Time to Bet the Farm
Since hitting a low on January 20, the iPath Bloomberg Commodity Index Total Return ETN (DJP), a proxy for commodity markets as a whole, has risen by 10.6%. The rally has largely been powered by rising prices for oil and related energy products, precious metals, and industrial metals. Over the span, the iPath Bloomberg Subindex ETNs for those three groups have risen 23.1%, 14.3% and 12.5%, respectively.
But not all commodities have gone along for the ride. One sector, agriculture, has been a standout underperformer. While the iPath Bloomberg Grains Subindex Total Return ETN (JJA) has rebounded with other commodities in recent days, it has fallen by 0.6% over the past seven weeks or so.
One question, of course, is whether this group is poised to catch up—in other words, is it a buying opportunity?
Certainly, there are reasons to believe this is not the case. Among other things, the U.S. Department of Agriculture recently reported that “farmers are expected to boost corn seedings would increase by 2 million acres to 90 million,” according to Reuters, while the International Grains Council announced that it was raising its forecast for global corn production from 959 million tonnes to 969 million tonnes.
One factor that has helped buoy production in the face of low prices for corn, soybeans and other grains has been the difficult straits that many farmers find themselves in. Despite years of falling prices, they continue to plant, hoping for a rebound that can turn their fortunes around. A rising dollar has made it difficult for U.S.-based farmers, in particular, because it allows overseas rivals to undercut their prices.
It should be noted, of course, that many farmers, in the U.S. and elsewhere, benefit from generous government-funded subsidies that help to take the sting out of low prices. Such programs serve to delay or discourage reductions in capacity or the rationalizations necessary to strengthen the sector's prospects.
Many see the re-entry into world markets of Argentina, once the “world's granary,” as a negative for prices going forward. In December, the country's newly-elected President, Mauricio Macri, said “he would abolish tariffs on all agricultural exports except soybeans,” though expectations are that the tax on the latter will also fall to 0% from its current 30%, according to PanAm Post.
Needless to say, large grain hoards have helped to keep a lid on prices. Citing data from the International Grains Council, Bloomberg reports that global stockpiles of corn, wheat and other foodstuffs are near their highest levels in three decades. Inventories have risen amid bumper harvests and slackening demand for animal feed.
Buyers are scarce?
Indeed, it is not just an abundance of supplies that is a problem. Faltering demand has undermined prices, too. Deteriorating economic conditions in China, the world's biggest soybean importer, as well as in other emerging countries, have raised fears that they may scale back purchases and, in some cases, boost exports of products produced locally.
The sharp drop in oil and other petroleum-related products over the past few years has also played a role in curbing appetites for grains. While it is true that farmers and fertilizer makers benefit from low energy prices, many major oil exporters have been forced to curtail imports of agricultural goods because of the damage that the fall in revenues has done to their economies and public sector finances.
Separately, demand from Egypt, the world's top buyer of wheat, has been a major concern because the country has during the past several months blocked shipments of the grain due to unacceptable levels of Ergot fungus, Agweek reports (though the country has recently resumed purchases).
In the price
Still, these various developments don't necessarily mean the outlook for grains—and agricultural commodities more broadly—remains bearish. For one thing, most have been known for some time, and odds are that the bad news is fully baked into prices following the relentless multi-year decline.
This is evident in the fact that sentiment and positioning are lopsidedly negative, suggesting there are few traders left to sell. According to Bloomberg, the outlook for crop prices remains “gloomy,” while money managers have their “biggest bearish position on record,” Reports like these are just what a contrarian would expect to see when a market is on the cusp of a major upside reversal.
The technical picture also looks supportive. After racing to fresh multi-year lows, the grain ETN has reversed higher, breaking a steep short-term downtrend in the process. Moreover, while prices have recently traced out a succession of lower lows, momentum has not, creating the kind of positive divergence that has historically marked a turning point.
The fact that oil and other commodities are rallying may also be a positive for the sector. Even if the fundamentals are markedly different, it would not be surprising amid the broader rebound to see investors eyeing laggard groups for a potential catch-up trade.
Food is a priority
While it is too soon to say that the bear market in oil is over, the rebound in crude prices is likely to provide some comfort to energy-producing countries that have been forced to curtail grain purchases because of falling revenues and overstretched budgets. Given that food shortages are rarely a positive for social stability, increased spending on agriculture products will likely be a priority.
Finally, even if, as expected, the dollar resumes its upward momentum, it's a good bet that the rate of increase will be less than the pace that has been seen up until relatively recently, making it easier for grain exporters and importers to make the necessary accommodations.
Arguably, the way things are aligned in corn, soybean, wheat and other grain markets bears more than a passing resemblance to what had been seen elsewhere, most notably in energy and precious metals markets (as was previously noted here and here), before those commodities began their sudden and widely unanticipated ascents.
In other words, it may be time to bet the farm.