In just three weeks, futures traders became extremely bullish on the price of corn. Normally, I would say that’s an indication the price is too high and due to fall. But in those same three weeks, the price of corn fell 8% … then rose 11% … then fell 8% … then rose 6% … then fell 6%.
The rollercoaster left the price back near a major low.
About the same time that the price of corn (and wheat, too) started going wild last month, I wrote Agricultural Commodities are Looking Good. The main idea: Agricultural commodities could be primed to begin a new cyclical bull market.
That’s why I’m tempted to call a bottom here.
Let’s stick with corn as an example …
Corn is battling what Bloomberg calls “The Great Corn Clash.” It notes that “Brazilian farmers are in the midst of collecting their biggest corn harvest ever.”
That’s a substantial change in fortune from when God kept rain off Brazil’s corn crop the year before. This year’s crop is expected to be a whopping 45% higher than 2016’s.
Meanwhile, the U.S. corn crop is coming off a record year. And existing crops look plentiful.
The USDA estimates this year will be the second-biggest harvest on record. The few places that have suffered some dryness, are getting rain again. Yesterday morning:
“As much as an inch of rain [across the upper Midwest] … will likely help improve spring wheat, corn and bean crops that had been suffering from a lack of precipitation.”
Brazil’s rise to become a major global exporter creates the potential for a sizeable U.S. glut when it comes time to ship out the corn set to be harvested this fall.
In the nearer term, the weather is the wild card for the prices of agricultural commodities. But if we’re thinking about longer-term price cycles, there’s more to consider …
Liquidity is one factor worth watching. And Federal Reserve interest-rate policy has kept financial conditions easy — liquid.
The Fed has, however, expressed desire to “normalize” policy. That suggests liquidity will recede. But it is likely to be gradual at most. That’s because price pressures are absent, and no central bank wants to pop a bubble.
Conditions should remain favorable for the market. But with U.S. averages trading at valuations many investors consider unsustainable, where do you go?
How about commodities?
That chart compares the WisdomTree Continuous Commodity ETF (GCC) vs. the SPDR S&P 500 (SPY). It shows that commodities have drastically underperformed stocks during this eight-year bull market.
This tells me that commodities are due for a move higher.
In fact, if the low-interest-rate environment remains … and liquidity does not recede … commodities look like an exceptional place for investors to find value as markets drift even higher.
After sufficient rain, it looks like agricultural commodities will soon have their day in the sun. If you like corn, consider the Teucrium Corn ETF (CORN). And if you’d rather make a broader bet on the agricultural commodities, consider the PowerShares DB Agriculture ETF (DBA).