Wednesday, March 31, 2010

Agricultural Commodity Prices Weaken on Ample Supplies

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The USDA report on March 31st was bearish for grains. Wheat, soybeans, corn and rice all had significant drops in their last day of the quarter trading. Agriculture commodities have been weak since they peaked in 2008 and a sustainable rally in the immediate future is extremely unlikely.

Food commodities had big rallies starting in 2007 and these lasted into the spring of 2008, when most prices hit their highs. At the top, wheat was over $13 a bushel, soybeans over $16, corn around $7.50, and rough rice around $25.00.  Significant selling followed in later 2008 and into the summer of 2009. A late year rally from last year has now faded. Wheat closed out the first quarter at $4.505, down 21.5 cents or 4.6% on the day. Soybeans were at $9.41, down 33 cents or 3.4% and corn for May delivery closed at $3.45 down 9.5 cents or 2.7%. Rough rice was the least damaged dropping 24.5 cents or 2.0% to $12.215.

The USDA report didn't actually appear to be that negative. U.S. farmers will be planting 9% less wheat in 2010, although winter wheat plantings from last fall were 2% greater than they were initially thought to have been. The soybean crop should only be 1% larger than last year and corn 3%. In a bear market, news tends to be looked at with a negative bias though and there is overreaction to the downside. Agricultural ETFs with significant grain exposure, such as DBA, RJA, and GRU are all trading in bear market patterns with the 50-day moving average trading below the 200-day moving average. The cross just took place for RJA.

While the short-term picture for the grains appears negative, in the long-term prices will go up again. The ability to increase global food production is limited. There is little additional land that can be opened for cultivation and the big yield increases from the Green revolution - use of cross breeding to produce sturdier and more productive plants, the introducion of nitrogen based fertilizers, and extensive applications of pesticides, fungicides, and herbicides - are in the past. Population continues to grow though and the ability to produce more food isn't keeping up. At the same time, improved economies in emerging markets means a greater demand for food from large numbers of the underfed. The basic realities of supply and demand will eventually cause food prices to go back to their 2008 highs and probably much higher. The charts will tell us when this is likely to happen.

Disclosure: None

NEXT:  March Employment Numbers Better Thanks to Government Hiring

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.


Nona said...

In his book TAMING THE LION, Richard Farleigh a hedge-fund manager of extraordinary talent (he retired a very rich man in 1964 at age 34), makes an observation that he used very profitably and that I always keep in mind: prices usually go much further, up or down, than anyone expects.

He comments (on page 154) that "When a market is trending up, it is more likely to rise further than it is to fall. Equally, when it is trending down, it is more likely to fall further than it is to rise."

Farleigh's advice: "Don't look for opportunities where the market's going to reverse, look for those where it's going to continue on its path."

For those of us who "know" that this market can't keep rising, Farleigh also notes: "Time and again I noticed how often up-trending markets ignore bad news." Also, uptrending markets "...get a better boost from good news."

I think that Farleigh's observations and experience help as much as anything to explain the market's apparent strength. There will be a comeuppance, of course, but it might take a lot longer than "seems" "right".

The market is the market, after all.

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