Bloomberg News

Commodities Headed for Bull Market as Drought Withers Crops

August 21, 2012

Commodities Headed for Bull Market as U.S. Drought Withers Crops

A grain bin at Kahle Supply and Feed Mill Inc.'s facility in Kalida, Ohio. Photographer: Ty Wright/Bloomberg

Commodities are poised to enter a bull market led by surging grain futures amid the worst U.S. drought in half a century and on mounting optimism growth in the U.S. and stimulus from China will boost demand.

The Standard & Poor’s GSCI gauge of 24 raw materials rose as much as 1.2 percent to 677.29 in London, the highest since May 3, and was up 1.2 percent at 2:14 p.m. in London. The gauge has jumped 21 percent from this year’s lowest close of 559 on June 21. A gain of more than 20 percent is the common definition of a bull market.

The worst U.S. drought in a half century sent soybeans to an all-time high of $17.1275 a bushel today, while corn reached a record $8.49 a bushel on Aug. 10 on the Chicago Board of Trade. The Department of Agriculture has slashed its corn harvest forecast by 27 percent since June, after declaring more than half of U.S. counties as disaster areas while drought conditions stretched from California to New York.

“The grains have been the strongest performing subsector in commodities the past few months, and that has purely been driven by supply-side considerations and the U.S. drought in particular,” said Sudakshina Unnikrishnan, a London-based analyst at Barclays Plc.

Oilseeds and grains are the best-performing commodities this year among 80 tracked by Bloomberg. Soybeans jumped 42 percent in 2012, the biggest increase on the GSCI, as the drought parched crops in the U.S., the top producer last season. The GSCI’s 4.8 percent gain lags behind a 9.1 percent advance in the MSCI All-Country World Index of equities. Treasuries returned 2 percent, a Bank of America Corp. index shows.

China’s Policy

Chinese Premier Wen Jiabao said there’s “growing room for monetary policy operation” amid easing inflation, state television reported Aug. 15. Confidence among U.S. consumers unexpectedly improved in August and an index of leading indicators climbed more than forecast in July, separate reports showed Aug. 17. China is the world’s biggest consumer of everything from copper to pork to soybeans, and the U.S. is the largest user of crude and corn.

The jump in grains and oilseeds sent world food prices up 6.2 percent in July, the biggest increase since November 2009, the United Nations Food & Agriculture Organization said Aug. 9. The gauge, which tracks 55 food items, slid about 7 percent in the previous three months on the outlook for bumper world harvests and ample dairy and meat supplies.

Goldman Sachs

In mid-June, Goldman Sachs Group Inc. moved to a “near- term overweight” recommendation in commodities. On Aug. 10 the bank maintained forecasts for a rally in corn to $9 a bushel in three months, adding that soybeans may climb to $20 a bushel while wheat may reach $9.80 a bushel. Corn rose 0.7 percent to $8.2925 a bushel today in Chicago, soybeans traded at $17.1075 a bushel and wheat was at $9.085 a bushel.

“We expect soybean prices to outperform to ration resilient export demand in the face of critically low U.S. supplies, corn prices to rally to secure sufficient ethanol demand destruction and wheat prices to underperform corn prices on relatively higher supplies,” Goldman analyst Damien Courvalin wrote in the Aug. 10 report.

U.S. corn production may drop to 10.78 billion bushels, a six-year low, while the soybean harvest at 2.69 billion bushels would be the smallest since 2007, the USDA said Aug. 10. Crops are in the worst condition since 1988, a year when the corn harvest tumbled by 31 percent because of drought.

Hedge Funds

In the week ended Aug. 14, hedge funds held wagers on a rally across 18 U.S. futures and options contracts near the highest in 11 months, according to the most-recent U.S. Commodity Futures Trading Commission data. A measure of 11 U.S. farm goods showed speculators’ bullish bets in agricultural commodities rose 0.6 percent.

The two crude oil components in the GSCI index, West Texas Intermediate and Brent, have rallied 24 percent and 29 percent, respectively since June 21, as a European Union embargo on purchases of Iranian oil took effect July 1 and as European economic leaders committed themselves to preventing any break-up of the euro area.

U.S. natural gas futures have also advanced since dipping to $1.902 a million British thermal units on April 19, the lowest close this year, as hotter-than-normal weather boosted power plant use, pushing prices above $3.20 at the end of July.

Natural gas futures were trading today at $2.821 per million British thermal units on the New York Mercantile Exchange and a barrel of WTI crude was worth $97.

Twelve of 24 commodities on the GSCI have fallen this year, led by a 27 percent drop in coffee and an 18 percent decline in cotton. Nickel prices have decreased 16 percent on concern that China’s economic growth is slowing.

To contact the reporter on this story: Whitney McFerron in London at wmcferron1@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net


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