a 100bps rate cut later in the year. Also interesting is the increasing chatter about 'stagflation'. Readers of this august blog will recall we’ve talked about that as the most likely outcome.

The tariffs, whether reasoned or otherwise, will cause dislocation. The higher rates are causing dislocation. The firing of massive swathes of federal employees (while we cheer it), will cause, minimally, frictional unemployment, and, to the extent these jobs were just crony sinecures, permanent unemployment. Recall also that the last rate cut was met with jeers by the bond market. People in the finance world have become a bit more complacent as it pertains to the ability (and willingness) of the central banks to step on the accelerator and that accelerator to have any effect on the economy. Economists have debated “structural equations” models versus “reduced forms”. In the structural equations approach, you specify the entire structure of the system, so you reduce the number of external (“exogenous”) variables. In the reduced form approach, you aren’t sure of the structure but infer some relationships from observational data. Most in the financial press reason from the reduced form view of the world, but think they have the structural equations. It is assumed that stepping on the monetary accelerator will always generate a bump in output. That is a fallacy. Most research finds monetary neutrality in the long run (but prices rise), and that money non-neutrality might occur in the short run when you build in some sort of friction in markets; labor union wage setting, costs to change menus, slow information transmission and so on. We are skeptical that a property developer from New York will appreciate this. If your entire existence is predicated on highly leveraged loans, you see a panoply of reasons to cut rates and increase credit. If the economy as a whole understands this, then increased credit will only goose prices. It is called “monetary fooling” in economics for a reason.

Let’s look at the action in some of the ags markets that might be of interest to our readers.

While it is certainly the case that spikes in wheat vol are not unusual, the spikes in vols (blue line top left panel, seem to presage increased volatility.

Mr. Trump’s mercurial approach to policy may, in the end, result in no changes. However, it adds to the uncertainly (and hedging) that producers have to incur. Again, international trade is complicated and transshipment may mitigate all eventual tariffs, but it is another friction the economy will have to deal with.

Even the Sleepy 500 Index woke up from its sleep walking ever higher and displayed a shocking amount of realized and implied vol…

We now proceed to our dive into the different market segments and our observations.

Both ETH and BTC futures were up and down-again. This is not as dramatic as in months past, but ethereum slipped 12% and BTC 2.6%. The dollar seemed to be weaker evenly across the currency futures (it took more dollars to buy the future). Euro vol was up dramatically. The Euro is facing prospects of a tariff war as their economic vitality (viability?) is in question. The loss of cheap Russian natural gas has caused the German engine to misfire. The prospect of massive defense spending, conscription and other military types of endeavors would seem to weaken another pillar of their post war success, the lack of military spending.

The short end of the curve seemed to have rallied, while the longer end sold off. This is consistent with hopes that there might be a reduction in interest rates in the coming months. Since we don't employ former Federal Reserve governors, we will not guess which way this will go. However, we will point out that the inflationary cat is out of the bag. Where the 90's and 00's were a period in which inflationary expectations were coming down, we are in an opposite regime. Nominal rates will stay high, barring somebody taking a two by four to the economy (ala Volcker). The boom states of the Covid period (Florida, Texas, Tennessee) are beginning to experience the other side of the boom. While we are not at commercial real estate levels of pain and woe, recall that many units were purchased at levels affordable only at very low interest rates. Without price appreciation, which allows owners to tap into the value, and low rates these properties become ticking timebombs.

As we discussed in our preamble, vol spiked dramatically at the beginning of the month, but quickly sold off. A lot will depend on the tariffs and how the loss of consumer confidence translates itself into a reduction in economic activity. The Conference Board's indicator moved to recession indications. At the outset of the increase in rates, about two years ago, people were convinced rates would moderate quickly and revert. They didn't. The same might occur with expectations around economic activity. People expect a mild recession and back onto the next bubble, perhaps real estate again. The reality is that the overhang of a nearly two decade bender might be a bit more dramatic than most appreciate. We repeat ad nauseam that the Fed's balance sheet is in the trillions. It was not so prior to 2008. It is not some amniotic sack nourishing the economy, but a festering boil that will be lanced by someone. They've dodged these bullets several times in the last 5 years, one day it will happen.

Metals were all up save for hot rolled steel. Gold and silver were up sharply, leading the precious metals. While this may be the time that gold shines, we are a bit cautious as this could be the latest 'rug pull' of retail investors. The manias seem to enter the retail world in quicker fashion as finance has 'democratized'. The real surprise is the rally in aluminum, copper (both at COMEX and LME) and tin. The LME base metals moved much more sharply. Perhaps this is some pattern induced by the tariffs and how they will impact the markets. China is the wild card in all these discussions. They are a massive consumer of copper. Aluminum is also China driven, and to some extent Mexico. It remains to be seen how the tariffs will affect the production chain for cars, for example, considering their greater reliance on aluminum. Implied vol was lower for the precious metals, but bid up for industrials (base) metals.

Corn and wheat futures were down, but vol zoomed up. Matif wheat rallied in price and vol dramatically. The same was true of Matif corn. We covered the tariff risk in our preamble. There was some positive news early in the month. Trump's plan for ending the war in the Ukraine envisaged a return of exports from the Black Sea, presumably Ukrainian and Russian products, a re-establishment of SWIFT connectivity and opening of ports to Russian fertilizers. However, by the end of the month, it looked like the nascent deal was on life support. We will touch on this in our Energy section.

Oil, whether Brent or WTI, had a strong month, about 1% up. Vol was slaughtered in most of these products. The primal reason is the 'peace deal' being waved around by President Trump. Our view is that expecting peace by April 20th, or so, is a child's dream. This is and has always been perceived by the Russians as existential battle. For the Russians to conclude a peace without most of their demands met would be a catastrophic failure, from their viewpoint. The Ukrainians and their European backers see a territorial conflict in which they wish to expel an invader. Time is clearly on the side of the Russians. They will pay lip service to any possible agreement, but work to their maximalist aims. We see the NY Times now discuss the pivotal role the US played at the start of the conflict. Our view is that this is preparing the ground work and narrative for another foreign policy black eye which will make the Afghan withdrawal look like a routine troop rotation. https://www.nytimes.com/interactive/2025/03/29/world/europe/us-ukraine-military-war-wiesbaden.html The US is in a rush to put this to bed and minimize the loss of prestige that will come from it, the Russians are not. The conflict will drag on for at least another year. The US will probably try to increase the severity of sanctions against the Russians. The only strategy our Western leaders understand is carrot and stick, but that only works when the other side plays the same game. The Vietnamese didn't play that game, the Afghans didn't and we are sure the Russians will not. After all they've endured the most withering collection of sanctions and interruptions in their trade, what is an extra sanction? With undoubtedly a strike on Iran in the plan and more attacks on Houthis, we are surprised nobody is concerned about spikes in energy prices. We thought that the demise of the green initiatives would bring back a lot of the hedging of energy products, but the activity still seems somewhat anemic. The sell off in implied vol on tentative peace news seems like naivete writ large.

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