Stay aware of global grain risk
There are a lot of factors that impact grain prices. The fundamental factors -- the supply and demand of grain -- have always been obvious and easy to understand. For example, when the weather turns hot and dry, supplies are threatened and prices move higher. (Just think of last summer and how the drought rallied prices!) Another example is when a USDA report shows a lot more acres than expected. All that extra anticipated supply triggers a drop in prices.
In general, prices will change when demand is much better -- or worse -- than expected.
When I started trading grains in 1974, supply and demand were the dominant forces in the markets. Indeed, for over 30 years, every seminar I gave kicked off with a review of the latest supply-and-demand numbers from the USDA.
In 2005, this changed. There was a landmark study that showed that a portfolio of stocks, bonds, and commodities outperformed stocks and bonds alone, and it had less risk than stocks and bonds alone. Wall Street traders also embraced the move from pit trading to electronic trading.
As a result, traders and investment firms on Wall Street began to look at commodities as an investment class. All of a sudden, a well-diversified portfolio would now have to include stocks, bonds, and some commodity-related investments.
For the investors who jumped into land and commodity investments early, it has been a great ride. Their investments outperformed the stock and bond market consistently from 2005 through 2012.
Today, all the seminars and webinars that I conduct start with the new set of market forces -- and that set does not include supply and demand. Although, in a way, it does. It’s the supply and demand of money. Who has money on this day? Where on the globe are they? Where are they putting money today?
Tracking and analyzing the flow of money has been a great challenge. Every morning when I am preparing my early morning email update, I look at five market forces and ask these questions:
What are the global stock markets doing?
Where are the U.S. stock indexes trading?
What is the value of the U.S. dollar?
What is the price of crude oil?
What is the price of gold?
Once a week, I also check what the commodity funds are doing by studying the Commitments of Traders report. Are they selling grain? Are they buying? Or are they sitting on the sidelines?
What’s been happening
Here’s how those five market forces have performed over the last several years.
1 & 2. The U.S. and global stock markets have made an impressive run since the last major low in November 2012. In the long term, this rally is positive for commodity prices.
3. For the last two years, the U.S. dollar has bounced around between 73¢ and 84¢. The dollar rallies whenever a financial crisis develops somewhere in Europe, then it drops back when there’s a temporary fix.