It has been a rough couple of weeks for commodities.
The entire class, including metal, gold, energy and grain, has been pressured lower by expectations of higher interest rates. And grain specifically has trended weaker because the market has shifted its focus from the drought-reduced U.S. winter wheat crop to much better growing conditions for spring sown crops.
There is a range of opinion about whether the broad commodity pullback is a transitory correction or the start of a bear market in commodities, but my perception of the weight of analyst opinion is that it favours the short-term correction assessment.
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The correction began in late May as traders began to feel the commodity boom was getting overheated and as the United States and Iran decided to cool their sabre rattling over Iran’s nuclear ambitions, allowing oil prices to edge lower.
The downturn really gained steam on June 5 when Ben Bernanke, the chair of the United States central bank, the Federal Reserve Board, warned about the possibility of high oil prices driving inflation higher. He said the board would be vigilant in keeping inflation under control and that meant it would increase interest rates.
There were already signs that the U.S. economy is cooling and many analysts fear that applying the brakes, through higher interest rates could slow it too much.
That could reduce demand for the commodities that have fuelled the global economic boom of the past few years.
Those fears were compounded when China said it would institute measures to cool its economy, which grew at a red hot annual rate of 10.3 percent in the first quarter of the year.
But as Ian Morrison, this week’s agrifinance columnist, notes on page 71, the global economy is expected to continue to grow at a healthy pace, maintaining the need for commodities and supporting a resumption of their upward price trend soon.
While commodities in general were getting battered, grains markets faced their own set of price-depressing news.
While there are sizable pockets of the Prairies where crops won’t be seeded because of saturated soil, Western Canada’s crop generally looks good with lots of moisture and heat units.
In the U.S., corn and soybean crops are off to a good start and worries about dryness in western portions of the Midwest were extinguished by recent rain.
Europe expects a larger crop than last year.
Australia again dodged a bullet with rain on June 11, the same day that the winter seeding season last year was saved by rain. But there was less moisture this year and timely showers are needed to maintain the crop through to maturity.
There is still time for a weather scare somewhere in the world, which could lift prices. Also, grain prices could rally if outside markets catch fire again over factors such as rebuilding tension between the U.S. and Iran, or a severe hurricane striking the southern U.S.
And nothing has changed the outlook for strong new demand from the biofuel sector in North America and abroad, providing sustained support for grain prices.
So although clouds have cast a shadow, the parade should continue, providing farmers with the opportunity to post a much-needed profitable year.
