Todd's Take

19 Jul 2016

By Todd Hultman
DTN Analyst

After being wrapped up in the day-to-day movement of grain prices, I often find it helpful to take time out and look around at how other markets are doing. Getting a larger perspective helps one see the ebbs and flows of the world's wealth and where grain markets fall in the scheme of things.

Among financial assets, holders of 30-year U.S. Treasury bonds gained 12% as of July 15, 2016 while stocks represented by Morgan Stanley's All-Country World Index were up 3%. Bonds' benefited from slow growth throughout most of the world and in the U.S., which is also allowing the Federal Reserve to stay cautious when it comes to raising interest rates. Numerous warnings from world leaders that Brexit would further slow world growth also added to bonds' appeal early in 2016.

In the world of commodities, it would be easy to guess from corn's new contract low in early-July that things haven't gone well, but actually the landscape has been more bullish than one might guess as 18 out of 25 commodities I track were higher on July 15 than where they started the year.

Of the 18 commodities that were higher, 10 have out-performed T-bonds with silver and soybean meal posting gains of 46% and 40% respectively. Like bonds, silver prices are being helped by the Fed's slow approach to raising rates, but are also benefitting from increased industrial demand.

Technically speaking, commodities that were as bearish as most were at the start of 2016 and are then able to trade above their one-year high, show a remarkably bullish change in trend. So far this year, we have seen 12 commodities trade above their one-year high, the most recent being cotton last week as hot temperatures blanketed the southern U.S. and USDA increased its estimate of U.S. cotton exports by one million bales.

Typically, dramatically bullish changes in commodities like the one witnessed in cotton come as a result of adverse weather, but in 2016 only four of the 12 new one-year highs included production problems. Most were largely due to increased demand, which is surprising given all the pronouncements of low world growth this year.

China's appetite for protein has helped raise prices of soybeans, meal and pork. Better housing demand in the U.S. is lifting lumber prices. Increased solar applications are helping silver prices.* Higher driver miles in the U.S. have helped demand for ethanol, and even natural gas prices are getting a boost from increased electricity production. Just maybe the world's economies are starting to do better than advertised?

On the bearish side of the commodity spectrum, most of the low prices are clearly the result of excess supply. The U.S. is looking for more parking lots to pile wheat and that is also weighing down corn prices. USDA expects beef production to be up 5% this year as cattle numbers grow. And a half-billion barrels of crude oil are more than enough to keep oil prices from doing anything crazy.

These surpluses won't last forever -- they never do. In the case of corn, the fact that prices remain depressed while many other commodities are showing signs of life is a bearish indication for now. In general, however, we can say that commodity prices are doing much better than was expected just six months ago. Bearish headlines aside, the world's economy appears to be waking up.

* 2016 Silver Market Trends by The Silver Institute, Jan. 28, 2016 at:

http://www.silverinstitute.org/…

Todd Hultman can be reached at todd.hultman@dtn.com

Follow him on Twitter @ToddHultman1

(CZ/BAS)