In just three weeks, futures traders became extremely bullish on the price of corn. Normally, I would say that’s an indication the price is too high and due to fall. But in those same three weeks, the price of corn fell 8% … then rose 11% … then fell 8% … then rose 6% … then fell 6%.
The rollercoaster left the price back near a major low.
About the same time that the price of corn (and wheat, too) started going wild last month, I wrote Agricultural Commodities are Looking Good. The main idea: Agricultural commodities could be primed to begin a new cyclical bull market.
That’s why I’m tempted to call a bottom here.
Let’s stick with corn as an example …
Corn is battling what Bloomberg calls “The Great Corn Clash.” It notes that “Brazilian farmers are in the midst of collecting their biggest corn harvest ever.”
That’s a substantial change in fortune from when God kept rain off Brazil’s corn crop the year before. This year’s crop is expected to be a whopping 45% higher than 2016’s.
Meanwhile, the U.S. corn crop is coming off a record year. And existing crops look plentiful.
The USDA estimates this year will be the second-biggest harvest on record. The few places that have suffered some dryness, are getting rain again. Yesterday morning:
“As much as an inch of rain [across the upper Midwest] … will likely help improve spring wheat, corn and bean crops that had been suffering from a lack of precipitation.”
Brazil’s rise to become a major global exporter creates the potential for a sizeable U.S. glut when it comes time to ship out the corn set to be harvested this fall.
In the nearer term, the weather is the wild card for the prices of agricultural commodities. But if we’re thinking about longer-term price cycles, there’s more to consider …
Liquidity is one factor worth watching. And Federal Reserve interest-rate policy has kept financial conditions easy — liquid.
The Fed has, however, expressed desire to “normalize” policy. That suggests liquidity will recede. But it is likely to be gradual at most. That’s because price pressures are absent, and no central bank wants to pop a bubble.
Conditions should remain favorable for the market. But with U.S. averages trading at valuations many investors consider unsustainable, where do you go?
How about commodities?
That chart compares the WisdomTree Continuous Commodity ETF (GCC) vs. the SPDR S&P 500 (SPY). It shows that commodities have drastically underperformed stocks during this eight-year bull market.
This tells me that commodities are due for a move higher.
In fact, if the low-interest-rate environment remains … and liquidity does not recede … commodities look like an exceptional place for investors to find value as markets drift even higher.
After sufficient rain, it looks like agricultural commodities will soon have their day in the sun. If you like corn, consider the Teucrium Corn ETF (CORN). And if you’d rather make a broader bet on the agricultural commodities, consider the PowerShares DB Agriculture ETF (DBA).
Do right,
JR Crooks
ralph johnson August 24, 2017
“whopping 45% increase…….second biggest harvest on record….” ………..gee, doesn’t that bode for a sizable surplus situation, and doesn’t that sorta follow history as an oversupply factor on prices? and you call for a significant move upward? pray tell; because timing that event is gonna be harder than your simple call……..when does the oversupply dwindle ? and prices move up? you have supplied seemingly contradictory forces-completely in contrast to all historical pricings , w/r/t supply/demand outcomes–that dont veer off traditional factor forces…….
What the hell are you talking about –time-wise–given your dramatic soon to be realized market supply boost????
mkj90620 August 4, 2017
More like a fiat currency crash,will drive all real goods up,in Dollar terms.
Henry S. Arnold August 4, 2017
Like everyone else, farmers have borrowed too much to product too much and somebody is going to eat a lot of debt before corn prices recover. Isn’t that the case with just about everything from cars to houses to corporate accusations and stock by backs!
Not the time to invest in debt burdened enterprises.
H. Craig Bradley August 4, 2017
COMMODITIES STILL LACK RELATIVE STRENGTH AND MOMENTUM
Commodities in and of themselves currently have no price momentum or “relative strength”. Some investors and brokers are skeptical of either of these market concepts. One retired Civil Engineer called it B.S. because Monument is a mathematical concept applicable to the world of physics, not finance or investing. Its another retreaded formula out of context. just like the ones used by our Central Bankers ( the FED ). Simply put,
Momentum = Mass X Velocity. So, there is lots of games going on with portfolio managers. Its an Art, not a Science as they say. Anyway, don’t buy commodity funds until and if they demonstrate confirmed momentum that is trending up long term. Otherwise, its just more volatility. Leave it alone for now. No body can time markets consistently. Nobody.
Chuck Burton August 4, 2017
Question: How much of that corn is GMO? I have nearly given up eating corn because it is almost all GMO now, and I do not really know if it is good food anymore. Besides, I try to avoid too many carbohydrates in my diet, and corn is high in those. If many follow my example, we will have a surplus of the grain. I also avoid HFCS.