The commodity markets – ag, oil, metals – seem to have hit something on the way down and bounced up a bit.
There’s been a couple-of-days rally going on and it’s hard to tell at this point if the thing has lots of bounce left in it, a bit, or is getting towards a state of doneness. Whatever it is, it’s a relief after the slump and slide of the past few weeks, which has erased the pleasant rally we experienced in the end of 2009 and into early 2010.
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An Illinois analyst I often speak with believes this present little spurt is due to little more than short-covering, so it’s got limited potential to become a medium-term rally. Once the shorts are out, then it’ll be time to assess the situation with a bit more clarity.
But he thinks the lows of the season are in, and that’s a relief if it’s true. Every year we wait for the market’s lows. Usually those occur in late fall as farmer deliveries swamp the elevator system and push prices low. But this year’s unseasonal rally confused things and made it unclear whether harvest lows had occurred, or had just been deferred. This recent slump in ag prices brought those concerns back to the forefront and worried many who saw the market falling pretty consistently. This present uptick breaks that trend for now, and if the lows truly are in, then this is a bounce off the bottom. Demand is weaker than thought a few weeks ago, but strong enough to let the grains and oilseeds and meats crawl along at slightly depressed levels.
A grimmer prospect is one I was just discussing with a Calgary analyst, who – like me – tends to favour the deflationary hypothesis. That’s the theory that the present economic and financial problems have at least a double-dip ahead (a second recession) or even another leg down (a depression). In that situation, the U.S. dollar rises, commodity prices fall and demand sinks far beneath where it is today. People cut back on their eating and what they’re willing to pay. Investors roll out of commodities and into the perceived safety of greenbacks. Things get dark again, like they were at this time last year. Ag commodities do better than other commodities – people need to eat and find money for food – but it’s worse than the present situation.
The markets are still terribly unsettled, unsure of how to assess future demand, wrestling with issues of recovery, inflation, deflation, treasury bubbles, problems with the PIGS’ debt levels, the victory of the New Orleans Saints, etc. But for today, they seem to have decided that crop prices were getting a bit too cheap, and you can’t complain about that.
