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History Says Farm Markets Have Way More Upside

Rally may not end at $12 beans, $5 corn

DES MOINES, Iowa — Are you shocked that soybean futures prices are trading close to $12.00 per bushel and corn is marching towards a market with a five in front of it, instead of the much anticipated $3.00 level?

You shouldn’t be, according to history.

Despite the overall feeling of low farm markets, commodities markets are outperforming stocks for the first time since 2007.

And if history has anything to do with it, this trend could last for the next three to five years. Furthermore, history shows that the farm markets benefit for the following 12 months after an El Niño weather pattern ends.

Note to self: Weather experts just announced, recently, that this year’s El Niño weather pattern ended abruptly.

And the historical price support factor may already be proving itself out. On Friday, July corn futures are 1¼¢ higher at $4.16, and Dec. futures are 1¼¢ higher at $4.18 per bushel. July soybean futures are 15¼¢ higher at $11.59½, while Nov. soybean futures are 8½¢ higher at $10.90.

Year-to-date, the nearby corn futures contract is up 15%, while the same soybean futures contract is 27.3% higher, according to Jodie Gunzberg, global head of commodities and real assets at S&P Dow Jones Indices.

“We are already seeing big spikes in the ag commodities,” Gunzberg says. This week alone, soybean futures have added 67¢ onto the nearby July contract.

For farmers, the good news is that between 1983 and 2010, agriculture commodities recorded an average return of 24.38%, 12 months following El Niño weather events. This includes commodities such as cocoa, coffee, corn, cotton, Kansas wheat, all wheat, soybeans, and sugar.

Specifically, the 12-month returns following an El Niño for corn averaged 30.4%, soybeans 19.5%, according to El Niño data spanning from 1973 to 2010, Gunzberg noted in a weekly blog at indexologyblog.com.

More broadly, an S&P Goldman Sachs Commodities Index (GSCI) study, made up of five sectors such as agriculture, energy, industrial metals, livestock, and precious metals, finds that all categories have positive returns in the 12 months following the El Niño periods.

The current upward trend in ag commodities may have legs, if you look at the history of the events when commodities did better than stocks, according to Gunzberg.

“History supports more upside for commodities and specifically corn and soybean markets,” Gunzberg says. “We’re seeing backwardation (the spot markets higher than the out months), in the futures market. This tells us that the demand is stronger than the supply,” Gunzberg says. “This is the first time backwardation has been in-play since May 2015.”

Performance History of Stocks vs. Commodities:
1980-1986: stocks outperformed Commodities
1987-1990: commodities outperformed Stocks (Commodities returned 300%, while they led stocks for those three years
1991-2008: both categories alternated lead roles
Crash of 2008: stocks outperformed commodities
Since 2008: stocks outperformed commodities

Why Commodities Not Stocks
So, why are investors looking at throwing money into the commodities sector right now?

Gunzberg says as risk comes down in the market, investors look toward commodities. “Right now, investors are more confident that they will get paid the risk premium by going long the commodities futures,” Gunzberg says.

Senior investment analyst Steve Sjuggerud told customers of the Daily Wealth newsletter (a product of Stansberry Research) on Thursday that just 17.8% of individual investors expect the stock market to be higher in six months. That's the second-worst weekly reading since 1992 in the American Association of Individual Investors (AAII) survey.

“Think about this for a second. We're talking about more than 1,200 weeks since 1992, more than 1,200 data points, and this is the second-worst number ever.  What that tells me is that everyone is fearful about the stock market now and nobody is interested in stocks,” Sjuggerud stated.

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