BEARS IN WINTER
As for the historically viewed safe-haven
gold market, it has also been idly moving in a downtrend as both the European and Middle East situations heat up. This could indicate a couple of different things: first, traders have grown weary of both stories, the European situation in particular. Second, it could also reflect that investors looking to protect global positions could be looking toward the US dollar as a hedge rather than gold. If so the February contract could fall back to a test of technical price resistance between $1,700 and $1,669. Again, given the possibility of an old-west wagon ride over the fiscal cliff, this is an interesting change in investor sentiment that will almost have to be seen to be believed. As I discussed in my December 2011
piece for Commodities Now (The View Ahead Resembles the View Behind), the trend in commodities in general could be as simple as hunger. Much like the old
Sauce! (I think you get the point). Heading into the winter the drought situation across the heart
of the US growing area (corn, soybeans, and wheat) has not improved but is actually worse than it was a year ago. Winter wheat condition ratings are the lowest on record as the crop heads into winter dormancy, not a precursor to a bad harvest next summer but certainly not a good sign. The epicentre of the drought is now over Kansas, Nebraska, and parts of western Iowa, the latter two being key growing regions for both corn and soybeans. It will take extraordinary winter precipitation to bring subsoil moisture back to near normal levels, a forecast that does not seem to be in the cards right now. What this means is, as the planting season approaches next
spring, tractors will start to move across ground desperately in need of a drink of water to start corn and soybean crops on the path to the needed near record production. Anything less puts hopes of rebuilding domestic, and possibly global, ending stocks in doubt for another year. Soybeans are a great example. While corn tends to get the
Agriculture seems to be the sector with the
most bullish fundamentals, and could reap the benefits of increased investor interest ...
dating adage, “The way to a man’s heart is through his stomach”, the same holds true for a market bull. If you want to wake him out his winter doldrums and make him stronger, make him hungry. And the strong possibility of a continued tight supply and demand situation in grains come next spring could do just that. Last year I talked about how corn could
be the key commodity given its ongoing demand market status due in large part to the US Renewable Fuels Standard put in place in 2005. Just recently, the Environmental Protection Agency denied a waiver of the RFS citing such a move would have little effect on the price of corn, meaning end user industries (livestock, renewable fuels, etc.) would see only minor beneficial changes to margins. This means that despite dramatically reduced corn production in the US due to the drought of 2012, demand levels to produce ethanol will be maintained in 2013 on the idea that the weather will improve and production will return to normal due to increased domestic acres and a move back to trendline yields. Let me say this in reply: Bouillabaisse
12 December 2012
majority of the press, it is actually soybeans that have potentially the tightest supply and demand situation from a global point of view. Both South America and the United States saw reduced production due to drought in 2012. Yet global demand, most notably from China, continues to go up. If we change our view of soybeans’ actual marketing year to run from the beginning of the South American harvest is March through the following February, including the US crop harvested in the fall, the argument could be that
2012-2013 marketing year (again, March 2012 through February 2013) ending stocks could approach zero. And while much has been made of projected record South American production in 2013 (Brazil expected to produce 81 mmt, Argentina 55 mmt), these supplies will not be available in the market until at least mid-March 2013. Therefore, the fate of the commodity sector could once again
rest on agricultural markets as investors weigh out risk to reward based on supply and demand. Agriculture seems to be the sector with the most bullish fundamentals, and could reap the benefits of increased investor interest that could ultimately turn commodities in general back to an uptrend. Remember, a hungry bull is an angry bull, making it possible for it to fend off the bear as winter’s shadow begins to shorten. •
Darin Newsom is Senior Analyst for DTN and provides
its subscribers with daily market insight and analysis.
For more information visit:
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