From just-in-time to just-in-case commodity markets

 

There has been a significant change in inventory management thinking around the globe. Businesses have moved from a just-in-time philosophy to a new just-in-case mentality. A just-in-case environment is rather simple, build and hold more inventory than previously viewed as optimal. Don't rely on the transportation system or better logistics to meet the threat of stocking-out. Across the board from raw commodities to finished goods, holding more inventory is the new normal. 

For commodities, the traditional wording is that there is a higher convenience yield from holding inventory. Markets should show more backwardation in forward prices. 2021 was difficult supply year with excess demand versus expectation yet backwardation is found across most markets in 2022. Looking at March to December 2022 contracts, the higher March values as of January 19th are significant:

Corn       5.46%

Wheat     0.64%

Soybeans 6.02%

WTI oil     9.35%

NY coffee  2.07%

This is great news for long commodity holders; nevertheless, a measure of lower supply congestion will be a decline in backwardation. The last decade was a period of lower backwardation relative to the 90's. Commodity index holders were disadvantaged especially in the energy complex that saw strong contango. The long period of high market contango may be over.