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Crop market ignoring stocks volatility

The stock markets might be undergoing a correction, but the decline so far hasn’t hurt grain futures prices.

I’ve been reading about how some analysts, notably Goldman Sachs, think commodities could be a big beneficiary from the decline in equities with the potential to lift prices, including agricultural product values.

However, others disagree with that outlook. As for me, I think shifting investment flows and currency fluctuations could have a minor impact, but crop prices are unlikely to move significantly higher until there is a widespread weather problem that seriously threatens yields in an important growing region.

The factor that apparently sparked the sell-off in stocks is the prospect of rising U.S. incomes fuelling inflation, which in turn would cause the U.S. Federal Reserve to raise interest rates more aggressively.

Money managers think that after a huge run-up on stock prices since 2009 and especially last year, the likelihood of further equities rallies is limited and so are looking at bonds, where interest returns could be more attractive and secure.

The prospect for higher U.S. interest rates would normally lift the value of the greenback, but that is counterbalanced by the idea that central banks in other major countries are also expected to raise rates or undertake other policies to step back from the stimulus that they have pursued in recent years.

Indeed, the U.S. buck has weakened against a basket of world currencies over the past year.

Commodity bulls argue that unlike equities, commodities have gone through a gloomy time for several years and are undervalued. If the U.S. dollar weakness continues and world economies continue to strengthen, leading to more demand for raw materials, then investors taking money out of stocks could add commodities alongside bonds as their new targets.

However, even if they do, the positive price impact on the crop part of the commodities sector will likely be limited.

Grain markets remain well supplied. The U.S. Department of Agriculture forecast for global year-end supply of wheat, corn and soybeans are all higher than they were at the end of 2016-17.

Argentina’s soybean and corn crops, which will be harvested in a few months, are struggling from dry weather, but excellent conditions in Brazil’s soybean crop are fully offsetting its southern neighbour’s problems regarding the oilseed. Argentina’s corn problem is not yet big enough to make much difference to global supply and demand.

It is dry in U.S. hard winter wheat country, but winter crops in Europe are generally OK, even with excess rain in France. And in Russia, prospects for another huge winter wheat crop improved with recent snow.

On the trade front, China has launched an anti-dumping probe into U.S. sorghum trade and limited licences to import U.S. genetically modified corn.

If the U.S.-China spat were to widen to include soybeans, then that would certainly roil crop markets.

For all these reasons, it is likely that crop futures markets will continue to focus on its own supply, demand and trade issues instead of the volatility of the stock market.

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